Getting Global Financial Stability Through Precautionary Principle

Today international society faces a challenge in addressing the global financial and economic crises. Never-ending debates on the key causes of financial crises shows there is uncertainty in financial matter. Unlike risk, uncertainty cannot be forecasted by mathematical and stochastic methods. In this regard, financial system can be analogized to complex ecosystem where the consequences of human actions are not predictable. If a financial business practice is too complex to predict whether it may cause financial crisis or not, it would be extremely difficult to decide whether the practice in question should be regulated or prohibit. From the perspective of traditional law and policy, there is no reason to prohibit too-complex-to-predict (TCTP) financial practices (e.g., complex derivatives) because there is no scientific evidence of harm. But this conventional approach presents a great deal of potential harm to financial stability. If is true that financial industry did not intend to cause the 2007-8 financial turmoil and the government was not aware of a possibility of crisis, it can be assumed that TCTP practices have substantial unintended consequences harming financial stability. For this reason, TCTP practices can be considered as “potentially dangerous.” The 2007-8 crisis already showed that any scientific risk assessment of TCTP practices can never forecast future crisis. It implies that financial uncertainty cannot be reduced to measurable risk. For the purpose of preserving financial stability, TCTP derivatives should be prohibited under the precautionary principle unless the financial industry proves that the practice in question presents no potential harm to financial stability