Financial Architecture

Mar 15, 2009 Features / Columnists, Ravi Dev

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The leaders of Caricom are meeting this weekend in Belize. Not unexpectedly the global financial crisis is high on the agenda, as is the CLICO fiasco. The latter certifies that we are well and truly liberalised and integrated into the global financial system, as promised by the “liberalisation” policy of the IMF/WB. We have received our dividend. The crisis has been engaging the leaders since January, and a special task force has been established “to recommend policies, programmes and approaches to lessen the effects of the global crisis on CARICOM Member States”. The report is to be presented in “early April”.

President Jagdeo has mentioned that “regulatory changes” are in the offing. He signalled that in his estimation the changes ought to go beyond the reflexive cosmetic ones floated in some quarters: “We have to look at this carefully to see whether in the future we may want to separate conglomerates from being able to raise their own money through inter-related institutions or, alternatively, regulate against excessive inter-company transactions.”

We had pointed out (“Banking for Development”) that this feature in our financial system was exacerbated by the liberalisation policy foisted by, and is only one consequence of, the flawed neo-liberal premises the IMF/WB (“Moral hazard”).

The same phenomenon was observed two decades ago in Chile when they liberalised their financial markets at prompting from the same quarters. According to one analyst in 1993: “Bank portfolios became increasingly concentrated in related clients and, when those companies failed, non-performing assets accumulated. Ultimately, and ironically, the state had to step in once again, renationalising companies and refinancing insolvent banks.” When will we ever learn?

We have belaboured the point over the last two weeks that the financial system must perform its social role of providing lubrication for the real economy and must not be allowed, as has occurred, to be the tail that wags the dog. It is not just a matter of fine-tuning or increasing the regulatory oversight over the present institutions. We believe that with the turmoil in the global financial system, which has plunged the world into what the World Bank has called a world “depression”, a complete revamping of our financial architecture is demanded. We must begin, however, with a very clear strategy for engendering sustainable growth, and then design a financial system that best caters to that model.

We have advocated the creation of a “Catalytic Entrepreneurial State” that plays a much more dirigeste role within an industrial policy-design framework than the “night-watchman state” the Washington Consensus has insisted on for the last two decades (“For a New State”). Economic growth is the result of the logically distinct processes of ‘capital accumulation’ and ‘productive investment’. Successful economic transformations in modern economies need a developmental state to coordinate these two processes. We need a financial system that most efficiently mobilises public savings and foreign funding and channels them into targeted sectors of the economy. The present set-up has failed us miserably, and we have advocated the reintroduction and maintenance of a public banking sector.

As we have mentioned in the past, our public banks failed in the past, not because they were public per se, but because of political interference and strategic missteps. (“Public Banking Anyone?”) The present crisis dwarfs any problem precipitated by the discarded “intrusive governmental model”. The East Asian economies, exemplars of the developmental state, intervened into the financial and real markets and altered the processes of capital accumulation and productive investment in line with the needs of earmarked priority sectors.

While there are several routes that the individual countries undertook in funnelling finance to directed sectors – from the bank/Chaebol combines of Korea to the strong Central Bank of Taiwan – they all rejected the dogma that the market alone would lead to increased allocative efficiency. We cannot even count on innovations such as the BOT and BOOT public/private partnership, exemplified by the Berbice Bridge project: the incentive demanded may be too much for the traffic to bear (pun intended). A professionally run public bank would also offer competition to the private banking system in the provision of loans and services – especially to the small business and entrepreneurial class.

The Entrepreneurial State cannot be apologetic in insisting that private banks also integrate their operations within the industrial policy framework. The recent extraordinary growth of the financial sector and the colossal profits generated by it (before the inevitable busts, that is) has made many forget that the sector is a derivative one and merely intended to service the real economy. The private banks will have to be reminded very strongly about the social role that is demanded on account of several factors – not least the implicit and explicit safety nets that the state provides them with. Their acceptance of the steady but safe returns of the old days may be seen by them as a tax for all the benefits conferred by the state.

Firstly there is the differential, not to mention deferential, treatment that they are accorded by the state under the neo-liberal dispensation. Banks and other financial institutions are treated with kid gloves putatively because of fears that their failure would result in “systemic failures”. The larger financial institutions are thus encouraged to take risks far beyond what is prudent, knowing that if they run into trouble the government will bail them out .The fact that we are all presently running around like chickens without their heads exemplifies the concern for the survival of our financial sector.

Compare it with the outrage from some quarters with the intervention in the sugar sector. Trinidad’s takeover of CLICO, with its touted T&T$100 million assets, further illustrates this point. The Central Bank, as the “lender of last resort”, is always there – with taxpayers’ money, of course. When the good times are rolling those taxpayers never get a whiff of the super profits that are generated mainly from their implicit guarantee.

For years we have railed at the moral hazard (not to mention perverse incentive), presented by the neo-liberal dogma that insists that our government “sterilise” billions of dollars ($60 billion right now and counting) while paying the banks billions in interest from taxpayers’ money, and while, of course, we cannot find funding for developing industries, since the banks are making the “rational choice” of taking the safe government money and run (all the way to their vaults).
Change, and deep ones at that, must come now. We need a new financial architecture.

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