Published: 11 October, 2008, 09:04
Edited: 11 October, 2008, 09:04
This week’s RT experts comment on the financial crisis that has hit all world markets. What will the global credit system look like after the storm is over?
Peter Lavelle, RT political commentator and anchor
Russia has not escaped the financial meltdown that started on Wall Street. Its stock markets have been hit hard. The Russian government has provided assistance to trade companies and made sure the banking system is sound. Russia should weather this storm without too much damage.
However, we see different countries approaching this financial crisis in different ways – in ways that in some cases only pass on problems to their partners. President Medvedev continues to push for a new and updated global security order.
Shouldn't we be thinking about the same when it comes the financial global order? Wall Street and the City cannot be the centre of finance. Shouldn't we be thinking about a new order that includes Russia, China, India, and other countries?
Sergei Roy, editor, www.guardian-psj.ru security website
Following his June 2008 five-point plan for security in Europe, President Medvedev came up with another five-point plan in Evian, this time for economic security on a global scale.
He called for a strengthening of international regulatory institutions; eliminating the imbalance between the amount of financial instruments issued and returns on investments (in short, blowing up financial soap bubbles); strengthening the risk management system; ensuring maximum information transparency; and removing barriers to international trade and free movement of capital.
Just like the security plan for Europe, it is a beautiful plan that would work ideally in an ideal world. However, one cannot help feeling sceptical about its applicability to this highly imperfect world of ours.
It is in fact tantamount to eradicating what Medvedev himself dubbed certain nations’ economic egotism, and this looks too much like a bid to change human nature. There is just not much likelihood of combating economic egotism in the foreseeable future, especially not on the part of the country or countries most guilty of it.
Consider the latest U.S. move to overcome its financial and every other kind of crises, the “bailout plan” to inject $750 billion into the economy. Forgive my naiveté, but where is Secretary of the Treasury Paulson going to get that chunk of dough? Isn’t the U.S. already in the red to the tune of trillions, according to the latest statistics on its budget deficit?
It looks as if, before injecting all that money into its financial sector and wherever needed, the U.S. will have to borrow it from other nations. In effect, it will continue to behave just like before – as if it had an unlimited credit line.
How’s that for conquering economic egotism? America is guilty of the biggest financial swindle in history – for that’s what the behaviour of U.S. financial institutions, FRS policies, auditors, credit rating agencies, economics gurus with Nobel Prize credentials to their names, and, surely, ordinary American consumers, amounts to. And still it expects the world to bail out its finances and save its economy from recession – while it continues to advance its world hegemony.
And you know what? The world will most likely come to the aid of this particular party, Medvedev plan or no Medvedev plan. Hasn’t Russian Finance Minister Kudrin reminded us recently that “recession in the USA will impact the world economy, developing markets and Russia”? Of course it will.
Recession means less demand for oil, less money for Russia’s treasury – so let’s join forces with other countries, let’s bail out America and entertain the hope, however forlorn, that some international organisation will help constrain that ogre’s egotism, along the lines of the Medvedev plan or one like it.
Well, that’s one kind of agenda. Another would be to take a more realistic stance and put our own house in order first, without putting too much faith in the ability of some new international institutions to make the world, and us, financially safe.
For starters, kick out a finance minister who has such a surrealist belief in the power of the U.S. economy and the dollar (just six months ago he insisted that “the US economy is sufficiently flexible, mobile, and the current crisis phenomena do not represent any special danger to it”).
Then, wean Russia’s financial institutions and corporations from the habit of adventurist borrowing abroad, indulging in soap bubbles of their own. Make an all-out effort to kick this country’s habit of mainlining on oil, gas, timber, metals, etc.
Concentrate on renovating the infrastructure and modernising production forces, stressing technological innovation. Reduce the corruption rent to manageable levels.
In short, do all those things that our leaders are so fond of sounding off about.
If at least some of these things were achieved, Russia could indeed hope to form the core, or part of the core, of a new economic order. Until then, Medvedev’s plans remain an exercise in fine rhetoric. More's the pity.
James Blake, RT business expert
What is happening here is that governments are stepping in to bail out a global financial system which has begun to eat itself. Governments are saving that system, giving it the chance to think about better and more effective ways of conducting business.
The government(s), and central bank(s), actions mark an historical turning point from an era in which the English language world sought to remove government from business, freeing it from regulation, and cultivating, if not enforcing, that approach though international bodies (the World Bank and IMF for starters).
