There is also another simple but important reason why people as well as the politicians elected by them would want to continue to spend beyond their means even though they realise that they could not afford to repay the debts in their lifetime. This is what I would like to call the “collective irresponsibility” syndrome. A father or mother will do almost anything to protect their children. Some would be prepared to sacrifice their happiness and even lives for their children. It is only in great desperation, such as the great famine in China depicted in the movie “1942”, that we would witness children being sold by their starving parents. But that was a very extraordinary and tragic situation. We can hardly say that the developed world is now in that desperate situation. There is an interesting point here: when a parent mortgages his child, he is accountable for this brutal and inhumane act. However, when a voter elects politicians who promise continued and unsustainable spending he is just one of many, many voters. The vote is cast in anonymity and the voters have no direct accountability for how they vote and for the consequences of such voting decisions. The voters may also think or hope that, even if the national debts can only be paid back by the next generation, it would be someone else’s children, not their own, who will have to shoulder the burden.
Reforms also are being considered for money market mutual funds, where the inherent run risk in the event that a money market mutual fund “breaks the buck” continues to be a significant vulnerability. Yet a third set of initiatives in the reform agenda seeks to strengthen the clearance and settlement infrastructure for over the counter derivatives. In addition to creating incentives to move derivative transactions into trade repositories and central counterparties, which provide the benefits of risk management mechanisms and encouragement of standardization of  BIS central bankers’ speeches  3  contract terms, the reform efforts extend to improving the international legal framework for derivatives transactions in the event of default and failure or resolution. Regulatory reform can create guardrails for the financial system, but in my view, those reforms are far more effective if accompanied by similar reform efforts in the private sector. Private sector reform can take the form of enhancing internal governance, re-evaluating strategy and business models, and strengthening risk management and internal controls within individual firms. It can also take the form of industry collective action to improve market structure and practice, to invest in financial infrastructure and to recommend best practices. In the U.S., the combination of public sector – and private sector – driven reform has historically played an important role in our financial system and should play a role today.