In 9 days time the US Financial Crisis Inquiry Commission begins hearing what senior bankers have to say about the causes of the crisis.

I will be keeping a close eye on the Commission’s work and posting background and analysis here on the APEsphere blog. Let me explain why.

The FCIC in a nutshell

Phil Angelides (pictured above), the man appointed to chair the commission, last September defined the FCIC’s mission as being “to conduct a full and fair investigation in the best interests of the nation—pursuing the truth, uncovering the facts, and providing an unbiased, historical accounting of what brought our financial system and our economy to its knees.”

The Commission’s 10 members — six chosen by Democrats, 4 by Republicans – have until December to report back to Congress. They have the power to subpoena witnesses, and to refer individuals for criminal investigation and prosecution.

Who cares?

The Commission is investigating the worst financial crisis since the Great Depression. The Global Financial Crisis (GFC) has produced a longer term Global Economic Crisis that has impacted the everyday lives of real people around the world to an extraordinarily severe degree:

• it has increased the number of people around the world in chronic hunger and poverty by over 100 million, to 1.02 billion;
• widespread conflict and state fragility is being anticipated and has already begun to be realised;
• between 200,000 and 400,000 more babies could die each year between now and 2015 if the crisis persists;
• the crisis has undermined the will to make progress on combating climate change, thus contributing to the ecological, social and political risks associated with that phenomenon. Earlier predictions that the recession would reduce emissions have proved ill-founded;
• an increase in global unemployment by between 29 million and 59 million people;
• one in eight US mortgage borrowers is behind on mortgage payments or facing foreclosure at the end of the second quarter 2009;
• pensioners relying on developed country stock market returns for their retirement incomes have seen their savings fall by 45%. The links between the crisis and retirement incomes are explained here.

No wonder countries are marking an upward trend in stress-related mental illness and crime.

What could this Commission achieve?

We want to ensure that this crisis cannot be repeated. A thorough public investigation of the causes can help channel anger into the political will to undertake effective regulatory reform, including the dismantling of powerful institutions known to be “too big to fail”. While regulatory reform is already underway in Washington and elsewhere, further and more profound reform is a potential outcome of this Commission’s work.

The committee set up in 1934 to investigate the causes of the 1929 crash and the Great Depression that followed it signals what is possible. Once Ferdinand Pecora became the committee’s lead investigator and began cross-examining Wall Street’s leaders the ground was laid for reforms that included the establishment of the Securities and Exchange Commission and the Glass-Steagall Act that separated staid commercial banking from risk-fuelled investment banking – reforms that kept Wall Street out of systemic trouble for forty years.

But the FCIC could achieve much more than this, and needs to do so.

When South Africa emerged from apartheid, a Truth and Reconciliation Commission was established to consign to history the egregious, state-supported human rights violations that were committed against a large section of its people.

In 1995, after decades of the systematic abuse of economic, social and political rights known as apartheid, the South African government set up a Truth and Reconciliation Commission to give ordinary people an opportunity to air their grievances against a system that institutionalized racial segregation and discrimination in all aspects of life.

According to the then Minister of Justice Dullah Omar, "... a commission is a necessary exercise to enable South Africans to come to terms with their past on a morally accepted basis and to advance the cause of reconciliation."

The TRC was a forum in which anyone who felt that he or she was a victim of the system could be heard. Those on both sides who had done wrong could also give testimony and request amnesty.
Now, political establishments around the world have been shown to have placed the interests of a powerful financial minority above those of the majority.

Dead babies will never learn to speak, and how do you give voice to the 100 million starving? But what the FCIC can do is provide public, open and free discussion of the causes of the crisis, confront those responsible with those they have impacted, raise the question of prosecution and possible amnesty rather than assume as now a cosy settlement between corporations and regulators.

How else do governments and financial institutions expect the results of egregious risk taking at great cost to communities and individuals to be put behind us? How else will they lay to rest the cynicism, mistrust of institutions and raw anger that that behaviour has garnered?
 

• 3 Comments

So what is the real story? Has the Great Recession dented ethical consumerism, or has the ethical consumer remained constant?

Consumers in the UK appear to be as ethical as ever, and the most ethical in Europe, according to a survey by IDG.

So how about this rival report by Mintel that says consumers are shying away from paying a premium for ethical or sustainable goods while they are under under the yoke of recession.

Can any readers resolve the apparent contradiction here?

• 2 Comments

Often when someone fights against accountability, they make their opponent's case for them.

