Faltering Economic Recovery, Risk of Another Recession, ‘Reason to Recommit’, Secretary-General Tells Participants at Closing of Thematic Debate
Faltering Economic Recovery, Risk of Another Recession, ‘Reason to Recommit’, Secretary-General Tells Participants at Closing of Thematic Debate
|Department of Public Information • News and Media Division • New York|
Sixty-sixth General Assembly
High-Level Thematic Debate
AM & PM Meetings
Faltering Economic Recovery, Risk of Another Recession, ‘Reason to Recommit’,
Secretary-General Tells Participants at Closing of Thematic Debate
Urges Leaders to ‘Take the Best of Your Insights and Ideas,
Turn Them into Real-Life Action to Improve People’s Lives and Prospects’
Deeply concerned over the slow pace of global economic recovery and the risk of another recession, United Nations Secretary-General Ban Ki-moon today called on Governments to strengthen their resolve to achieve sustainable development.
“The current difficulties are a reason to recommit, not to shrink from it,” Mr. Ban said as he wrapped up a two-day high-level debate at Headquarters on “the State of the World Economy and Finance and its Impact on Development”, which he co-chaired with General Assembly President Nassir Abdulaziz al-Nasser.
“We will not kick-start the global economy with slash-and-burn policies,” he told the gathering of senior Government officials, economists, experts from academia, the media, think tanks and civil society representatives. “But if we act within a long-term vision of sustainable development, we can reduce debt burdens, consolidate development gains and generate new dynamism and growth.”
Mr. Ban said next month’s United Nations Conference on Sustainable Development, known as Rio+20, was an opportunity to set that transformative agenda in motion. He said a brief summary of the past two days’ discussions would provide important input for Rio+20 and the Group of Eight (G-8) Summit, also scheduled for June, in Los Cabos, Mexico.
The challenge, he said, “is to take the best of your insights and ideas and turn them into real-life action to improve people’s lives and prospects”.
The General Assembly President agreed. He said the myriad of constructive and stimulating speeches had advanced the dialogue on what policies were needed to stimulate global growth and economic development. Given the deep-seated differences over policy options, it was important for the United Nations to present a unified message.
“Let us proceed to follow-up actions, in order to make this thematic debate a meaningful stepping stone towards resolving our present economic problems,” he said.
Highlighting the central messages during the event’s four round-table discussions, Mr. Al-Nasser called for policy packages to create full and productive employment, and decent work for all, as well as nationally designed social protection floors. While Governments must work over the long term to reduce the sharp increase in debt brought on by the world crisis, they should avoid excessive austerity measures that could hinder economic recovery.
Technical aid from donors could play an important role in setting up environments conducive for increased production, trade and investment, he said. It was also important to avoid trade protectionism and to conclude the Doha Round of trade negotiations with a balanced, ambitious, comprehensive and development-oriented outcome.
Elimination of the root causes and problems caused by excessive price volatility, another main message of the debate, could be accomplished through greater economic diversification and promotion of transparency and market information at all levels, he offered.
Lastly, he said, while the international community had drawn the right lessons from the financial crisis, it must work more to make the financial sector safer, more stable and once again in the service of the real economy and shared development goals, he said. Developing countries’ concerns must duly be taken into account.
Round Table III
With the theme “Limiting commodity price fluctuations, increasing production, trade and development”, panellists in round table III included Valentine Rugwabiza, Deputy Director-General of the World Trade Organization (WTO); Otaviano Canuto, Vice-President for Poverty Reduction of the World Bank; Yilmaz Akyüz, Chief Economist of the South Centre; and Gillian Tett, Chief of the New York Office of the Financial Times. Co-chairing the session were Maria Kiwanuka, Minister of Finance, Planning and Economic Development of Uganda and Luc Oyoubi, Minster of the Economy, Employment and Sustainable Development of Gabon.
