Who Sets the Post-Meltdown Rules?

Hopefully, the current financial crisis will silence forever the people who say that over the long run and without intervention, the markets work and business will always do the right thing for the most people. It's flat out not true.

Business needs "rules of the road." The trust-based systems that the foes of deregulation like to cling to evolved in much smaller communities, where owners, management, workers, and customers were all vested in making sure the system worked over time. If you own and run a grocery store in a small town, your workforce and customers are going to be your neighbors and their kids are going to be attending school with and playing with your kids. Unless you want to live in isolation, you're going to work to earn their respect.

Now, the workforce is global, customers are global, and natural resources are global (though they can be exploited in ways that offer no benefit to local people who will end up paying the consequences), and ownership is so murky that -- as the Madoff case and the broader Wall St. meltdown shows -- even investors have no idea what they own or think they own.

The current financial system operates much like the childhood game of "hot potato," where investment managers are incented to move money around in ways that generate huge financial returns for themselves -- with no one ever asking hard questions unless someone gets hurt because they're holding the potato when the music stops.

Moving forward, it's critical that we figure out how to balance between rules that encourage people to act in ways that ultimately deliver the most good for society and rules that might stifle and ultimately crush innovation.

The "most good for society" is likely to come from:

- rewarding innovators for their contributions - which encourages them to keep applying their creativity to solve interesting problems
- ensuring that workers are fairly treated - which becomes ever more difficult as the standard of "what's fair" needs to encompass the fact that when jobs can be moved offshore at lower cost, they will be
- ensuring that the environment is protected
- ensuring that consumers' health, safety, and rights are protected
- ensuring that competition will be fair
- ensuring that investors have access to the information they need to make good decisions and that they suffer the consequences when they ignore or encourage behavior that violates "the rules," much as a small business owner in a small community pays the price when he or she violates the community's trust.

A difficult problem now is determining who should establish and enforce the rules of the road. With free trade, the system has gone global and there's no going back. When one country crashes, the fallout is often felt around the world. Clearly, Barack Obama is going to play an activist role. However, even his very powerful voice is just one part of a much broader system that even the "experts" don't fully understand.

We need to develop new systems and new "rules of the road" that reflect the reality of our interconnected, interdependent world, where financial resources, natural resources, and human resources are all intertwined. Greater transparency is an absolute necessity.

Governments will need to figure out new ways to step up - and work together in ways that perhaps could not have been imagined before the greed on Wall Street triggered a financial collapse in Iceland, and before melting icecaps in the Arctic became a key indicator for drought and flooding across the Southern Hemisphere.

Nongovernmental organizations and watchdog groups that can operate across borders also need to play a bigger role. Increasingly, warning bells are going to be sounded by organizations and people that operate from a global perspective, who can see local symptoms, but who understand that those symptoms and their potential solutions must work in a global context.