Take three recent instances:

Attempts by British oil trading firm Trafigura to gag the Guardian newspaper from reporting on a question posed by a MP in Parliament about the company's existing secret gagging order preventing the newspaper from reporting on Trafigura's dumping of toxic waste in the Ivory Coast. Had Trafigura succeeded in preventing reporting on the parliamentary question, it would have represented a stunning override of parliamentary privilege. The attempt was undermined effectively by people on twitter who took it upon themselves to make the question public.

Then there is the reaction of UK-listed and based Vedanta Resources to being told by the UK National Contact Point for the OECD Guidelines for Multinational Enterprises that the company had failed to consult on or look out for the interests of local people regarding its plans to construct a bauxite mine in Orissa, India. According to India's Business Standard, Mukesh Kumar, chief operating officer of VAL's Lanjigarh project responded:

“We condemn the findings of the UK-based agency. Our bauxite mining project at Niyamgiri hills has been cleared by the Supreme Court, the highest judicial authority in India. It is inappropriate for the agency of any other country to comment on a project being developed in India”

Even where that company is rooted in and takes advantage of capital markets in that other country?

Then there are the mounting attempts by corporations to shift their tax residence elsewhere from their actual base of operations in order to avoid tax (prompting this response from the UK tax authority) .

As corporations take ever greater liberties with the reach of democratic accountability, they make the case for global or at least extra-territorial regulation.

• 1 Comment

Stephen Green, Chairman of HSBC and author of a new book "Good Value", has said in a BBC interview that he feels banks owe the public an apology.

This makes quite a change from the tales of "back to business as usual" emanating from Wall Street and London's Canary Wharf, and much more appropriate to the author of a book with the subtitle "Reflections on Money, Morality and an Uncertain World". I wonder though whether an apology is enough. Here's a reminder from my earlier post about what we can now view as:

the worst financial crisis since the Great Depression: an increase in the number of people around the world in chronic hunger and poverty by over 100 million, to 1.02 billion; between 200,000 and 400,000 more babies could die each year between now and 2015 if the crisis persists; an increase in global unemployment by between 29 million and 59 million people; one in eight US mortgage borrowers is behind on mortgage payments or facing foreclosure at the end of the second quarter 2009; pensioners relying on developed country stock market returns for their retirement incomes have seen their savings fall by 45%.

The Financial Crisis Inquiry Commission in the US holds out the promise of going beyond apologies and the inevitable return to customary way of doing business. It offers a public space in which public but impotent anger can be channeled into better understanding and a focussed demand for real change, generating and sustaining in its turn the political will for the necessary reforms.

London could do with a comparable public inquiry of its own.

• 1 Comment

Just premiered in Venice...

UPDATE: The Guardian's review is here.

• 1 Comment

Mixed news on the battle brewing over bankers' bonuses.

European finance ministers (with the UK taking a back seat) are coming out strong on curbing banking bonuses.

This I get. Dealing with the excessive (arguably unbounded) risk taking that super-high bonuses encourages, and the crises such excessive risk-taking produce, finding a way of reining in the expectation of high bonuses for excessive risk-taking seems like the only way to ensure the recurrence of such a damaging crisis is avoided.

On the other hand there is something very disturbing about the recently announced French approach: curtailing the bonus upside but also punishing traders for any substantial hit suffered by the bank.

This seems to me merely to raise the stakes - a contributor to the adrenalin fueled environment that leads to excessive risk-taking in the first place.

The French, of course, are feeling somewhat bruised by the whole Kerviel affair in January 2008 when national financial champion Societe Generale was hit with  a 4.9 billion euros ($7 billion) loss due to what the bank maintains was unauthorised trading by Mr Kerviel. The preferred narrative in France is that the bank's systems and controls (including remuneration culture and policies) were not at fault; this was a simple case of a rogue trader. So punishing the trader when the bet goes the wrong way helps reinforce that narrative.

But surely it is better to address the up front incentive for unbridled risk-taking rather than pull your punches in favor of creating stiff personal consequences for the failure of the bet? Rogue traders already know that if the bet goes wrong they stand to lose their jobs and their lifestyles, but "rogue" traders (ie those produced by the prevalent bonus culture) show again and again that they never imagine they will fail, that the bet will go against them.

It is the size of the potential upside that motivates their actions and that is where serious politicians and regulators should focus their attention.

• 1 Comment

Was the chairman of the UK's financial watchdog just trying to impress concervatives when he expressed support for a tax on foreign exchange deals?

