Fri, 20 Feb 1998

Big banks mismanage global economy

The financial crisis in East Asia has brought home to what extent the world's banks have mismanaged the global economy, says author Hazel Henderson. In this Inter Press Service column, she calls for a rethinking of the role of banks.

ST.AUGUSTINE, Florida (IPS): The continuing woes of Asian economies have taught the world a lesson about what's wrong with conventional economics.

The usual prescription of globalising financial markets, privatizing state enterprises and services, wooing private investors, cranking up exports, and going for GNP measured growth at the incalculable cost of social disruption and environmental damage have not worked.

During the past 10 years, grass roots activists, global citizens, and many concerned scientists have documented the appalling, often irreversible, social and environmental consequences of narrowly focused, short term GNP growth.

As global direct investment and portfolio flows quadrupled between 1990 and 1997, the World Bank, the International Monetary Fund (IMF), central bankers and their private banking colleagues all hailed the Asian growth miracle. Today, we learn that these global public and private bankers knew all along about the "crony capitalism" of insider dealing, lack of transparency, lax regulatory supervision, imprudent borrowing and lending, as well as rising excess capacity in many manufacturing sectors. Indeed, their advice was to further deregulate, privatize, and open their markets.

During these heady years, the public received little warning as to the growing fragility of the financial markets even after the Japanese asset bubble burst in the early 1990s. Few bankers or their economic experts will admit that the widespread banking and financial deregulation they encouraged in the 1980s helped create the daily global casino that involves more than US$1.5 billion 90 percent of which is speculation.

Why did the central bankers not warn the public sooner about the worldwide asset bubble inflating ominously in Asia and on Wall Street since the early 1990s? How could they not know that removing all the "firewalls" between the world's economies through deregulation, privatization, and free trade agreements would inevitably increase such interactive financial flows and exacerbate volatility in floating currency exchange rates?

The extent to which the world's banks have mismanaged the global economy only now is becoming visible.

From the U.S. savings and loan banks' bailout in the late 1990s, the Mexican crisis in 1994, to the Asian meltdown, short sighted, imprudent, badly supervised banking systems, as well as deregulated and virtually unregulated financial markets, have been at the heart of these problems.

This has cost the world's taxpayers, employees, small businesses and investors dearly. Worse, the world's poorest citizens have been the most tragic victims of badly designed, malfunctioning financial systems and the debacles caused by the false promises of a generation of conventional economists.

More fundamental banking reforms would correct the monetary design flaws in most countries that allow private banks to literally print money (i.e., increase the money supply) each time they lend a customer money. Such debt backed currencies are widely viewed as the basic cause of boom and bust cycles.

In the United States, and many other countries, national legislatures and treasuries have jurisdiction over issuing currencies in the case of America this was given over to private banks via the Federal Reserve System.

Most Asian governments today are sadder and wiser, saddled with massive debts and IMF bailout conditionalities, which may spare elites but cause further suffering for the most vulnerable citizens. People in Japan, meanwhile wonder why they should bail out their reckless banks after recently paying for a costly rescue of their savings and loans.

Down Wall Street, there also is speculation on whether IMF prescriptions have not worsened Asia's financial disease causing unnecessary loss of confidence, bank closings, and further currency sell offs. The public now understands what economists call "moral hazard" when lenders, bond owners, and investors grow reckless expecting government (taxpayers) bailouts.

Many in the United States balk at the $18 billion replenishing of the IMF bailout fund. Some businesses are trying to block IMF bailouts, which will benefit their Asian competitors, thus causing layoffs among U.S. workers.

One Congressman, Bernie Sanders, points out that such new funds for the IMF contravene a U.S. law that limits bailout funds to countries that respect human rights and International Labor Organization (ILO) conventions on employees' rights.

Welcome to the new era of global interdependence; the world's financial system is becoming an increasingly inter linked web, as deregulation, privatization, information technology and electronic commerce advance.

Surely now is the time to rethink the role of banks and the way central bankers create money, oversee monetary policy and credit, and to reveal the politics underlying economic theories, such as the Washington Consensus.

If bankers don't shape up, they may risk being bypassed by today's 'infocurrencies' direct electronic exchange, high tech barter, local scrip, swaps and global countertrade now estimated to comprise up to 25 percent of all world trade.

The World Bank, the IMF, private bankers, and global financial players should join the call for a 'Global Securities and Exchange Commission' and currency exchange fees to tame today's global casino. Let's rewrite the rules so that markets can serve not dominate our societies.

The writer is a development policy analyst and author of Paradigms In Progress and Building a Win Win World.