Prior to the start of that discussion, participants heard an address by Andry Nirina Rajoelina, President of the High Transitional Authority of Madagascar. He stressed that the United Nations was the only forum for the full participation of all in the search for solutions to world problems, and which took into consideration the needs of the most vulnerable. The recent world financial crisis had threatened the achievement of the Millennium Development Goals, he said, adding that countries in transition — such as his — had been heavily impacted. “We speak of recovery, but the world population continues to suffer,” he said in that respect. The creative, sustainable growth of jobs was needed, especially for young people. In Madagascar, measures had been taken to ease the crisis and spark recovery, including those aimed at stifling inflation and protecting consumption. But economic growth had not yet been possible, due in part to the lack of foreign investment. To the international community, he said, “our countries need your support”.
Madagascar’s debt rate stood at 20 per cent, and it had honoured its debt scheduling, he noted. Though unable to establish a long-term policy, the Transitional Authority had established a number of priorities; key among those was ensuring food security and supporting the production of renewable energy. Despite the State’s efforts, however, the global crisis had led to a rise in unemployment. Madagascar intended to resolve that problem through sectoral policies and capacity-building programmes. More than ever, there was a need for a global solution and the rationalization of resources. There was also a need to demonstrate a greater will to implement previously agreed measures, as well as to develop new ones.
Issuing brief opening remarks, Mr. OYOUBI said that commodity price fluctuations had caused many problems for States, both on the budgetary and planning levels. In Gabon, budgetary challenges had resulted from the erratic oil prices. At first, the country had decided to subsidize refined oil products, but the International Monetary Fund had asked it to allow prices to fluctuate naturally; in the end, Gabon had returned to subsidies. Even so, he noted, budgets at the end of the year did not always match up to actual oil prices.
Ms. KIWANUKA said that the spikes in food and fuel prices had had major effects on developing countries. In Uganda, which was a net exporter of food, prices had risen 30 to 40 per cent. Europe was both a destination for Uganda’s exports and a source of its remittances; those two channels had stagnated since the start of the crisis, and the country’s current account deficit had widened. Such developments were not unique to Uganda, but were occurring in many developing countries around the world.
Taking the floor, the first panellist, Ms. RUGWABIZA, said that many macro-level changes had taken place over the last decade. In 2000, developing countries had only accounted for one third of the world’s merchandise exports. In 2010, about half of those exports came from developing States, demonstrating that trade had enabled those countries to better integrate into the world economy. Nonetheless, trade had been decelerating over the past year, and consequences would be seen in both developing and developed countries. The current situation could further deteriorate if countries did not resist protectionist pressures. The World Trade Organization engaged in regular monitoring of trade restrictive measures; though such measures had been reasonably contained, “clear slippages” towards protectionism were now being seen. “The situation doesn’t look good in terms of trade worldwide,” she cautioned.
In addition to monitoring the situation, she said that maintaining the integrity of the global financial system built over the past 60 years was critical. Those multilateral trade rules allowed countries to regulate trade relationships among themselves, but lack of regulation had been among the causes of the crisis. In addition, the current rules left a significant margin for members to legally put in place trade restrictive measures, a situation which needed to be remedied. Active multilateral cooperation was needed, she added, noting that the stalemate in the Doha Development Round of negotiations was another major problem.
She recommended implementation of previous commitments to small and developing countries, such as duty-free, quota-free market access for least developed countries. Those commitments would not influence the balance of power among major world players, but would make a great difference to many developing States. Unlocking the growth potential within regions, including sub-Saharan Africa, was another important aim, as was increasing the investment in trade capacity-building — “aid for trade” — and related investments. Reducing non-tariff barriers was another potential measure that could be undertaken, and which did not require multilateral negotiations. Those talks were facing difficulties, which could further marginalize low-income and developing countries. The sophisticated trade barriers now being used by some countries should be made more transparent, allowing other States to engage more effectively.
Mr. CANUTO, focusing on government policy interventions related to commodity markets, said that some of those interventions were positive, while others could aggravate price volatility. Commodity markets remained highly distorted, and the markets alone could not be blamed. A multipolar world economy had emerged in the past two decades, which had changed the political economic landscape. Higher prices and greater volatility had boosted the use of export barriers and restrictions, and the use of those barriers could continue to increase. In developing countries, the average rate of taxation on agriculture had declined, which reflected higher rates of economic growth in those countries, while export taxes on natural resources had increased.
