Here are my core lessons and takeaways from Javier Milei’s speech at WEF.

📌 DO NOT RELY ON THE STATE TO PROVIDE PROSPERITY OR STABILITY. WHEN SOMEONE BLAMES MARKET INEFFICIENCY AND ASKS FOR MORE REGULATION, LOOK FOR ULTERIOR MOTIVE AND CONCENTRATION OF POWER

Milei argued that in most segments heavily regulated by the government or where the government is the main client the cost of services disproportionately increases (military, education, healthcare). The more your segment depends on the government, the more likely you will experience problems, layoffs, injustice, poverty, or degradation.

📌 LEGAL OWNERSHIP OF RESOURCES IS NO LONGER RELEVANT TO IDENTIFY WHO IS THE REAL BENEFICIARY

State actors and corrupt elites no longer need to legally own companies or resources to exercise control and reap benefits. They do it via regulation, taxes, quotas, permissions, price control, inflation, and other indirect means.

📌 EMBRACE SMALLER COMPANIES AND LESS REGULATED INDUSTRIES OR SERVICES

Milei argued that free enterprise capitalism is the system that creates the most value, ends poverty, and creates productivity via innovation and risk-taking. It is unrealistic to rely on others (including the state) to make your life better.

📌 SIGNS THAT THE WESTERN COUNTRIES ARE RAPIDLY DECLINING

• Excessive and poorly managed welfare programs and subsidies create a culture of dependency and disincentivize work and innovation.
• Excessive central power, regulation, taxation, and government intervention in the market restrict innovation, and breakthroughs in science and lead to stifling productivity. 
• Cultural Marxism, identity politics, dividing groups into oppressed and oppressors leads to moral relativism, inability to discuss issues because someone might get offended, hypocrisy, and loss of national identity.
• Central banks are printing too much money as a default solution for any economic or political problem, eroding the value of savings and making it difficult for businesses to operate.

More generally, I agree with Javier Milei that global elites tried and succeeded in shaping and controlling the global financial industry as a way of controlling resources by mandating the implementation of Sarbanes Oxley (SOX), FATCA, Dodd-Frank, sanctions, and many similar requirements over the last decades. Instead of direct colonialism and extortion of resources, modern-day control is exercised by owning or controlling financial rails.

I would like to argue that the recent banking crisis (especially among smaller or niche-focused banks in the US) is largely caused by and was almost an unintended consequence of this global agenda. I disagree that this crisis was caused by a lack of reporting lack of transparency or inadequate risk management.

Additionally, in my view, CBDC “push” is unlikely to be successful (at least in the next few years), mainly because it is very disadvantageous for the banks and global payment companies (such as Visa or PayPal) to drive and champion CBDCs implementation.

How recent Financial and Public Companies Regulations promoted “just in case” as opposed to “just in time” approach to compliance and risk in the financial industry.

New (mostly US-influenced) requirements have mandated financial companies to hire a lot of additional risk, compliance, and audit people, implement a lot of redundant and unnecessary processes, and produce a lot of unhelpful reporting. The original goal of each of these regulations was very noble – to ensure sound decision-making, adequate financial reporting, sound remuneration, bonus/incentives structure, transparency around risk-taking, etc. On a more general level,  one of the likely intentions was to create a financial industry that is obedient and is able to punish the entities that “don’t fall in line”. But this is not what happened.

A significant class of “elites”  without the skin in the game is growing within the financial sector.

In reality, these regulations generated a class of people who work within the financial sector in back office functions, and they view their jobs as “information providers” to the management about all things related to risks and compliance.  They are not really responsible for risk management and are not rewarded for adequate risk-taking. They view their success as a function of warning their senior management about as many risks or regulatory gaps as possible, and whether or not their advice is followed or not, is irrelevant.

In the words of Nassim Taleb, those people would be a classic example of someone without skin in the game. Every time there is a question about a new project, expansion, new initiative, investment, risk, and compliance functions have huge incentives to amplify the risks and recommend not to do anything or to do it with so many conditions that make this project unprofitable or unattainable. The incentives of the back office functions would be to seek full immunity from any possible adverse consequences, and then the bank management would have to overrule the recommendation of the risk and compliance and do whatever they feel compelled to do to reach their growth or profitability targets.

There is no healthy dialog happening within financial companies between compliance and the commercial side, similar to the lack of dialogue between left and right in media or politics.

