国際大学グローバル・コミュニケーション・センター

As I write this, the financial markets around the world are on a downhill roller-coaster ride with no prospect of returning to the starting point. It is frightening; those caught in the ride are screaming, and for them, it does look like the end of the world.

As one of those who suffered real dollar loss of several years of savings, there is no schadenfreude to see my friends suffer. Instead, I want to draw some lessons for what has happened in the financial world and apply them to the internet world.

Trust

The current financial crisis is an illustration of the value of trust in a market. The credit markets froze because those who can lend are not sure that they can trust the borrower to pay back. Here, each person working for his or her own selfish ends does not help the invisible hand. Instead, governments have to step in. Trust, having faith that the other party one is transacting with is acting in good faith, is often taken for granted. Trust is noticed, but noticed quickly, when it is absent. Some research has shown that trust has a higher correlation to internet penetration and use than GDP per capita. In fact, it is one of the best predictive factors for internet adoption. To build and maintain trust on the internet requires the help of the stakeholders—government, civil society and business. Each can play a role to ensure that the internet is safe, secure from scams and other fraudsters and that those who promise to keep users’ data private do indeed keep the data private. If one does not know it from personal experience already, the current crisis shows how difficult to rebuild trust when it has broken down.

Moral Hazard

If the value of trust is so blindingly obvious, how did the investment bankers—often the cream of the MBA graduate pool—bring the crisis onto their own heads? The answer is that there was a moral hazard, a conflict in interest between them and their customers. Mortgages were converted into tradeable securities, given a good credit rating and sold at a profit. So those who originated the mortgages were not incentivised to be careful about the quality of the borrowers. Moral hazards do exist on the internet. Take spam. One of the reasons it is taking so much time to defeat is that ISPs and telcos do benefit from spam. When I roam, the more spam that is sent to my mailbox, the more revenue my telco collects in roaming charges. The rules regarding the hosting of third-party content, such as user-generated book reviews on the Amazon.com site, would be a good example of the balance that can be struck between the competing interests. Globally, the move is towards a limited immunity for intermediaries (such as forum sites and ISPs) who host third-party content. The immunity is limited to reasonable action by the intermediary in taking down the content when notice is given that the material may infringe some rights. And there are counter-measures to ensure that the notice. Moral hazards should be eliminated where they arise. Otherwise, they create a perverse result that is ultimately destructive.

Regulations

Because the financial market/internet is an important interconnected global, it needs more, not less regulation. By regulation, I also mean enforcement of the rules. It appeared that some prudent lending rules—such as that the borrower can actually afford to repay—were not followed. Lest I be misunderstood, let me add the word “judicious” before regulation because it is obvious that many industries benefited from liberalization and deregulation. The telecom sector in fact is one such beneficiary. It is not a coincidence that the growth of the internet came after the liberalization of the sector in the USA. This generation may well have witnessed the highwater mark of the sentiments of de-regulation and non-regulation. The trick is to recognize the areas where in fact more regulation might be needed, for example, to minimize moral hazards. The internet is an important and powerful medium for communication and information. It is precisely because it is important and powerful that it needs regulation.

Multilateral and Multistakeholder Response

The financial market is an interconnected global system. The current financial crisis is a networked financial disaster. It is surprising who around the world ultimately holds the securitized mortgages. Because of the linkages, governments have to coordinate to avoid the fallout. Interestingly, some wealthy private individuals, Warren Buffet in particular, have offered to help the US Government in its recent bailout package by buying into some of the distressed assets. Back in 2001, when US President Bush spoke the first time at the United Nations’ General Assembly, he did not use the word “multilateral” even once; in his recent speech to the same Assembly, he used the world “multilateral” 10 times. It is hard to see any space for a unilateral world; the multilateral world is here to stay. On the internet, the issue of its unilateral control by the USA has been defused but not truly solved by the agreement at the World Summit on the Information Society in 2005 in Tunis. There is no crisis to speak of at the moment. The internet works. But that is not the point. The USA should prepare for a multilateral control of the internet when there is no crisis. The WSIS of 2005 also talked of a multistakeholder approach. And so civil society and business should also have a role. Again, it is not an issue of a crisis. The issue is a more robust governance structure precisely to handle if not avoid crises.

Conclusion

There were warning signs of the economic downdraft in America. But even the appearance of those warning signs may indicate that it is too late. The above lessons are lessons in the organization and structure (aka governance) of the internet. It is too late to apply them to the financial markets, but not too late yet for the internet.