Often, during a crisis, Governments attempted to insulate themselves from shocks, causing commodity prices to rise, he said. For example, price volatility in many African countries might have been greater because of Government policies that tried to insulate them from rising food prices. Addressing those distortions in a multipolar world was today’s challenge. A system was needed in which imports and exports were able to flow “both in good times and bad times”. Many of the policies that affected commodity prices and global trade were subjected to WTO and other rules, but many were not; in that regard, extending the effort to negotiate and agree on export restrictions was important. Given the importance of food prices, cooperation in that critical area should revolve around a ban on export quotas and reducing the use of distortionist policies.
Mr. AKYÜZ said that global conditions exerted a strong influence on developing countries, and the current landscape in that respect was “not very encouraging”. There was contraction in several economies in Europe, tensions in global financial markets and slow, erratic growth in the United States. While growth in developing countries had increased at an unprecedented rate over recent decades, research showed that the conditions leading to that growth could not be recreated and sustained in years to come. Even if Europe and the United States fully recovered, there was no way to return to pre-crisis growth levels, in which the United States had acted as a “locomotive running growth deficits”. Additionally, China’s investment-led growth could not work indefinitely.
There had been a failure to reconcile the need for short-term fiscal stimulus with a credible programme for long-term consolidation, as well as a failure to remove “debt overhang”, he said. Cuts in interest rates and quantitative easing had not been very effective in addressing debt and spending cuts, but had led to a “currency tsunami” and problems for developing countries with regard to exchange rate management. In addition, surveillance by the International Monetary Fund had been ineffective, and the Fund had been unable to ensure responsible behaviour on the part of States. A deepening of the crisis in the euro zone could create the same situation that had led to the Lehman Brothers collapse in the United States in 2008. It was that danger that had motivated an initiative of the International Monetary Fund to double its funding and “come to the rescue” of the European Union, he said.
In that regard, there was no justification for the Fund to lend “big money” to the euro zone, he said. Many States around the world were concerned about bailout operations, which could negatively impact international liquidity. There were also “moral hazards” associated with such bailouts. The world economy was no less fragile today than it was in 2009, and developing economies were just as vulnerable to downside risks from developed States as they had been then. Developing economies should strengthen their own fundamentals and reduce dependence on foreign markets, capital and commodities. However, he said, “we cannot expect them to put their house in order” when the world economy continued to suffer from systemic shortcomings.
Ms. TETT said that commodity markets were the one place where the financial sector collided directly with individuals “on the street”. In recent years, those markets had undergone a wave of “financialization” — a word she used instead of the word “speculation” — in which they had expanded and become more globally integrated. Information flows now linked the globe, and, moreover, commodities had become an asset class to be traded. Great deals of money had travelled from wealthy investors, banks and pension funds into commodity markets, a shift which “terrifies many people”. Indeed, that financialization had led to volatility, often distorting prices and creating overreactions.
Simply to assume that the financialization of markets was a bad thing, however, was extremely short-sighted, she said. The growth of trade and increased information flows had created markets that were better able to create feedback signals and ultimately better at matching supply and demand. When those markets worked well, more people than ever were able to hedge their risks. However, commodity prices could be opaque, and far too often, a small cartel of players controlled key segments of the market. Ensuring against those cartels, as well as removing trade barriers, were some actions that Governments could take to improve commodity markets. The lessons to be learned from the recent crisis was not that markets in themselves were bad, or that financialization was bad, but that it was critical to create markets that were free, fair and above all democratic.
During the ensuing discussion, many countries decried what the panellists had described as recent increases in protectionist trade measures, and warned against their negative impacts. The representative of the European Union delegation, however, said that, in the current economic context, Governments had been “quite restrained” with regard to protectionism. While there had been examples of restrictive measures being put in place, their incidence was relatively small, and most had been put in place within the past year. The implementation of protectionist policies was nonetheless worrying, he said. Moreover, while sustained growth was important, the basis of growth should be broadened to allow more people to benefit.
