Global IssuesECONOMY: As the EU Regulates, or Does Not
Faced with a crisis that sent shockwaves through the markets and continues to cause immense pain in the real economy, the European Commission charged eight bankers and economists with drafting a blueprint for how financial regulation should be approached in the future. It might seem odd, then, that all members of this panel, which presented the results of its discussions this week, have displayed an aversion to regulation in the past.
The most controversial appointee was Callum McCarthy, who had previously been chairman of Britain's Financial Services Authority from 2003 until last year. This authority has been heavily criticised for failing to predict the woes that befell the bank Northern Rock. Even as the confidence of those who kept their savings with the bank waned in 2007, McCarthy dismissed calls for greater oversight in the financial services as a 'mad dog reaction'. A probe by the treasury select committee in the House of Commons subsequently found that the failure of Northern Rock was also a failure of the FSA as regulator.
Other members of the panel include Rainer Masera, who became head of Lehman Brothers Italy in 2007. The following year the U.S.-based parent company of this investment bank became the most high profile casualty of the sub-prime crisis when it filed for bankruptcy.
The panel's chairman Jacques de la Rosière was managing director of the International Monetary Fund in the 1980s when the notion of 'structural adjustment' was spawned. Anti-poverty campaigners have maintained that structural adjustment has caused untold suffering in Africa, Asia and Latin America as it has made assistance from the IMF and its sister organisation the World Bank conditional on slashing expenditure on vital public services like health and education.
'Most of these guys have acted like wild cowboys,' said Paul de Clerck, a campaigner on corporate issues with Friends of the Earth. 'They have brought misery to millions of people. Their one-sided advice is not wanted. They are part of the problem, not part of the solution. The European Commission should not rely on a group with such close ties to the financial industry.'
The main recommendation in the de la Rosière report is that a new body should be established to monitor risks to the financial system. Known as the European Systemic Risk Council, it would work under the aegis of the European Central Bank in Frankfurt.
The report avoids suggesting that a pan-EU regulator should be set up. De la Rosière has argued that he may have been accused of being 'unrealistic' if he made such a proposal.
Charlie McCreevy, the European commissioner for the single market, has welcomed how the report does not blame hedge funds for the financial crisis, despite how they have been involved in highly speculative activities. Chief among them is short selling, under which a share borrowed from a company is sold in the hope it can be repurchased at a lower price.
'Hedge funds and private equity have become central in this debate,' he said. 'In political terms, this may be understandable. Hedge funds and private equity were the poster-boys of the new finance. They surfed the wave of abundant liquidity and cheap credit. Now the financial system crumbles, they are easy scapegoats for more deep-rooted problems. Before we rush out to point the finger of blame, we should not forget that hedge funds and private equity have not been central to the crisis, and it is not just me that says so.'
McCreevy is to present a plan in April detailing what rules should apply to hedge funds. Despite his defence of their activities, he has conceded that there is a need to examine how they operate. 'As regulators, we have to ask ourselves some tough questions,' he said. 'Did we underestimate some of the risks associated with the break-neck growth of alternative investments? Were we perhaps complacent that existing regulatory and self-regulatory measures covered all the bases?'
Peter Wahl from the Berlin-based anti-poverty group World Economy, Ecology and Development (WEED) is advocating that hedge funds should be banned, as was the case on a national basis in Germany until 2004. In a new report, he documents how hedge funds have been critical to not only the convulsions in the financial markets but also the increase in hunger throughout the world.
Once the market for sub-prime securities collapsed in 2007, hedge funds shifted their speculative activities to the markets for oil and agricultural commodities. The resulting 'bubble' contributed to a rise in food prices, often provoking riots, in more than 20 countries last year.
'The speculative move on commodity markets distorts prices, reinforces instability, increases market inefficiency and periodically leads to the formation of bubbles,' said Wahl. 'The worst effect is the aggravation of hunger in developing countries. The price bubble has pushed an additional 120 million people into poverty. Behind the facade of pinstriped respectability lurks misery and hardship for millions of people.'
© Inter Press Service (2009) — All Rights ReservedOriginal source: Inter Press Service