Getting Global Financial Stability Through Precautionary Principle

Today international society faces a challenge in addressing the global financial crises. Despites never-ending debating on the key causes of financial crises, it seems quite certain that there do exist a great deal of "uncertainty" in global financial market. Unlike risk, uncertainty cannot be forecasted by statistical inference. For instance, over-the-count derivatives are too complex to predict whether they can cause financial crisis or not. While some says that derivatives enhance economic efficiency, others criticize that derivatives are "financial weapons of mass destruction." At any rate, the recent global financial crisis well shows that any scientific risk assessment of too-complex-to-predict (TCTP) financial practices can never forecast future crisis. If it is true that financial industry did not intend to cause the 2007-8 financial turmoil and the governments were not aware of a possibility of crisis, it can be assumed that TCTP practices have unintended economic consequences which makes the lives of ordinary people worse. This paper argues that TCTP financial practice should be considered as “potentially dangerous” for the purpose of global financial stability. Of course there is an uncertainty whether a particular TCTP practice would really cause financial crisis. In regard to this, this paper finds that global financial system can be analogized to complex ecosystem where the consequences of human actions are not predictable and the Precautionary Principle (PP) says that uncertainty should not be used as a reason for postponing measures to prohibit TCTP human behaviors. In this context, this article suggests that the PP should be introduced to deal with TCTP financial practices. Of course there are critiques of the PP. It is true that the PP can be misused in some circumstances where unreasonable and speculative fears of future harms are exaggerated. But when considering already-happened catastrophic financial crises, fears of next crises can never be considered as unreasonable and speculative. Moreover, when considering a possibility that large fiscal expansion to mitigate private financial sectors crisis causes another sovereign debt crisis, it is highly needed to introduce the PP in dealing with TCTP practices. As the PP may have various forms in different contexts, the argument for it is just a starting point. To have a real meaning in the real world, the PP is required to be more specified. This article argues that the strongest form of the PP should be introduced. It must be financial firms, rather than the government or the public, who bear the burden of proof that TCTE practices would not cause financial crisis. As far as potentially dangerous practices give financial firms a chance of astronomical amount of money, TCTP practices will be nothing more than rational choice for them. If financial industry fails to prove it, the governments should prohibit a TCTE practice in question to protect the lives of ordinary people which are particularly vulnerable to financial crisis.