Sunday 15th January, 2006


Globalised money market

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Money was defined as “information on the move” by John Reed, a one-time Chairman of Citicorp, the company preceding Citigroup. This was when money laundering was taking off in a quizzical “green revolution,” and it forced the advent of an international financial regulations domain.

There were three significant developments that helped to swing the pendulum away from local control and local regulators. The first was the idea of free trade and free markets, the phasing out of interest rate controls in the US and the creation of a single European financial market.

The second phenomenon was the technological advances that facilitated foreign participation in local markets. This was the beginning of global finance and private institutions began to rework strategies to expand markets.

They made it easy for individuals and institutional investors to move into and out of certain countries to take advantage of investment opportunities. This resulted in increased surveillance by organisations such as rating agencies, financial analysts and international lending agencies.

The third trend was the blurring of the lines within the financial sector. Banks began selling insurance and annuity products, and insurance companies started innovating to include look-alike banking products.

Although in developing countries banks fought off the insurance companies by virtue of regulations, to prevent their entry into the blurred-lines arena, the international forces of liberalisation continued to relentlessly sweep the playing fields clean of such regulatory debris.

What emerged was the concept of “risk management,” the traditional forte of insurance companies. Investment companies were now re-branding themselves in the business of risk.

According to sources, these developments caused the commercial banking sector to lose about 40 per cent of its hold on financial assets, the world over.

New-age products, such as options, futures and derivatives, have centred the entire financial services industry on financial planning advisors and the management of risk.

In addition, niche market strategies have been aggressive, so much so that, to better serve its international customers, Dow Jones has established a Dow Jones Islamic Market Index. This Index tracts 600 companies whose businesses conform to strict Islamic business Law.

There are some other observations as well, that seem to be contrary to the textbook relationships.

It used to be that central banks played a purely technical role. Now central banks are more involved in co-ordinating control and aligning of the gamut of financial institutions.

In fact, they are moving away from being directed by the political powers of the day, and striving to insulate monetary policy, to gain greater international acceptance in the global marketplace and facilitate free trade.

So the pace seems, more and more, to be set from abroad.

Another trend is the disconnect between the national economy and the amount of money that seems to be in circulation.

The money appears to have a life of its own and is not necessarily contributing to development, even if it is reflected in growth statistics. It is almost as though the money is there, but it does not belong to us, the local players.

It used to be that if the economy was booming, and inflation rates were rising, returns on savings, in vehicles such as CDs, would increase, but not so now!

Money is information on the move, and the speed of movement equates with the speed of the Internet.

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