The representative of Pakistan stressed his concern over the state of the world economy in general, and said that the 2009 World Conference on the financial and economic crisis had adequately identified measures to be taken to improve the situation. While some of those recommendations had been implemented, many had not. Only collective action would help to reverse the negative impacts of the crisis.
Several delegations, including those of Comoros and Lao People’s Democratic Republic, who spoke on behalf of the group of landlocked developing countries, addressed the particular needs of developing States, whose means of growth were frequently limited. Addressing the situation in landlocked States, Mr. CANUTO responded that regional integration was “the way out”, allowing them to build cross-national infrastructure systems and providing channels to “go beyond their limitations”. They were the ones to gain most from regional physical integration.
In that vein, the representative of Viet Nam raised a number of questions related to the intersection of trade and present development paradigms. The global crisis had revealed the shortcoming of such unsustainable development models, he said, adding that it should be seen as a chance for developing countries to take steps to redefine those models. New development models should also be viewed as a top priority for the international community as a whole.
Also taking part in the discussion were the representatives of Nepal, Uzbekistan, China, Republic of Korea, Algeria and Morocco.
Round Table IV
Under the theme “increasing stability, predictability and transparency in the financial sector”, panellists in round table IV were Abdallah bin Saud al Thani, Governor, Qatar Central Bank,; Jean-Pierre Diserens, Secretary-General, Convention of Independent Financial Advisors; R. Seetharaman, CEO, Doha Bank Group; Hani Findakly, Clinton Group Inc.; and William Black, Professor of Economics and Law, University of Missouri-Kansas City. Nicolas Nahas, Minister of Economy and Trade, Lebanon, chaired the meeting. Kamala Persad-Bissessar, Prime Minister, Trinidad and Tobago, and Wunna Maung Lwin, Union Minister of Foreign Affairs, Myanmar made opening remarks.
Opening the round table, Mr. NAHAS said the discussion would look at whether the international community had genuinely learned something from the global financial crisis that began four years ago. It would consider whether the political system was able to resist the different lobbying parties to put financial houses in order to benefit all, and whether growth could be driven by real orthodox practices instead of fictitious supply and demand strategies. It was time to take advantage of the lessons learned and to restructure market rules and behaviour in order to build a more stable future for everyone’s benefit.
Ms. PERSAD-BISSESSAR said there was a real risk that the present global fragility could impact small peripheral economies and other developing countries that were able to withstand the initial impact of the crisis due to strong domestic economic buffers. It was likely that those countries might not be able to withstand a second shock of similar magnitude, having not yet attained pre-crisis economic strength. The economy of Trinidad and Tobago, for example, had been able to withstand some of the pervasive effects of economic downturn because of its strong economic buffers and appropriate Government action to support macroeconomic activity, including $9.8 billion in international reserves at the end of 2011, up from $8.7 billion in 2009. That amount was the equivalent of 13 months of imports. The Government had also been seeking to boost local investment and economic activity, and attract foreign direct investment by ensuring a sound macroeconomic framework and a business-friendly environment.
The country’s National Innovation Policy placed increased focus on small- and micro-entrepreneurial activity, given its potential to increase economic growth, employment opportunities and social development, she said. Measures undertaken by the Government included the establishment of an Innovation Fund to allow talented individuals with pioneering business ideas the opportunity to develop their concepts into marketable products; creation of an Economic Development Board and the Council for Competitiveness and Innovation mandated to improved global competitiveness and to support an investment strategy for diversification of the economy; and launch of an Information Technology Platform to modernize the way companies connect with Government agencies in the process of conducting business and trade. Trinidad and Tobago also placed emphasis on developing human capital through improving education.
The country was considered the regional financial centre for the Caribbean, with a well-developed financial sector accounting for about 25 per cent of non-energy gross domestic product (GDP), she said. Also high on the agenda was cooperation among regulators at the national, regional and international levels to facilitate the continuous exchange of information and to develop a common approach towards regulation. The Government had also begun a programme of regulatory cooperation with the Office of the Superintendent of Financial Institution in Canada with respect to Canadian banks that operate in her country’s jurisdiction, and it was also establishing similar arrangements with its neighbours in the Caribbean region. In 2009, Trinidad and Tobago had established the Financial Intelligent Unit as a tangible initiative towards minimizing the risk of the securities market as the target of the perpetrators of financial crime.
