Trust in policymaking role of banks and other financial institutions not merited, says UN agency

Given their “irresponsible behavior” in the economic crisis, banks and other private financials institutions do not inspire trust in the role they still have in shaping the recovery. So says an intergovernmental agency, the UN Conference on Trade and Development (UNCTAD), in its report on “Post-Crisis Challenges in the World Economy,” released September 6.

“Little has been learned about placing too much confidence in the judgment of financial market participants, including rating agencies, concerning the macroeconomic situation and the appropriateness of macroeconomic policies,” the annual UNCTAD report states.

“In light of the irresponsible failure of many private market actors in the run-up to the crisis, and costly government intervention to prevent the collapse of the financial system, it is surprising that a large section of public opinion, and many policymakers, are once again putting their trust in those same institutions to judge what constitutes correct macroeconomic management and sound public finance.”

The report emphasizes the importance of wage growth to recovery, since wage income is the main driver of domestic demand in both developed and emergent market economies. “However, in most developed countries, the chances of wage growth…are slim.” Declining wages dampen the private spending needed for recovery.

The thrust of the report is that, in the current crisis, the focus on cutting budgets and debt is counterproductive.

A new Census Bureau report underlines the urgency of the situation. More Americans are now living in poverty than at any time since records began to be kept 50 years ago. As a Financial Times news story put it:

“The aftermath of the recession has been a ‘two-speed’ recovery for Americans, as the wealthiest maintain their spending habits and lifestyles while a record number of their fellow citizens are mired in poverty.”

UPDATE

The Director-General of the International Labour Organization, Mr. Juan Somavia, said the time has come to “place the real economy in the driver’s seat of the global economy, with a financial system at its service”.

“This means putting productive investment in the real economy at the heart of policymaking; an enabling environment for sustainable enterprises; and less availability of unproductive and risky financial products”, Mr. Somavia told members of the European Parliament during an address in Strasbourg. Read more!

Age of Greed -- and Deceit

When a friend of mine, Gerry Holmes, learned that I had bought a new book, “Age of Greed” by Jeff Madrick, he warned me that reading it could provoke a bad case of depression.

Actually, newspaper stories, especially the latest ones, have just about exhausted my capacity for depression. Madrick’s panoramic account – subtitled “The Triumph of
Finance and the Decline of America, 1970 to the Present” – lends itself more to outrage than depression.

Madrick rejects the notion that the age of greed and its recurring crises can be blamed on natural swings of the political pendulum or on an inevitable force of history. No, he insists; they were caused by human beings and their reactions to change, especially to troubling events. So he tracks the financial crises of the past 40 years largely through the words and actions of human beings – specifically, three dozen influential men.

Take, for example, Walter Wriston, son of a university professor who used his academic platform to preach against FDR and the New Deal. Disregarding his father’s advice to pursue an academic career, he joined New York’s National City Bank in 1946, when banking was far different from what it is today. Wriston changed that. A dedicated free market evangelist and vigorous opponent of government regulation, he built up a bank deemed too big for failure and thus dependent on government to save it. Citibank, its successor had to be rescued several more times.

Partly through his leadership, the whole financial industry – banks, brokers, and insurance companies, operating under much weakened government regulations –- became such a source of great personal wealth and power that eventually finance no longer played second fiddle to the great manufacturing, transportation, communications, and retail industries.

To my mind, of all the types of wrongdoings that Madrick chronicles, the worst was deception – lying – especially the systematic lying by the accounting industry, whose organizations sold the right to be called a profession. Wholesale deception enabled Wall Street firms, time after time, to misallocate fabulous amounts in bad or foolish investments.

The Supreme Court aided and abetted that vicious habit. Reversing 60 years of precedents, it ruled in 1994 that accountants, lawyers, and bankers could no longer be sued for participating in a fraud perpetrated by a client.

In his final paragraphs, Madrick writes:

“For all these endeavors, Wall Street professionals got fabulously rich. They channeled hundreds of billions of dollars into wasteful investments that could have been spent on energy, transportation, and communications infrastructure, health care and medical research, education, technical and business R&D, and new, truly innovative consumer products and business equipment. The question was not whether Wall Street bankers contributed enough to the economy to warrant their compensation, but how much they cost the economy in the damage done….

“Wall Street has continued to complain about how new regulations would undermine its profitability, and has threatened to leave those financial capitals that impose restrictions they deem damaging. America has not yet turned the page.”

To which I would add: This is the Wall Street that some respected persons would trust to “privatize” Social Security and Medicare. Read more!

How can trade and finance work for people?

“Making Trade and Finance Work for People and the Planet” is the subject of a public symposium to be held in Geneva June 22-24 by UNCTAD (the UN Conference on Trade and
Development).

Governmental and non-governmental leaders will discuss the subject from various aspects in two round tables and eight break-out sessions, with emphasis on interactive debate. Simultaneous translations will be provided in the six official UNCTAD languages.

The International Trade Union Confederation will lead a breakout session on the proposed financial transaction tax.

For more information contact UNCTAD at http://www.unctad.org/publicsymposium. Deadline for registration, which is mandatory, is June 10.

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