Latest update April 25th, 2024 12:59 AM
Mar 08, 2009 Features / Columnists, Ravi Dev
Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
are full of passionate intensity. (W.B. Yeats)
As the devastation from the crisis up north seeps inexorably into the underdeveloped south, with its leaky or non-existent safety nets, Yeats’s prophetic words seem most apt. One wonders, to paraphrase his concluding words, “And what rough beast, its hour come round at last, slouches towards Guyana to be born?” But maybe there is an opportunity here. It is in times of crisis that we can better discern the nature of the beast, however hazily, and equip ourselves for confronting it.
Last week, we wrote of the moral hazard created with the triumph of “market fundamentalism” as the solution to all allocative decisions in society. Among other innovations, it allowed the financial industry to regulate itself on the premise that “professional” organisations would be more au fait with the idiosyncrasies of their specialised fields and be in a better position to detect problems and propose regulations. The premise, we suggested, was flawed since it did not acknowledge the pervasive and corrosive impact of human greed.
Greed is the unchecked id; and if given free flow, as it was in the last two decades of liberalisation, we ought not to be surprised at the consequences. If manufacturers can lace milk for babies with melamine, what else is beyond greed? In the financial world, where the product is all entries on balance sheets, it becomes so much easier to rationalise excesses. But the financial tsunami that unfettered deregulation has unleashed is now pushing the pendulum in the other direction and we in Guyana have the prospect of retooling our entire financial system to better match our circumstances.
Enacting rules and enforcing them is not necessarily a question of morality but to ensure that the social purpose for which the institutions were allowed to be established are being fulfilled. Finance was never meant to be an end in itself but simply to facilitate the production of goods and services necessary for human satisfaction. It has to do with dealing with the omnipresent reality of risk that inheres in all transactions. The goal of all reform therefore, has to be focused not on the financial institutions per se, but on ascertaining that they are servicing the real economy most efficiently and prevent them from damaging the same. That is, that they are assuming and aggregating risk within tolerable and manageable limits to ensure that production is profitable.
In the go-go years however, with deregulation, financial institutions moved from being financial intermediaries of credit that earned small but steady profit to being massive profit centres. This financialisation of the economy reached its apogee in the US when by 2008, 40% of all profits came from the financial sector as their manufacturing sector atrophied. All sorts of ingenious subterfuges were invented to evade or corrupt the regulatory vestiges that survived – all purporting to deal with the vicissitudes of the demon of risk.
There was, for instance, the shift by banks from the “originate and hold” model of mortgage financing to the “originate and transfer” model through the magic of securitisation and its subsequent further attenuation through mind-boggling derivatives. Then there was the creation of Special Investment Vehicles (SIVs) that simply moved risks to “off balance sheet assets” and freed up capital for further gambles. And so on and so forth. Some of these practices, and all of the premises, emigrated down here. Who allowed NBS, for instance, to extend its mandate from providing mortgages for housing (a social good) to project investments?
So new rules are needed but there arises the problem of “what” and “to what degree”? We cannot just revert to the status quo ante…the river has flowed on. There is no question that we need to balance the demands of a ‘free market” with the overall social good – which is to be protected through judicious regulation. The proof of the pudding has to always be in the eating. Changes will have to be engendered on both sides of the fence – in the regulatory regime and organisation and in the substantive rules of doing business.
On one hand we cannot have the regulatory body over insurance point out a breach of the regulations by one company and have nothing done one year down the line. On the CLICO debacle, how could the local CEO blatantly misinform the public about the health of her firm without any sanction? Or the CEO of Hand-in-Hand Trust blithely absolve himself from any responsibility for being duped by Stanford’s Ponzi scheme? Apart from the continuous healthy returns that belied every investment model, didn’t the purported “due diligence” that showed identical returns for two years running, provide a tip-off? Greed fuels all Ponzi schemes.
It was also greed that encouraged financial firms to go public thus encouraging the captains of finance to place their salaries and bonuses ahead of the prudent management of capital, that had been their lodestone when they were private. Risk was severed from consequences. What this (not to mention the trillion-dollar collapses farther up north) proves is that financial assets are far riskier than the “experts” have let on. The models that the pros use are obviously based on fundamentally flawed assumptions.
Another reform will have to address the public’s right to know about the health of their financial institutions balanced against the obvious need for confidentiality. Too often, the latter rationale has been used to treat the public, in one crude formulation, like mushrooms – feeding them waste matter while keeping them in the dark. And this has been the practice on both sides of the regulatory divide: they are all evidently more concerned with protecting their own interests over that of the investing public. Nowadays everybody lies: truth is the talisman no longer – money and power are the new gods.The best lack all conviction, while the worst are full of passionate intensity.
(To be continued)
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