Better financial regulation: Hedge funds and forest funds

The sub-prime crisis, the collapse of hedge funds, and mouth-watering write-offs lead to a clamour for more regulation. But there is a smarter alternative which could save the planet, thanks to a brilliant Dutch forestry expert.

Financial institutions are already absurdly over-regulated. This is obvious for anyone in the business of emissions trading. It regularly takes a bank several months to approve credit on a carbon deal. Irrespective of a projected IRR in excess of 40% or 50%, the compliance officers and the credit people will inevitably request, at the last moment, a notarised copy of the official translation liftboy’s football pool form of 14th March 1992. As the liftboy happens to be from Ossetia and the football pool form is therefore in Ossetic, this adds another few weeks to the already delayed transaction.

Financial regulation seems to be about protecting people who do not read small print or cannot understand it. Surely a better approach to banking regulation would be for the state to fulfil its part of the bargain when it makes school education compulsory: if people were educated properly, they would not need molly-coddling with banking regulation. Properly educated, they would tell the bankers to stuff their devilish products up their banking bottoms and be done with it. But that is a long-term question.

In the meantime, an alternative is inspired by an article in the Observer (4th May 2008) of all places. It tells the story of Dr Willie Smits, an expert on Indonesian forests, who bought 5,000 hectares of land which was once rainforest and had become a moonscape of grasses devoid of birds and insects. “Without the forest, the rains disappeared and temperatures rose: streams dried up, harvests failed, fires broke out, jobs disappeared and ill-health soared.” Dr Smits and his chums, in a period of only six years, rebuilt the forest and it is already “teeming with insects, birds and animals.” The rain has returned. So have primates, various mammals, and over 100 species of bird. And funnily enough, the farms around the forest are working and local people are better off.

So why wait ten years for the World Bank’s forest facilities? Why wait another ten years for petty-minded bureaucrats to negotiate a successor to Kyoto. The solution is very simple.

1. Eliminate the regulation of financial institutions, except sufficient to define what is a financial institution, and to make effective points (3) and (4)

2. Encourage financial institutions to make as much money as possible

3. Require that 10% of taxable profits be put into activities to save the world’s forests (this will probably be way lower than the current cost of complying with absurd regulation)

4. Require highly paid bankers and hedge-fund managers to spend one year in five working for Dr Smits and his chums planting forest around the world, and use their business acumen to help local communities make a living without cutting it all down.

The benefits of this approach to the planet, to society, to the emotional wellbeing of bankers, and probably therefore to the shareholders of financial institutions are staggering. The growing-up experience of seeing the real world and doing something useful would make bankers less likely to sell irresponsible products. And by the time Kyoto is settled we could have tens of millions hectares heaving with life again.

Banks like to boast about their prowess in emerging markets. Here’s the big chance.

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