This ethos may have brought a period of what seemed to be greater efficiency and flexibility, with greater competitiveness and productivity, for some parts of those nations. That period will now be weighed against the additional need to bail out the system, and the societal costs this entails.
Capital, from here, will need to display considerably more political savvy than it has for a generation, and political savvy in the context of it no longer having the power it appeared to have. Now that governments have stepped in to save the system, that system, and the government’s interactions with that system, will now be part of a political process.
Essentially the question will no longer be how much politics will the financial world permit, but how much support can be gained from the political system by the financial world.
In this political process almost every other issue – from labour rights, to health, cultural issues, and education – will now have more scope to achieve what are meaningful outcomes in terms of those issues, without having them scoped within the framework of how much they will be allowed to achieve whilst maximizing financial outcomes at individual, organisational, and societal levels, as well as in international forums.
The needs of capital are unlikely to change fundamentally. It wants, and will continue to want, legal systems of clarity and sophistication to handle the world of business, services and specialists which will cultivate an ethos of profit maximisation, and a community of understanding about norms within this process.
These factors are what have made London and New York the global financial centres they are – large numbers of people working to manage other people’s money efficiently and within a sophisticated and flexible system, operating within a similarly refined legal framework, who are sought out by the owners of capital for that expertise and system.
There was never any 'decision' to make them global financial centres, they evolved that way. In both cases being major trading ports helped.
New financial centres will not come about through government edict or, indeed, though negotiated political agreements. They will come about when other global centres replicate the finesse of the systems in place in London and New York, the respect with which they are held by capital owners, and can supplant them in terms of access to volumes of capital.
The changes in global balance of payments in recent years have shifted much of the ownership of capital, particularly towards Asia, but also towards energy producers. What remains, if any of these places is to become a new centre of global finance, is for the systems in place in those locations to generate the respect of the capital which has been accumulated there, and later elsewhere, and to demonstrate that they have legal and administrative systems of sufficient clarity and finesse to motivate buyers and sellers to want to be there.
Joera Mulders, independent Russia watcher, Amsterdam
I do not see a common multilateral solution to the financial crisis yet.
Russia's situation is different from those in western countries. Its financial system is relatively young and undeveloped. In western economies the speculative elements within the financial system are much more entwined with the real economy than in Russia.
Although, we may see the growth of Russia stock markets over the last decade as a bubble that is now deflating, the weight of Russia's stock markets capitalization for the real economy is relatively small. Listed banks, companies and investors do suffer, but this is a contained group. Consumer credit was rising rapidly over the past years, but it is still small. Mortgage programs are only starting. Russia's bubble is limited and the economy will survive a deflation.
Russia's real crisis is located within its banking system. There has not yet developed an efficient practice of interbank loans. Many of the small and mid-sized banks therefore borrowed heavily from foreign banks. At the end of 2007 about 25% of the capital of Russian banks was foreign. Banks with foreign loans and a large stock portfolio are now in rough weather. As a result they cannot support investments programs of Russian mid-sized companies. This already hurts the economy and many expect the full scope of ramifications to hit in a few months' or even a year's time.
The crisis and the remedies proposed by the government have only exacerbated the mistrust among banks.The bulk is provided to the larger banks to be distributed among the smaller. Many do not trust this money to reach the places where it is needed most.
Russia's Central Bank and the larger banks will use the crisis as an opportunity to consolidate and increase their own positions. This could be better for the system in the long run. Russia has too many banks to built an efficient and transparent system. Consolidation may in the long run improve the level of trust in the banking system.
So where the 'overdeveloped' capitalism of the West could profit from increased regulation to prevent the growth of new bubbles, Russia's lesson from the crisis is to strengthen its own 'underdeveloped' banking system. I therefore do not see a common approach to regulation. Frankly, Russia does not have the experience to propose regulations for 'overdeveloped' capitalism.
Russia's solution at hand is to use oil and gas profits to finance the banking sector. Thus, instead placing it in low yield foreign bonds, while Russian banks borrow their money at much higher percentages from foreign banks. The vector is nationalization, although this vector should not be pursued too far.
The vector of nationalization and state interference, we have seen over the past weeks, is not limited to Russia. What we witness is another phase in the return of the nation state on the international scene, or in Surkovian: 'the rebirth of the sovereign financial system.'
What Russia should do is use its diplomacy to coordinate the divorce from the current international financial system. Its aim should be to built trust for this process. Attacking the Worldbank, the IMF and other parts of the current system is far from helpful. So is bailing out Iceland.