Three points must guide discussion

This week, Treasury Secretary Henry Paulson is hosting a “Conference on U.S. Capital Markets Competitiveness” and the U.S. Chamber of Commerce is convening a “Capital Markets Summit on Securing America’s Competitiveness.”

I welcome these participants to the important discussion about how to make America’s capital markets as strong as possible in the 21st century. In my view, three crucial considerations should guide this discussion.

First, we should keep in mind that America’s capital markets remain the most competitive in the world.
We’re hearing a lot these days about London, Hong Kong and Shanghai. But the fact is, the U.S. capital markets remain the largest, most liquid, most innovative and most resilient in the world.

The total amount of financial stock in the U.S. — equities, bonds, loans, and deposits — is more than six times the amount of the U.K.’s, more than double Japan’s, and four times that of the other Asian capital markets. Although IPO and trading activity on overseas exchanges has been growing, the market capitalization of the major U.S. exchanges dwarfs that of their overseas competitors. The market cap of the New York Stock Exchange is over $15 trillion. That is 15 times the value of the Shanghai Stock Exchange, four times the value of the London Stock Exchange and three times the value of the Tokyo Stock Exchange.

Much of the growth in capital is coming from overseas investors — and in record amounts, according to some measures. The most recent Economic Report of the President found that foreign investment in U.S. financial stock such as U.S. Treasury securities, corporate stocks, and corporate and other private bonds totaled $5.7 trillion in 2005 — the highest level in nearly 30 years. In addition, 34 foreign IPOs were listed on U.S. exchanges last year — the highest percentage of foreign IPOs in the U.S in 20 years.

This competitive strength brings us to a second consideration: Our capital markets are strong precisely because of — not in spite of — the legal architecture within which those markets has been conceived and grown.

In a 2004 report, Glenn Hubbard, the former chairman of President Bush’s Council of Economic Advisors, wrote: “Effective capital markets require … the enforcement of laws and property rights, transparency and accuracy in accounting and financial reporting, and laws and regulations that provide the proper incentives for good corporate governance.”

Last month, a Goldman Sachs study found that the strength and continued appeal of the U.S. capital markets could be explained in no small part by “a history of solid regulation.”

That “history of solid regulation” provides investors with a degree of confidence that is unmatched by any other market in the world. Investors get a fair shake in our markets.

Win or lose, they invest with a high degree of confidence that American balance sheets are accurate, that investment products like securities and derivatives are properly valued, and that the markets are well policed against those who would commit negligent, deceptive or fraudulent acts.

That is not to say that all regulation is good — any more than it is accurate to say that any regulation is bad. I have supported changes to our laws and regulations where warranted to strengthen our markets’ competitiveness. But we must resist the temptation to engage our international competitors in a regulatory race to the bottom. Our laws and rules to protect individual investors are a crucial competitive advantage in the global marketplace.

Our competitors know that. If we jettison some of those legal protections, we hand them a victory greater than any they could achieve on their own. And we would almost certainly see the slow flow of capital out of our markets and into those of our competitors.

Finally, America’s continued ability to attract financial capital also hinges on our ability to cultivate and attract intellectual capital.

Last week, Bill Gates came to Washington to sound an alarm bell about how the shortage of educated and skilled workers threatens our nation’s overall economic competitiveness.

It was a sobering assessment. Our ability to tap and shape the growing markets overseas and our ability to innovate, create jobs and expand the base of wealth here at home will depend on our nation’s response to this education challenge.

So, despite the bearishness of some, the United States remains the pre-eminent destination for global capital.

Furthermore, we are still the leader in providing financial products and services not only in the United States, but also in emerging financial centers overseas.  If we want to keep our competitive edge in the capital markets, we must adapt our regulatory approaches and our workforce to changes in the world.

Dodd is chairman of the Banking, Housing and Urban Affairs Committee and is  keynote speaker at the U.S. Chamber of Commerce Capital Markets Summit.


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