Mr. MAUNG LWIN spoke about Myanmar’s economic gains. To combat unemployment, the Government had worked to build more industries and attract foreign direct investment by creating a more conducive investment environment. It had eased many financial constraints and revised investment laws and regulations. The Government was also working to support small and medium-sized enterprises, which created jobs, particularly for women and youth, and helped achieve stable growth. It was giving high priority to reduce poverty from 26 per cent at present to 16 per cent in 2015.
Since taking office, the country’s new Government had implemented many far-reaching reforms, he said. Consequently, many Governments had lifted or suspended sanctions and restrictions against Myanmar. That would help facilitate economic reform, create jobs and generate income. But some restrictions could still hamper investors’ confidence and affect the flow of foreign direct investment and business activities. Therefore, he called on all countries to remove all restrictions as soon as possible. Additionally, developed countries should honour their development assistance commitments to least developed countries.
Mr. NAHAS, speaking again, said the historic changes in the Arab countries presented tremendous opportunity for democracy, economic growth, investment and widespread development. To help the Middle East and North Africa address its significant financial and economic challenges, in May 2011, the Deauville Partnership had been launched at the Group of Eight (G-8) Summit. It provided Egypt, Jordan, Morocco and Tunisia with a partnership framework to support democratic transition and an economic framework for transparent, accountable Governments and sustainable, inclusive growth. Various international and regional financial institutions were actively working with the G-8 countries to encourage reforms and help Governments withstand short-term economic instability.
Funds were earmarked for governance, transparency and accountability of economic activities, social and economic inclusion, economic modernization and job creation, private-sector-led growth and regional and global integration, he said. Thus far, the international community had committed $80 billion through various financial instruments for the next three to five years to support the new partnership. He invited other countries to join, as equal partners, as its enlargement was critical for the effective and beneficial impact on recipient economies.
He called for measures to ensure the maximum impact and sustainability of all financial support. Access to non-debt financing mechanisms, such as equity financing and foreign direct investment, would compensate for the region’s limited financial resources. Middle East and North African countries and products must have greater access to developed nations’ markets to avoid aid dependency, build human capital and increase the private sector’s role. He also cited the need for innovation in knowledge and technology.
Mr. BIN SAUD AL THANI said his country was implementing measures towards stability and transparency in the financial system based on a 2011 International Monetary Fund report. European bank bailout plans encountered mass rejections, as shown in French and Greek elections. Qatar was not behind other nations in implementing measures outlined in the Fund’s report. The Government was aware, early on, of the impact of financial turmoil.
Some steps undertaken by the Government had included contributing 20 per cent of instalment capital in 2009 and 2010 to enhance the stability of the banking system, he noted. Measures also related to increasing the confidence in the banking system and ensuring sufficient banking capital. The Government had purchased some risky instruments, such as mortgages, from banks. That was an example of assisting and stabilizing the banking system. The Government also had conducted periodic tests on financial institutions and established a risk management system to assess systemic risk and a corporate governance system. The bank deposit and deduction system through a secure network had also been created. A body had been established to monitor credit, as well as the stock trading system. Directives were issued to the board members of financial institutions to realize good governance.
He said that the Qatari Central Bank was working to implement Basel III (international regulatory framework for banks) by 2013. Qatar has a good track record in cooperating with the International Monetary Fund Financial Sector Assessment Programme and tackling money-laundering and other illegal activities. The State had developed laws governing the financial system to improve transparency, competitiveness and oversight. Additionally, it had developed policies aimed at regaining investor confidence in the financial system. Qatar was on track to register real economic growth of 3.9 per cent on average for the 2012-2016 period. And 41 per cent of $38 billion in 2011/12 went to public projects. The country was also focusing on economic diversification, including for developing the private sector.
