What the poor can teach the rich at G-20

Just like the microfinance industry in developing countries, small-scale financial institutions in the United States avoided getting their hands dirty in the derivative market and subprime lending mess. These institutions are in comparatively good shape today. It's not as lucrative a proposition as bundling securities and selling them off into the financial market without regard to the consequences, but such "relationship banking" is what is keeping the majority of the microfinance sector on track.

A healthy global financial system will depend on our global leaders' ability to accept and indeed embrace this reality. The irony of course is that Treasury Secretary Timothy Geithner's plan, if successful, will probably erode local and regional banks (whether in the US or the developing world) because it disproportionately subsidizes the irresponsible players. With the huge government subsidies they have, big Wall Street banks are now able to offer higher deposit rates and lower interest rates than are local banks. The great danger is that these banks will eventually eat up global market share and threaten the growth of players who have kept their hands clean.

A second lesson is to ensure repayment through responsibility sharing that restores accountability. Microfinance lenders achieve such extraordinary repayment rates in part through careful monitoring and group-oriented incentives. Big global lenders, on the other hand, are experiencing the hard way what happens when they promote excessive risk-taking that undermines the overall system's health. Global leaders must work to create and maintain oversight systems that allow and encourage regulators to prevent future financial catastrophes that are the result of the selfish irresponsibility of a powerful few.

A system of peer pressure, like the one commonly used in microfinance, in which an individual's success depends on the responsible behavior of the overall group could prove useful for the global financial system. Had such interdependence existed earlier, the financial community might have prevented a few bad actors from poisoning the well with exotic instruments and ludicrous leverage.

Now the leaders of the industrialized world are convening yet again to seek out solutions to the macroeconomic mess in which the world uncomfortably finds itself. They would serve themselves well by taking some cues from what is actually still working in financial markets.

Jamie Zimmerman is deputy director of the Global Assets Project, a joint venture of the Center for Social Development at Washington University in St. Louis and the Asset Building Program of the New America Foundation.

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