Development charities are delighted. And why wouldn't they be? The global economic crisis rooted in excessive risk-taking (rooted in remuneration policies that rewarded it) is estimated to have caused some 100 million down to the level of extreme hunger.

Personally I wonder whether a Truth and Reconciliation Commission could help bring some measure of justice by bringing together victims of the crisis perpetrators.

But a Tobin tax on currency transactions could help remedy the material impacts of the crisis rather than simply the emotional and cultural. It is argued that the tax brought in could be used to finance economic development for those who have suffered at the hands of the finance industry.

Lord Turner went on to comment that the UK's financial sector has "grown beyond a socially reasonable size". Hardly seems like posturing towards a future Conservative government to me; more like a note of sense from someone who is not only close to the action as a regulator now, but has himself been a business leader.

• 0 Comments

Does the ongoing anger over bank bonuses suggest the need for something akin to a Truth and Reconciliation Commission on the causes of the crisis?

You might think I have been spending just a little bit too much time outdoors over the summer; “Truth and Reconciliation” is the way nations like South Africa consign to history the egregious, state-supported human rights violations that have been committed against a large section of their people.

But bear with me for a moment and reflect on the breadth and degree of damage that the culture of greed managed to inflict by causing the worst financial crisis since the Great Depression: an increase in the number of people around the world in chronic hunger and poverty by over 100 million, to 1.02 billion; between 200,000 and 400,000 more babies could die each year between now and 2015 if the crisis persists; an increase in global unemployment by between 29 million and 59 million people; one in eight US mortgage borrowers is behind on mortgage payments or facing foreclosure at the end of the second quarter 2009; pensioners relying on developed country stock market returns for their retirement incomes have seen their savings fall by 45%.

Let’s not forget the stories behind the numbers. My friend Mike’s mother has been working for General Motors her whole life and was due to retire this year. Now she has no pension and will likely be working for the rest of her life. For more stories, take a stroll through the New York Times’ Living With Less – The Human Side of the Global Recession.

No wonder people remain angry.

The political will to rein in Wall Street and the City of London’s high stakes culture is lacking, and the financial sector is doing everything within its power to undermine what will remains.

A report by Essential Information and the Consumer Education Foundation found that $5 billion in political contributions over the past decade gained Wall Street freedom from regulation. According to OpenSecrets.org: “Despite the mortgage and banking crises of 2008, the financial sector still managed to donate $468.8 million to federal campaigns and candidates during the 2008 election cycle, an 80 percent increase during the two previous years.”

The Center for Responsive Politics notes that the finance, insurance and real estate sector spent $109.4 million on lobbying in the US during this year's second quarter alone, during which time the industry has been lobbying against the movement for tighter regulation provoked by the financial crisis.

How can we move forward?

We have a precedent for resolving situations where the will of government has been put at the service of powerful minority interests, to the detriment of the majority.

In 1995, after decades of the systematic abuse of economic, social and political rights known as apartheid, the South African government set up a Truth and Reconciliation Commission to give ordinary people an opportunity to air their grievances against a system that institutionalized racial segregation and discrimination in all aspects of life.

According to the then Minister of Justice Dullah Omar, "... a commission is a necessary exercise to enable South Africans to come to terms with their past on a morally accepted basis and to advance the cause of reconciliation."

The TRC was a forum in which anyone who felt that he or she was a victim of the system could be heard. Those on both sides who had done wrong could also give testimony and request amnesty.
Dead babies will never learn to speak, and how do you give voice to the 100 million starving? But that does not negate the need for public, open and free discussion of the causes of the crisis, to confront those responsible with those they have impacted, to raise the question of prosecution and possible amnesty rather than assume as now a cosy settlement between corporations and regulators.

How else do governments and financial institutions expect the results of egregious risk taking at great cost to communities and individuals to be put behind us?

How else can we say that we are serious in our desire to stop this happening again?

• 3 Comments

As regular readers will know, I have been a little preoccupied of late so I learned rather late that the British prime minister Gordon Brown has decided to merge two ministries - the Department for Innovation, Universities and Skills which includes responsibility for higher and further education and the existing Department for Business, Enterprise and Regulatory Reform - to form the Department for Business, Innovation and Skills (BIS).

The logic of the merger is the desire to align education with business’s needs for skills aimed at economic growth. This is how the government describes what the new department will do in relation to adult education:

Assess the changing skills needs of the UK economy, especially the intermediate and high skills vital in a global economy and design policies to meets them through public and privately funded life long training;
Invest in the development of a higher education system committed to widening participation, equipping people with the skills and knowledge to compete in a global economy and securing and enhancing Britain’s existing world class research base;
Continue to invest in the UK’s world class science base and develop strategies for commercialising more of that science;
Continue to invest in skills through the Further Education system to help people through the downturn and to prepare Britain for the future

My gripe with this (actually I left an impression of my balding pate on the ceiling) is that education serves a broader purpose than nurturing market participants.