Mr. DISERENS said the Convention was a non-governmental organization that represented independent financial advisers, which had suffered most from the crisis begun in 2008 and predatory behaviour of systemic risk financial institutions. To fix things, the origin of the problem must be located and eliminated. Until 1990 or 1991, bankers were not risk takers, they were here to invest their clients’ money wisely. After that year, bankers had been replaced by traders, preoccupied with quick profits, who did not add value to the financial system. To make the financial system whole and sound, institutions must be restructured, but the Group of 20 (G-20) and parts of Europe were tolerating what were in effect gambling institutions. Today, investors had no trust either in the financial system or in regulators and countries that represented sovereign risk.
“We really have to rethink the financial system and restructure it so that investors gained trust, because trust is the engine that restarts the economy and creates added value and jobs”, he said, adding that “the financial system does not need more regulation, it needs good regulation”. He said the global financial markets must encourage movement of liquid funds into the economy’s productive sector. Investment and financial service providers must only be rewarded in proportion to their contribution to economic growth. Sovereign States had the responsibility to promote economic growth, and private-sector growth should always exceed public-sector growth.
At the same time, unregulated private-sector behaviour of financial intermediaries must facilitate outcomes of prosperity and justice, he said. Financial intermediaries should complement prudential regulation, according to a Hippocratic Oath of working in the service of investors. Financial market regulation and industry best practice standards must promote sustainable valuation of financial instruments. Information provided by rating agencies must not be subjected to conflicts of interest or superficial methodology.
Mr. SEETHARAMAN called for improving market discipline, and systemic liquidity, while closing information gaps. At the macroeconomic level, he cited the need for close supervision of systemic risks, strong fiscal policies and regulation of international capital flows. Fiscal and monetary policies must be aligned, he said, stressing that today’s euro crisis was a clear case of conflict between those two policies. To respond to the crisis, the Financial Stability Board was reviewing and enacting global regulatory reform, and its resources and outreach were being bolstered. Accounting standards must be reviewed primarily for financial instruments focusing on fair valuation, impairment and rules governing offsetting.
The current realignment of the global financial architecture would support achievement of the eighth Millennium Development Goal to “develop a global partnership for development”, he said. By integrating sustainable development into policies and programmes, economies could also achieve the development target calling for environmental sustainability. The financial sector could facilitate that process through carbon trading and “green” banking, which would help manage climate change and mitigate global warming.
Turning to the Gulf Cooperation Council (GCC), he said its nominal GDP was expected to grow by 11 per cent in 2012 to more than $1.5 trillion, driven mainly by Qatar, Saudi Arabia and Oman. In accordance with global regulatory developments, the Council was amending banking regulations for retail, real estate and investments, among other areas. Its Governments had promoted economic stability and transparency through visionary leadership and long-term planning.
Mr. FINDAKLY focused primarily on the United States’ financial system, but also discussed the international system in the context of the regulatory changes in different parts of the world. The financial system, in his view, was far too complex and too big to be transparent, and might require “radical surgery” to be stabilized. Since the 2007-2008 global financial crisis, several congressional and parliamentary inquiries had been held, several laws had been promulgated, and hundreds of books and articles had been written on the causes and effects of the crisis. A Financial Crisis Inquiry Commission in the United States had concluded that there were major failures in risk management and oversight, in corporate governance, in the lax and largely ineffective regulatory system, and in regulatory oversight. It had further concluded that the banks and investment banks took excessive risk, not only in the quality of their assets, but also in the high leverage of their balance sheets relative to their capital.
In sum, he said, the financial system was too big, highly concentrated, overly leveraged, opaque, and seriously conflicted. In the 30 years preceding the financial crisis, the total debt held by the financial sector in the United States had grown from $3 trillion to $36 trillion, or almost two and half times the nation’s GDP. By then, financial-sector profits constituted 27 per cent of all United States’ corporate profits, compared to 15 per cent two decades earlier. With the United States’ financial sector doubling in terms of its share of GDP over the past few decades, the 10 largest banks had held 55 per cent of the industry’s total assets. Similarly, the United Kingdom’s financial sector had grown at twice the country’s GDP during the 10 years before the crisis.
