The still-developing LIBOR scandal is the latest and biggest blow to the credibility of big banks and their regulators, and should catalyse broad-ranging reforms to the financial system.
The reputation and credibility of banks, regulators and the banking system in Western developed countries, already battered by the twists and turns of the financial crises, have reached new lows with the LIBOR scandal, which is still evolving and will yet reveal more wrong-doing.
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Below is the speech delivered by Dr Yılmaz Akyüz, Chief Economist of the South Centre on the Sustainable Development Dialogue Roundtable on the Global Financial Crisis, UN Conference on Sustainable Development 2012, in Rio de Janeiro on 16 June 2012.
As seen over and again during recurrent financial crises in both developing and advanced economies (DEs and AEs), including the recent global crisis originating in the US and Europe, financial instability and boom-bust cycles undermine all three ingredients of sustainable development – economic development, social development and environmental protection.
Roberto Sansón Mizrahi, guest blogger
Since the outbreak of the crisis, false choices have been imposed on us. First, we were led to believe that we must bail out large, troubled financial institutions using public resources or let the world collapse, such as happened in 1930. Then, when the crisis spread throughout Europe, the decision was to deal with fiscal deficits and sovereign over-indebtedness by imposing brutal adjustments that affected large majorities; otherwise, the collapse would sweep the European Union and the euro.
The development process can quickly unravel when a herd of speculative investors steers into a country. Brazil boldly attempted to regulate such speculation in 2010 and 2011. Their efforts were a modest success, but developing countries can’t bear the full burden of regulating cross-border capital flows.
On 16 June 2012, a twelve-member jury convicted the India born and educated Rajat Gupta, former head of consultancy major McKinsey and Company and former board member at Goldman Sachs and Procter and Gamble (among other firms). He was found guilty on three counts of securities fraud and one charge of conspiracy. All convictions were related to insider trading in Goldman stocks, which were among the charges on which hedge fund manager Raj Rajaratnam of Galleon Group had been earlier convicted. Rajat Gupta, the jury concluded, provided confidential information to Rajaratnam with regard to Goldman Sachs that permitted him to enter into and profit from trades based on insider knowledge.
The recent downgrade of India as a sovereign borrower by the US-based Fitch has come close on the heels of similar downgrades and placing on “negative watch” by the other big two international credit rating agencies. In April, Standard and Poor’s had lowered India’s rating outlook from “stable” to “negative,” and June it warned that India become the first “fallen angel” among the BRICS nations to get a sovereign credit rating below investment grade.
It is well known that while real wages kept the pace with labor productivity up to the early 1970s in the United States, they have lagged ever since, as shown in Figure 1. The causes of the collapse of the so-called Golden Age of Capitalism that allowed for expanding wages in the advanced economies are complex and diverse, but it is clear that the demise of the Keynesian consensus and full employment policies was at center stage.
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Suranjana Nabar-Bhaduri, guest blogger
Recent months have seen public concerns being voiced about the incipient slowdown in the Indian economy. Manufacturing output grew at only 0.1 per cent in April; the Indian rupee has been on a downward spiral since late 2011; exports have fallen; and capital inflows have been inadequate relative to India’s current account deficits. India’s GDP growth has declined to a nine-year low of 6.5 per cent in the financial year 2011-12.
The current situation draws attention to issues surrounding India’s services-led growth development strategy, and its persistent trade and current account deficits. It will hopefully provide a much-needed wake-up call to Indian policy-makers to undertake policies beyond “reforms”. A recent paper emphasizes that India’s services-led growth entails questions of long-run sustainability with respect to its balance of payments (BOP) and has a limited ability to raise the living standards of the population as a whole.
Part of the Triple Crisis Spotlight Rio+20 series.
Rio+20 came and went. The UN Conference on Sustainable Development (UNCSD) could have been an important event. Instead it set new standards on how to make oneself irrelevant. One quick recipe: pretend you have never even heard of the global economic and financial crisis!
Stephany Griffith-Jones and Matthias Kollatz-Ahnen, guest blogger
Strategies to overcome the European crisis only focused on collective austerity are not working; they are bad arithmetic, worse economics and ignore the lessons of history. A key missing ingredient is the urgent restoration of growth, which European citizens demand and several leaders are increasingly stressing. However, meaningful actions on a sufficient scale have not yet been taken.