Friday, November 21, 2008

Economic crisis, development, and environment

Of course all the news now is about the financial crisis. There is much said about it and I won't repeat much of this. I want to concentrate on its effect on the environment and sustainable development. But first I will give my take on what has happened.

There are three things that I think have contributed to this crisis. First was the selling of loans. The banks which give out the loans now often sell those loans to another company (I had student loans from four different banks, everyone was sold). The bank now makes a profit and the debt is given to somebody else. The crisis occurred when loans where sold from company 1 to company 2 to company 3 to ...

The second is the use of "innovative finance": derivatives trading, selling short, and all that other newspeak. These have nothing to do with the reported purpose of the stock markets - to provide liquidity and raise capital. The only purpose of this innovative finance is to make money -- period. The stock market IS about speculation.

The last thing was the use of floating interest rates by banks. In most cases the banks would give out loans at one percent, then after a year jack up the interest to five, seven, or higher percent. Innocent people (who do not understand finance) thought one percent was a good deal, but could not pay back the loan at higher rates. My take on this is quite simple -- it is fraud!

What has been bothering me lately is that from the recent news it sounds like nothing has changed. The story that really brought it home was the complaint that China's economic growth rate was only nine percent. Only!!! Most countries would die to have a growth rate that good. Was it not the attempt to increase economic growth through so-called innovative finance that led to the economic crisis?

Just a few days before the news from China, George Bush was encouraging the rest of the world to follow the US's lead. But, he said, that other countries should not do anything that damages the free market. Wait a minute! Was it not the freeing of the financial market that led to the mess we are in now?

I am convinced that the unconstrained economic growth, and especially the idea of no interference in the free market, are the cause of much of the environmental damage done today. Just look at climate change, loss of environmental habitat, or problems with hazardous waste. We need sustainable development, not "anything goes" development.

The US and Europe poured billions of dollars into the financial companies and did it amazingly quickly, claiming a fiscal "emergency". This wrote off huge amounts of debt. This money went directly to financial institutions -those that caused the problem, with none of the money going to those damaged by the crises - pension fund holders, people with floating-rate mortgages, etc. At the same time the developing world needs money for emergencies and humanitarian relief. Yet much of the money for such is not been given out despite being pledged.

Some quick sums: The US bailout package is 700 billion dollars. The UK rescue package is almost the same (680 billion). The total of the packages in the Eurozone (most of the EU, but not the UK) is estimated* at 1370 billion dollars. That is 2.75 trillion dollars in total.

Now let us look at the funding for emergency relief efforts worldwide through the UN Flash appeals**. The total flash appeals for 2008 through October 24 was 6.9 trillion dollars. Forty percent of which has not been met. That is about 2.77 trillion dollars that is still needed. Almost the same as the amount of as the emergency funding for financial institutions.

In other words, money for these financial institutions can be found immediately, yet the money for the most disadvantaged -- well, we will have to think about it. And oh, you need to have sound economic policies.

The conclusions of all the above is the following:
1. Let us have sustainable development. And yes I am talking to the developed countries also.
2. So far nothing has been done to change the financial system. We need to make a radical! change in the world's economic system, not trying to do cosmetic changes.
3. If we need to have government intervention let us give the money to the people who really need it, not to institutions whose only purpose is to make money.

Here are some suggestions as possible ways forward:
1. Fix the financial markets. Prohibit, permanently, derivative trading, short selling, index trading (i.e. trading on value of a stock exchange). And prevent speculative trading on currency exchanges, such as that which caused the Asian crash.
2. Make the banks provide there designed services, instead of just making money. Prevent any loans from having interest rates increase during the term of the loan. Prohibit banks from selling loans to another company.
3. Radically reform the IMF. The developing countries must be given equal voting powers. Even more importantly, IMF must give equal rate to social issues. Currently, the IMF usually calls for austerity measures, which means that health care, etc. are the first things affected.
4. Have guaranteed pension funds and health insurance. These must be guaranteed by governments with businesses paying into the program.
5. Give up the neoliberal free trade rhetoric. In practice the proponents of free trade have been forcing other countries to open their markets, while increasing restriction in theirs.
6. Most importantly, give priority to the environment, social issues, and human rights over economic growth and profits. This needs to be done at all levels - development banks (like World Bank), foreign direct investment, national and local governments, etc.

* BBC's estimate
** These are for both UN agencies and for NGO's. They are coordinated by the UN's Office of Coordinator of Humanitarian Affairs.

Update (24 Nov)
1. The recent news of Obama's reported choice for Secretary of the Treasury, the current head of the NY Federal Reserve Bank, is totally wrong. The Federal Reserve has been part of the problem. So much for change!. (For a related topic - about Obama's chief economic advisor Paul Volker - see here)

2. This article from Planet Ark (Reuters) shows some of the ideas mentioned in this article.

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