It is urgent to set up a European crisis committee to provide sturdy reliable solutions to the present crisis of markets
By Jacques Delors, Jacques Santer, Helmut Schmidt, Massimo d'Alema, Lionel Jospin, Pavvo Lipponen, Goran Persson, Poul Rasmussen, Michel Rocard, Daniel Daianu, Hans Eichel, Par Nuder, Ruairi Quinn, Otto Graf Lambsdorff
Le Monde, May 22, 2008
This financial crisis did not come out of the blue. It was not impossible to foresee, contrary to what today claim some high ranking officials from the world of finance and politics. The whistle had long been blown by some lucid individuals. The crisis stresses the factual failure of lightly or badly regulated markets. And it shows us once again that they don't have the ability to regulate themselves. It reminds us too of the worrisome income inequalities which grow relentlessly in our societies, and which cast a serious doubt on our capacity to engage into a credible dialog with the developing countries on the great challenges facing our planet.
Financial markets have become more and more opaque. Identifying those who support or evaluate the risks turns out to be an extraordinary difficult task. The so-called "shadow" banking sector, little- or un-regulated, has increased over the last twenty years. Large banks took part in this game of "creation and distribution" of extremely complex financial products. They embarked into the selling, wrapped in dubious packages, of debts linked to highly risky mortgage loans. Inadequate incentives to managers, too short-sighted views and blatant conflicts of interest encouraged speculative transactions.
Below investment grade mortgage loans, based on the mistaken idea that real estate prices would keep climbing endlessly, thus enabling borrowers to repay easily their debts, are only the symptoms of a wider crisis touching financial governance and commercial practices. The world three largest quotation agencies rated these funny financial instruments as relatively secure. One investment bank earned billions of dollars betting on the decrease in value of subprime loans, while selling them to its clients, which illustrates better than anything else the total loss of ethical mooring in the world of business!
We had been warned about the danger of this situation. Alexander Lamfalussy and the Committee of Wise-Men, in a report on the markets of European securities (2001), stressed the relationship between the apparent increased efficiency of the markets and its cost in terms of lost financial stability. Paul Volcker, some years ago, already expressed his concerns. Paul Krugman a decade ago did point as well to the threats posed by unregulated and growing financial entities. In 2003, Warren Buffett dubbed financial derivatives "financial weapons of mass destruction".
A report on financial stability, from the Bank of England, underlined the dangerous gap between moneylenders’ actions and their consequences. The problem lies in the current model for economic and business governance based on weak shareholders' representation, inadequate control and too small an offer of public goods.
The financial crisis demonstrates all too clearly that the financial industry is unable to regulate itself. We must imperatively improve the controls and the regulatory framework of banks. It is also necessary to reconsider the regulation of investment instruments. The use of financial instruments (like Collateralized Debt Obligations, or Asset Backed Securities) must be controlled. All these financial institutions should, like banks, maintain a minimal level of reserves, and their debt leverage ratio should not be limitless. Lastly, the system of incentives and rewards to managers should be reviewed in order to avoid encouraging inconsiderate risks without any prudence rules.
As regards the consequences of this crisis on the real economy, it seems that economic experts the world over were struck by a bout of shyness. Almost all forecasting outfits are now lowering their estimates of growth of developing countries for 2008 and 2009. But nobody dares clearly tell whether Europe is under threat of an economic recession. Some symptoms, however, are unmistakable. In the case of the European Union, a recession this year or next year would have dramatic consequences.
Growing inequalities of incomes did develop in parallel to the growth of the financial sector. It is true though that technological progress significantly contributed to wider and wider differences in income, favouring a highly qualified workforce. However, ill-advised policies had a major impact in this domain as well. Financial capital today amounts to fifteen times the gross domestic product (GDP) of all countries. The cumulated debt of all households, plus financial and non-financial firms, and public entities in the United States represents three times the US GDP, which is twice the level it had reached at the time of the stock market krach of 1929.
The world of finance has accumulated a huge quantity of fictitious capital, which did not contribute in any significant way to improving the well being of humankind or to preserving our environment. This financial crisis made it easier to see the frightening income disparities, which only increased over the last decades. It is ironical that the salaries and bonuses of many CEOs reached vertiginous levels while at the same time their firms returns stagnated or decreased. The ethical challenge is therefore also a major one!
Free markets cannot remain unconcerned with social morals. Adam Smith, the founder of economic laissez-faire, did also write the Theory of moral sentiments, and Max Weber showed the link between hard work and moral values on the one hand, and the rise of capitalism on the other. Decent capitalism (that is capitalism respectful of human dignity, to quote the words of Amartya Sen) requires efficient public intervention. The pursuit of profit is the engine of market economy. But when everything is for sale, the social fabric begins to unravel and the system to collapse. The current financial crisis reduces the ability of the West to engage into a constructive dialog with the rest of the world on the challenges facing our planet, on the management of the consequences of globalisation and on climate warming – while the startling economic boom of Asia brings with it new and unprecedented challenges.
The spectacular increases in energy and food prices only aggravate the effects of the financial crisis, and bode badly for the future. In this respect it is significant that hedge funds, via speculation, contributed to the price increase of commodities. The citizens from the poorest countries will be all the more struck by that. We incur the risk of an unprecedented explosion of misery, of a proliferation of bankrupt countries, of bigger migration flows and more armed conflicts.
Some declare loudly that Europe is made of "strong economies", with better financial controls and better regulations than in the United States. This is partly true. But let's not overlook the growing problems in real estate markets in the United Kingdom, Spain and Ireland, and the economic stagnation that is trickling all over Europe. Let us pay attention as well to rising economic nationalism and populism, both of which seduce more and more people.
European decision takers, at the European level as well as at the national level, must bring a firm response to the present financial crisis. We need pragmatism, an open mind and a spirit of cooperation in the pursuit of common goals.
Europe must study these evolutions and identify the foreseeable consequences, short term and long term, in order to elaborate propositions addressed to the international community at large, which will counter the effects and the deep causes of this crisis.
The time has come to create a European crisis committee, which will gather high level political representatives, former heads of states and of governments or finance ministers, together with renowned economists and financial experts from every continent. This committee will have the following agenda:
In 2000, we agreed to make the European Union the most competitive region in the world. This ambition was voiced again in 2005. We must make sure that European competitiveness is reinforced not undermined by financial markets. We must act without delay: for our fellow citizens, for more investments, for economic growth, for social justice, for work opportunities, and, in the end, for a better future for all Europeans.
Translation: Andre Cabannes
This paper would be more convincing if nation-states were less, not more as they are, financially irresponsible than hedge funds. The fact is that, in the future, private financial institutions will become more powerful, thanks in particular to new private currencies.