Is the tap opening?

Published October 2009

Back in October 2008 in an article about the World economy I wondered “with all these gigantic losses to the taxpayer, investors, banks and other financial institutions employees, who are the ones that gain? We are talking about large amounts of wealth and their frightening negotiating power on future arrangements of the financial and perhaps other sectors or even political processes. Assuming there have been intentional distortions of the system that have caused the crisis, people behind them will fight to preserve their gains”.

There is now ample evidence that this fight has been raging with early signs it might be reaching a critical point, an unhappy moment for public interest.

With multiplicity of disturbing to the layman financial instruments involving peculiar terms such as “bad banks” and “toxic assets”, governments led indisputably by the US administration have been funneling public wealth to the whole chain of the private financial system directly or indirectly. In return they increased their level of influence in key institutions of this system being mostly under the control of a small group of majority shareholders. This small group kept the financial system at ransom. Its goal seems to be of drawing enough public funds to eradicate liquidity problems in the parts of their operations been affected whilst keeping healthy and unhealthy parts out of reach of a robust national and global regulatory or supervisory regime. The situation now seems to be reaching a point of settlement with maximum gains to this small group without loss of critical majority ownership and strategic decision making capacity.

On reaching that point the privately owned global financial system is gradually opening the taps and funds flow irrigating the choking global economy, rapidly boosting the markets. Shares and particularly shares of financial institutions are climbing back to normal values. Governments hope to recover public funds. Shareholders though in addition to what it has already been provided to cover for the reckless risks taken would see their shareholding value skyrocketing. Given that the small group of majority shareholders has interests not only in the part of the financial chain that led to the crisis but also in related industries such as construction and property trading, it is coming out of the crisis having accumulated wealth created by years of laboring of the world economy. And from this position of strength it continues challenging the introduction of whatever regulatory or supervisory framework in the name of their notion of the “market”.

There are four key actors in that game, the controlling shareholders’ group, governments, including existing global institutions, civil society and communications media. It might be worth looking at the apparent positions of each and public’s expectations.

Controlling shareholders from a strong position are expected to continue fighting for a loosely regulated global financial environment and further development of exotic instruments of finance engineering. They have formidable weapons. In addition to their level of control on the world’s physical assets they control the financial sector employees, one of the brightest parts of society’s workforce. With minor exceptions this group represents the hard and uncompromising face of pure capitalism, often expressed by arrogant colluding senior management. Any notion of social capitalism model is anathema to them. They would only yield to highly determine political and civil society presence because they know that ultimately their license to operate depends on acceptance by society.

On the government side, with a strong mandate to a promising President in the US, an effectively linked sage China, a careful Japan and reasonable political stability in broader Europe the conditions couldn’t be better. Options such as regulation or supervision, related to the social structure of countries might be clouding the horizon but the essence of effectiveness of their implementation is a common goal. The same goes to the channels used to revitilise the economy. The US is funneling most of funding via the private financial system. Europe as expected is using public funds via social channels. On a broader global perspective these two approaches might prove complementary. Leaving aside critics on details, the process of getting the necessary steps to free the global economy from the financial blockage is progressing. Determined political leadership seems to me emerging. Against all criticism the G-20 meeting has shown signs of this. The fundamental weakness of this actor is credibility. In intervening in the financial sector they are obliged to employ experts emanating from the very system they are called to overhaul. Public expects an innovative approach in bridging this credibility gap; besides a strong public overview is required.

This is the crucial role of a well organized and effective civil society. Unfortunately this seems not to be the case. Civil society in this sector is unusually lagging on dynamism, militancy and constructive proposals made public. Perhaps this is due to the economic decline and its consequences to the unemployment threat. Memories of past year’s terror of collapse are fading rapidly and energy for strong long term sustaining action is waning. Well tested channels of building strong pressure on governments have not been apparent. Disillusionment is setting in. We believe this actor has a catalytic role to play. How can this player be mobilized? Without it exerting tight and long term political pressure very little will be achieved.

The role of the media has been crucial but counterproductive. Saturating the public with masses of redundant information has created confusion, fatigue and indifference. The real threats as well as the options to counter them were poorly exposed. How objective is the strategic perspective on such an issue of the large media groups privately owned by controlling minorities with sometimes much broader economic and political interests? Is real-time insatiable media scrutiny of the political establishment even on private lives, influencing government policy? Their role is critical but have they gone too far? Media have a fundamental responsibility to stay independent and keep the public truly informed and mobilized in order to enable civil society to play their catalytic role. How can this be achieved?

In concluding however there is a much more important underlying issue. It is perhaps the first real crisis on a truly global scale and of course happened to a sector that has gone more global than any other. But by having caused such damage to other sectors such as the global economy it is a strong wake-up call. It is forcing global political leaders to coalesce realizing that the planet is rapidly integrating and the need of effective global governance has become urgent. Existing global governance systems are antiquated and ineffective left far behind by modern societies, technology and accelerating communications media. The recent creation of G20 is only one positive sign of this trend. Relevant to the four players in this article, other global crises are looming in sectors such as energy, climate change or even the next financial one. The challenge seems to be in creating modern effective global institutions on time to deal with them. This is where everyone that believes in sustainable evolution of life on this planet has to contribute.