In an environment where there is an absence of healthy dialogue between business and risk/compliance functions, and in the presence of huge costs associated with having to maintain a lot of these back office functions, these smaller or niche banks actually did everything by the book, their investment strategies and their reporting were technically compliant with the existing regulations, which is why neither the commercial management of these banks nor their risk functions had any incentives to apply common sense. 

We have seen a similar example of that same issue with Twitter files: the company collaborated with government officials and had no incentives to look at the problem of bots, political bias, or lack of profitability.

The current regulatory requirements oblige financial institutions to maintain a lot of just-in-case processes and reports, but there are zero incentives to be ready for risks or emergencies. All companies are trained to do is to report bad things, they have zero incentives to prevent bad things.  We have seen it with Wirecard and more recently with Credit Suisse.

The presence of a huge and ever-growing population of people without skin in the game within the financial sector is the main reason why banks and large institutions cannot innovate, cannot figure out their growth strategies and essentially drift and often stagnate.

Why is this outcome not what the original policy-makers wanted?

Because the current structures are so inefficient and dysfunctional, they cannot effectively execute. The processes, the redundant roles, and the need to prepare for 2000+ risks and report on these risks, regardless of how likely these risks are to materialize, make risk management very inefficient. There is a lot of reporting but it is impossible to determine who is responsible.

Why CBDCs in their current iteration cannot be implemented in the next few years?

I do believe that despite the fact that central governments will definitely try to push projects with CBDCs (because many of them like the idea of control,  social credits, and CO2 footprint…),  these projects are unlikely to gain traction because of the following reasons:

• Central banks and governments don’t have the infrastructure to register and manage individual wallets, perform monitoring and compliance checks, register digital identities, etc. They need institutions such as banks (who are already equipped for that purpose) to carry out these formalities. However, banks have no incentives to support and promote CBDCs, because it is a) costly and b) it erodes the deposit base for the banks (if people store their savings as CBDCs, there will be likely no interest paid on these deposits, since those are viewed similar to cash), so the banks will have fewer resources to lend and invest.
• People don’t like CBDCs, so the adoption of it will likely be a challenge, as shown by existing experiments in Nigeria or even China. Most people don’t like the idea of CBDCs due to privacy concerns and if there is no interest paid on CBDCs,  this is actually a bad investment due to inflation. If CBDCs are used for payments, again, it would erode the market for payment giants, such as Visa, Mastercard, or PayPal.

The counterproductive role of FATF 

The Financial Action Task Force (FATF) constantly introduces new measures and updates to combat money laundering, terrorist financing, and other financial crimes. On the surface, their initiatives aim to enhance global financial security, however, their recent guidelines impose excessive burdens, introduce discriminatory rules, and result in financial system efficiencies and unintended (or deliberate?) negative consequences.

• Banks often opt for “de-risking” which involves terminating relationships or avoiding business with clients or regions perceived as high-risk. For example, FATF issued several statements during the last years (and still has not repealed them!!) asserting that non-face-to-face relationships are riskier than relationships established via personal meetings. This idea is entirely untrue and most likely has no factual evidence behind it, but the entire financial industry is forced to replicate this position within all local risk assessments. This measure made it so much harder for many FinTechs to secure banking relationships.
• Many FATF industry guidelines and topographies are outdated and not up-to-date with realities (travel, insurance, crypto, diamonds, luxury goods…) and as a result, impose unnecessary burdens on the industries and on the financial institutions supporting them. For example, FATF has issued guidance on the risks associated with non-profit organizations and this resulted in many charities (especially smaller ones) having no access to bank accounts. And don’t even get me started about the Travel Rule.
• When FATF categorizes jurisdictions as having deficiencies in their AML and CTF frameworks, it can have significant consequences, especially for smaller developing countries. Such listings can result in restricted access to the global financial system, hindering trade and financial flows based on very arbitrary and subjective criteria.
• In 2020, the Financial Times reported that the FATF had been pressured by the United States to remove Saudi Arabia from its “gray list” of countries The report alleged that the US had threatened to withhold funding from the FATF if it did not remove Saudi Arabia from the gray list, while keeping Croatia and Bulgaria (EU members) on the list. How is it possible that Croatia and Bulgaria are riskier than Pakistan, Saudi Arabia, or Russia?!?!?