While much remained to be done, he said, three things stood out in his mind: the too-big-to fail problem of large banks; the lack of coordination among policymakers and regulators of the financial system; and the lack of attention to the global macroeconomic imbalances. The United States had had a long history of dealing with anti-competitive practices, and effectively had used anti-trust laws to break up monopolies that had stifled competition and limited innovation. The resulting boom in the energy sector and, more recently, in computer technology and telecommunication were arguably a direct result of the break-up of such large monopolies. A revisit of that too-big-to-fail issue should entail an anti-trust approach to break up the banks as the most effective approach for a long-term solution. Short of that approach, a clearly defined and enforced Volcker rule, combined with a Swiss model for higher capital, would be a second best option for the immediate future.
Mr. BLACK said things were far worse than the other speakers suggested. He focused his talk on “control frauds”, or crimes led by chief executive officers, which used their companies as a fraud vehicle. That made the chief executive officers incredibly wealthy, but resulted in economic stagnation. Such perverse and recurring behaviour had wreaked havoc on the United States’ mortgage industry and stock market capitalization and on other markets and economies worldwide. It had threatened neoclassical policies, and in Latin America, it had led to the election of a series of anti-United States leaders. But neoclassical economists had learned nothing from that experience, and their economic policies, taken to the extreme, not only eroded institutions set up to constrain control fraud, but they also damaged markets and aided the predators. Contrary to external auditors’ assertions that financial actors did not act abusively or cause recurring crisis and stagnation, he said, they did.
By creating fictional income, control frauds created perverse incentives to enter into the worst transactions that had the best accounting options, he said. For example, by operating as a Ponzi scheme, which extended the life of the fraud, they created a bubble that caused further economic inefficiency, and damaged and corrupted other critical institutions. “The saying in the trade is ‘A rolling loan gathers no loss,’” he said. Through them, chief executive officers looted the economic underworld for bad profit.
Control frauds used top-tier credit agencies, which consistently gave them clean financial statements, showing the company was highly solvent and profitable, as a way to hide the fraud, he said. No one could say there was no warning. In September 2004, the United States Federal Bureau of Investigation had warned of an imminent epidemic of mortgage fraud that would cause a crisis. In 2005, Mr. Black had sounded the alarm. In 2006, the mortgage industries’ own experts on fraud had reported on the pervasive use of “liars” loans — the term the industry used to describe them behind closed doors. Such loans did not require the recipient to show proof of income. They were banned by United States Government regulators after they were used in 1992. But instead of heeding that warning, liars loans increased 500 per cent, accounting for one third of all loans made in 2006.
In the ensuing dialogue, the representative of the European Union delegation said real progress was made on the regulation of over-the-counter derivatives, and the implementation of Basel III would ensure that banks faced similar regulatory requirements no matter where they were located. However, there was no international consensus yet on the right model for insurance supervision. The appropriate regulatory framework for short selling or for alternative investment funds was also a matter of ongoing debate.
The representative of Bolivia viewed greed, speculation, globalization of finance, easy credit and risky indebtedness as among the causes that had unleashed the financial crisis. “The financial market was not capable of self-regulation,” he said.
The representative of Sri Lanka, discussing the impact of the financial crisis from the viewpoint of the poor, called for a comprehensive measure to minimize a future crisis and asked the Bretton Woods institutions to listen to the concerns of United Nations Member States. In a similar vein, the founder of New Future Foundation, a civil society organization, added a perspective of the minorities to the debate. If experts did not have solutions to the problem, how could the plights of vulnerable people be eased? she asked.
The representative of the United Republic of Tanzania expressed opposition to a panellist’s view of the role of regulations, stressing the importance of a regulatory system, which was smarter than before.
The representative of the Permanent Observer Mission of the Holy See asked panellists to discuss the ethical and moral dimension of the financial system.
In response, a panellist said that when ethics broke down, it was the poorest and the minorities that bore the brunt of the impact. Another panellist discussed how 60 to 70 per cent of a graduating class went to Wall Street, arguably driven by short-term compensation. He called for a shift to longer-term benefits. Creating a new financial system would entail taking into consideration the common interest of the people, and not the interest of corporate chief executive officers. The crisis was an opportunity for changes towards moral and ethical governance, panellists said.
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