Is looting by hedge funds the cause of the crash?

Below is an excerpt from a question-and-answer session between Australian journalists and World Bank vice president for East Asia and the Pacific Jean-Michel Severino, following remarks made by the latter at the business conference in Melbourne on June 16.

Question: You have, as with many other economic rationalists, continued to prescribe the same medicine that the world has been seeing for the last 20 years and it is beginning to be recognized, as you have already said, that the financial crash the world is now facing is because of the continued unsustainable looting by hedge funds. What steps have been taken by the World Bank to regulate global speculation, especially over-the-counter derivatives?

Severino: Let me give you a very straight answer. We have taken no steps, because it is not our responsibility. We are a development agency, our role is for our clients and we have absolutely no regulatory mandate. We can participate in the international debate over what is necessary to monitor and to, say, regulate the international financial sector. And we recognized and we have publicly recognized that some initiatives could be taken at an international level or at a country-by- country level to regulate, especially short-term capital flows.

In this respect, we have the feeling that there are several good options and also good precedents that exist in the economy. We think, for instance, that solutions that have been used by Chile could provide a good learning experience for many countries. Let me finally say that if hedge funds may have a responsibility in the crisis, they for sure would not have withdrawn the money or their money if flows and problems had not existed in the economies as well.

Let me also add that if they have withdrawn their money, they have also had major participation in these economies. The high growth rates that several of the Asian economies have enjoyed over the years have also been achieved thanks to their participation.

Q: We heard this morning that a considerable portion of the money taken out -- you mentioned US$150 billion to $200 billion -- has flowed out of the countries in trouble and that a large portion of that was from their own nationals rather than from hedged funds and international financial institutions. By what process do you think that money could be induced to return? Second, following on, do you see any need for a new global financial architecture?

S: Regarding the origins of the capital flows, the origin is mixed. You have, of course, a lot of funding coming from the U.S., Europe or Japan, but you also have the citizens or nationals of these countries that have withdrawn, in certain cases, their money out of the country. In no country has the phenomenon been so wide or important as in Indonesia, where the specific economic circumstances of this country have led a lot of the major domestic players to withdraw their money outside the banking sector and economy and put it wherever in the world.

The bottom line is very simple. One cannot have a restructuring and a successful recovery without a climate of political confidence. Indonesia has been a perfect example of that. I think that what we have seen in Thailand and in Korea is also a very good example; in both cases, new governments elected freely have come and changed completely the way the public opinion looked at the programs, and these political factors play an absolutely key role in the economic recovery process.

Regarding the financial infrastructure, a lot of this term means a lot of things and people put different things under that theme. If your question is related to the debate about the management of the financial sector, which is the way the G-7 is talking about that, then the World Bank position is that we do not need an additional institution, additional structure. Three institutions can play a critical role. BIS, which probably has to be revamped in terms of setting norms and standards for over the world. IMF is there, especially for the crisis periods and for emergency funding, and the World Bank is there for much longer term agendas and especially for noncrisis periods.

So, (regarding a) regulatory agency for banking or development agencies, that should be enough to monitor and deliver in this area.