NO FINANCIAL REFORM IN SIGHT AS BANKS RESUME BUSINESS AS USUAL

By Roberto Savio and - - Reprint | | Print |

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ROME, Nov 5 2009 (IPS) - The financial landscape has now been blessed with a new American company that lists divorce settlements of millionaires on the stock market. Investors pay the high legal costs of one of the parties and shares in the proceeds if the judgment goes their way. All of this, as the financial crisis has added 100 million more poor to the world.

Although everyone is giving assurances that there is light at the end of the tunnel regarding the most recent financial crisis, for at least the short term the enormous number of unemployed is not expected to drop.

Meanwhile, despite universal clamour for reform, the financial system has gone back to business as usual, as if nothing had happened. In mid-October it was reported that the sum of derivatives, the high-risk financial instrument that set off the crisis, has continued to increase to a total of 445 trillion dollars, a staggering figure equal to 6.5 times the gross world product.

Bear in mind that the shipwreck of Lehman Brothers and the crisis of AIG insurance company, rescued by the US treasury for USD 182.5 billion, were the result of derivatives, a significant proportion of which had been transformed into toxic bonds.

Another piece of breaking news is that the latest Global Stability Report issued by the International Monetary Fund states that while banks have written off USD 1.3 trillion in toxic assets, the total of those still on the books is USD 1.5 trillion.

What is happening now is that thanks to the help from taxpayer money, financial health is no longer a priority for banks, which can keep this massive quantity of toxic assets in their portfolios, a ticking time bomb sure to explode with the next crisis.

Certain politicians have begun to call for the much-spoken-of structural reform of the financial system, which is demanded by a chorus of civil society organisations, religious figures from around the world, and innumerable enraged citizens. Italy’s finance minister, Giulio Tremonti, for example, has launched a campaign for “a new Bretton Woods”. Thus far, however, there has been no concrete reform whatsoever.

Meanwhile another systemic risk grows larger: the increasing concentration of the financial sector. The largest banks to have survived the crisis are buying up smaller troubled or bankrupt banks. In the United States alone, more than 100 banks went bust between January and October of this year. In this way the “banks that are too big to fail” and so must be saved with public money continue to grow bigger, increasing the risk of incipient failures.

As if that were not enough, with the injection of public money and low interest rates, banks have returned to their old vices. In effect, they are receiving huge sums from the central banks at near-zero interest rates, thus building up capital such that the financial sector, the cause of the disaster, is the first and thus far the only to emerge from the crisis.

This sector has pushed the stock markets so hard that the Dow Jones index has again topped 10,000, while Goldman Sachs is about to hand out USD 23 billion in bonuses to its employees, the same amount as in 2007, though now they will give 300 million to charity.

This reality is in sharp contrast to the pro-reform rhetoric of governments. The US Congress is debating a bill to address derivatives but the result is predicted to be so full of loopholes that it will have no real effect.

In Europe the debate seems to have been reduced to the issue of bankers’ bonuses. France’s finance minister, Catherine Lagarde, came out against a bill to impose a tax on banks. (Lagarde, like the majority of public economic leaders, has held important positions in certain international banks.) And all that came of Tremonti’s campaign is that in its desire to contain public spending, Italy has dropped to last place among donors of development aid, which now stands at 0.1 percent of GDP as opposed to the 0.7 percent that Rome had promised.

This brings us to a sad observation. According to ethologists, our species displays a troubling shortcoming: we doesn’t learn from fear.

On December 10 leaders of all of the countries of the world will meet in Copenhagen to discuss ways to control climate change. Survival of the species is instinctive in the animal kingdom. For man, the climate is clearly a life-and-death matter, and yet there is still no agreement between the old industrialised countries and newly-industrialised countries like China, India, and Brazil, to finance technological changes that would allow the latter to reduce greenhouse gas emissions without restricting growth.

Without such an agreement, our species and the planet that supports it is in jeopardy. The cost for the above intervention would be about USD 40 billion, but the rich countries are saying that because of the crisis they cannot afford it. And yet we have seen that in a single day the United States came up with USD 182.5 billion to save one company, AIG. As the meeting in Copenhagen approaches, the rich countries should get their priorities straight and assume their share of the responsibility for their planet. (END/COPYRIGHT IPS)

(*) Roberto Savio is founder and president emeritus of the Inter Press Service (IPS).