How banking shenanigans could have been avoided
...letter published in the Financial Times, May 11th, 2009 - read it here. (It refers to a paper in Development Policy Review, which can be downloaded from the 'Books and articles' section of this website).
Sir, John Gapper has reached "a damning verdict" on two decades of capital adequacy regulation under the Basel accords ("How banks learnt to play the system", May 7); while Matthew Richardson and Nouriel Roubini ask why we should keep insolvent banks afloat ("Insolvent banks should feel market discipline").
The Basel framework was a response to the weakness of international banks during the debt crisis that followed Mexico's near-default in 1982. There was much talk about the "moral hazard" of letting indebted countries get away without meeting all their obligations. At the time the same principle was little applied to the banks, which had lent billions to borrowers that proved unable to repay. In any other area of business in a market economy, such errors of judgment would be severely punished.
I examined the rules of the game (prudential regulations, debt renegotiations, lender of last resort facilities, accountancy rules, the role of auditors and tax incentives), and found that they overwhelmingly benefited international creditors at the expense of debtors, although the crisis arose from mistakes on both sides. One of my conclusions was that "the effective guarantee against bankruptcy provided to major banks ... should be called into question and probably abandoned" (Development Policy Review, September 1989).
Because of those rules, the main costs of the debt crisis were borne by the poor countries, and many of the poorest citizens within them. It is only recently that many of those countries have begun to recover from it. If in 1988 Profs Richardson's and Roubini's suggestion had been pursued, and not the Basel programme, some banks might have fallen but it would have caused much less disruption in the rich world than there is now, because the crisis was more contained. Afterwards, the banks would have had to be more circumspect in their behaviour and the shenanigans of recent years might have been avoided altogether.
Thomas Lines,
Brighton, E Sussex, UK
Former Lecturer in International Business, Edinburgh University
Copyright The Financial Times Limited 2009
www.ft.com/cms/s/0/a9468bcc-3dc2-11de-a85e-00144feabdc0.html?nclick_check=1
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Here is a customer's review on www.amazon.co.uk:
Persuasive account of how to end rural poverty,
Lines writes that the IMF and World Bank `promote and protect the interests of global capital'. They claim that the market lifts food prices, benefiting the poor. Instead, world food prices have halved since 1960. Twelve of the world's poorest countries are poorer than in 1985. In Britain, since 1988, the prices that farmers got for their produce have risen by just 3.4%: retail food prices rose by more than 50%. Global free markets have benefited speculators and supermarkets, not producers or consumers, producing `unfathomable wealth for those who have worked in finance'. Investors speculate in primary commodities, turning 2007's food price problem into 2008's world food crisis. The supermarkets have become the masters, the price makers, controlling global supplies. Lines proposes that national governments, not the World Bank or the World Trade Organisation, should decide their own policies. Governments should stop relying on exports to volatile commodity markets: rural policy should start from national food security, not foreign trade. Governments should support domestic agriculture and the production of staple foods, feeding their own people first. Governments should cut corporate power and raise agricultural workers' wages. Governments should raise and stabilise agricultural products' international prices. Governments should promote domestic and regional trade, especially in staple foods. Lines finishes by writing, "this approach is the only humane one and it has to be pursued, in the face of the powerful vested interests that will inevitably oppose it." |
About the author...
I am a freelance consultant specialising in international
trade and agricultural markets. I started my working life as a journalist
reporting on the commodity and financial markets,
and later became a lecturer in international business at Edinburgh
University. I have worked in more than 40 countries, including as a team leader of agricultural aid projects
and a policy advisor of U.N. agencies, leading NGOs, fair-trade and
trade union organisations. I am the author of numerous papers and articles on the themes mentioned. Now I live in Brighton, England. One of my hobbies is photography, and I support Watford
FC. I was a candidate for the Green Party in the 2005
general election.
On this site you can find copies of my analytical papers, both ancient and modern. There will soon be page of photographs taken in various places from France to Moscow to Turkmenistan to Zanzibar. Have a look round!