Apparently I’m not alone. The editorial in Times Higher Education was scathing:

“There have been widespread fears for some time about the corrupting effects of commerce on the academy: graduates have been encouraged by the Government to think not of the personal and civilising benefits of a university education, but only in terms of the extra cash they will earn...

With this move, the Government has gone the whole hog: it appears to have delivered higher education into the arms of Mammon, or at least into the hands of Lord Mandelson, the unelected Business Secretary and First Secretary. Its zeal for higher education supporting the pursuit of a knowledge-based economy has led to the creation of a department that takes its inspiration from entrepreneurial reality-TV shows.”

Even Margaret Thatcher’s former secretary of state for education, Lord Baker, remarked in the House of Lords:

"Universities are not basically about improving competitiveness or building industrial strategy. They are essentially custodians of scholarship, intellectual rigour and world class teaching.”

Lord Mandelson justifies the merger arguing that it is crucial in order to sustain a recovery even though the economy appears to be on the road to recovery without it.

He goes on to suggest that “it is possible to further boost the role of universities in generating our economic growth without in any way compromising the place of fundamental science or curiosity-driven research in their mix.” But can he and his ministry be trusted to do so?

While attempting to reassure universities that their autonomy and independence from government will be preserved, he warns that:

“There is a need to make sure we set the right overall strategic direction in the UK in terms of some of the key skills and specialist knowledge that we will need to excel in a global economy”

That strategic direction will be set by a ministry whose primary focus is serving business, a department which before the merger the environmentalist George Monbiot surmised “functions as a fifth column within government, working for corporations to undermine democracy and the public interest”.

We can already begin to see how this will pan out. An emergency plan to create another 10,000 places for university students this autumn is to be restricted to those applying for science-related courses.

Lord Mandelson demonstrates himself repeatedly to be a man of singular impulse. He recently urged the European Parliament – the lower house of the European Community’s bicameral legislature - to be "Europe's economic conscience", pushing European member states to work together to rebuild Europe's economic strength. I’m not sure what economic strength has to do with conscience but presumably throwing them together into one phrase was meant to soften a request that boils down to abandoning the non-competitiveness aspects of Parliament’s legislative remit including healthcare, research, environment, social policy and immigration policy.

The issue here is not whether “business” is good and can be trusted with adult education; it is whether in principle responsibility for educational policy should be placed in a department whose interest in education is so entirely instrumental and narrow.
 

• 4 Comments

I was intrigued to see this news article on the BBC website this morning: WHO warns against homeopathy use.

Quickly, throw open the door of your medicine cabinet and eject all those little white homeopathic tabs; the World Health Organization after careful consideration reflecting its singular position of authority has clearly at last come down firmly on the side of homeopath sceptics.

Except that is not really what the article says.

Firstly the article is not talking about homeopathy in general but is instead focused on the problem of homeopathic remedies being promoted as primary medication for developing world sufferers of TB, infant diarrhoea, influenza, malaria and HIV. Not even the Royal Homeopathic Hospital in London agrees with reliance on homeopathic remedies for such conditions, according to a comment by Dr Robert Hagan - a St Andrews University researcher quoted in the BBC article.

I am not particularly convinced that homeopathy works, and so I agree with the assertion that people with HIV, TB and the like should not RELY on homeopathy at the expense of readily available conventional medicine.

Even so, I detect more than the passing hand of the pharmaceutical industry behind this article.

The letter to the WHO by the young doctors concerned reliance on homeopathy at the expense of conventional medicine, but the headline suggests that the WHO has come out completely against the use of homeopathic treatments, full stop. The headline is sensationalist and incorrect in the breadth of its assertion.

Secondly, the article ignores the problem of access to conventional medicine even though it is focused on the developing world where the problem of the prohibitive cost of drugs is well documented. Homeopathy may be little more than a placebo for all I know, but better that in desperate situations where the patient has little hope of being able to get something that actually works.

The primary source for the story is Sense About Science which, a small amount of googling reveals, is a pharmaceutical industry-funded astroturfing unit whose main aim would indeed have been to get a headline suggesting incorrectly that the WHO has come down firmly against treatments competing with pharmaceutical drugs.

• 1 Comment