By Kenneth E. Bentsen, Jr.

Looking at the future of financial markets, former Treasury Secretary Hank Paulson and former UK Chancellor of the Exchequer, First Secretary of State and current Member of Parliament George Osborne see the return of politics and political risk to the global economy. In a discussion at SIFMA’s 2016 Annual Meeting, The Capital Markets Conference, in Washington DC, the two touched on regulation of financial markets, green finance, and monetary policy, but the overarching theme of the conversation was the effect of politics on the economy.

“You see political risk returning across the world,” Osborne added, saying that politicians “vying with each other to see what barriers they can erect to trade is not very encouraging.” Osborne noted that while this “return of politics” may be alarming, it is necessary to identify and address “people’s concerns that they aren’t getting the fruits of the system.” That doesn’t mean changing monetary policy, he argued, but finding “an ameliorating alternative.” It is important to garner “support for real markets” and free enterprise.

Osborne specifically addressed the recent “Brexit” decision in the United Kingdom. Osborne, a supporter of the campaign to “Remain” in the European Union, said that when the UK makes decisions “that make us more remote from our European partners, we will pay a price for that.”

Although Osborne lamented the immediate economic consequences in the aftermath of the Brexit decision, he argued that there are still opportunities to “get the decisions right” moving forward. “We all have a collective interest in supporting open markets [and] free trade,” he said.

For his part, Paulson noted that “the impact is really greater on Europe than on the United States,” but agreed that the decision pointed to latent issues of rising populism and nationalism.

“I think this is a real moment of challenge for people who like international institutions, the Western alliance, free markets, and free enterprise,” Osborne said. “We’ve got to rally and we’ve got to fight back against those who think the answer is to pick apart institutions, close markets, and stop free trade. That to me is the big generational challenge.”

With a nod to the future of the global economy, Paulson, who wrote a book titled “Dealing with China,” specifically addressed the economic superpower. Here too Paulson emphasized the effect of political forces. “You can’t talk about what’s going on in the economy…without talking about Xi Jinping,” he said, noting that the Chinese leader is “changing the social, political, and economic fabric of the country.”

“I think that there’s certain to be plenty of bumps along the road,” he added. “There’s going to be a wrestling match between state planning and markets” in China.

An area that China has prioritized is green finance. “The way business is done is definitely going to change and so there’s no doubt that business is going to have to protect themselves,” Paulson argued. “It’s going to take a huge amount of money to really fund the investments in renewable energy,” Paulson noted. “This is where green finance is so important.”

Speaking on the future of financial regulation and supervision, Paulson and Osborne lauded the U.S. and U.K. systems as some of the best in the world economy.

“The US financial system, in my judgement, is or should be the envy of the world… we’ve got our problems, but we’re the most efficient, effective, and I think best regulated financial system in the world,” Paulson said. “We didn’t need more regulation; I thought we needed better regulation… We got some of both,” he added.

Paulson said that there have been some significant improvements to the system, including doing away with regulatory arbitrage, but there’s more work to do. “We always fight the last war and there’s this preoccupation with the big banks,” he said. “There’s no bank that’s too big to liquidate, but in a financial crisis, almost anything of size is too big to liquidate… without hurting the economy.”

Reflecting on his own experience, Paulson shared some words of wisdom with the next Treasury Secretary, including the importance of developing “a comfortable working relationship” with the President as well as with regulators.

When dealing with a crisis, Paulson emphasized the importance of being decisive and being prepared to make adjustments. “When you’re in the midst of a crisis, there’s never a perfect solution… It’s important to be decisive,” he said. “When the crisis comes, there’s a big premium on acting quickly and with force.”

Kenneth E. Bentsen, Jr. is President and CEO, SIFMA