Financial crisis: a tale of avarice, greed, lawlessness
Feb 18, 2009
FROM the USA, to Japan, to the EU, and other parts of the globe, economies are contracting, unemployment spiralling and businesses collapsing. Yesterday’s corporate titans are now teetering on the brink of collapse — their only hope, a government bail
By Andrew Rugasira
FROM the USA, to Japan, to the EU, and other parts of the globe, economies are contracting, unemployment spiralling and businesses collapsing. Yesterday’s corporate titans are now teetering on the brink of collapse — their only hope, a government bailout.
Iceland’s economy collapsed so spectacularly that it has given economists a greater appreciation of ‘globalisation and its discontents’.
Africa’s vulnerability to this crisis is fast-becoming evident: revenue collections are down, there is a drain on foreign reserves, inflows of remittances have dropped significantly, food inflation is undermining already strained social safety nets, falls in export receipts and a general contraction of economic activity is leading to increased unemployment and the potential for social unrest.
As exogenous as this crisis is, we remain both exposed and vulnerable to the shocks.
The story begins with bankers in the developed countries who became intoxicated with cheap money flowing into their financial markets.
These banks packaged innovative financial products like subprime mortgages that advanced loans to mortgage seekers who did not qualify for the normal prime underwriting requirements. Couples could acquire mortgages that were six times their annual income.
The banks then packaged and traded these supposedly high yielding mortgage-backed securities on the international financial markets, thereby spreading the poison.
When analysts asked if there should not be reason for concern, the response was that house prices were rising — no need to worry.
When the market plummeted, banks were left with worthless assets and defaulting homeowners. These toxic assets led to a dereliction of interbank trust, credit froze and what began as a housing crisis quickly grew into a full blown economic recession.
A virulent consumerism drove this crisis too. If you wanted a bigger house or a better TV, a faster car or any other fantasy — no problem, just put it on your credit card or finance it through your bank.
Already mortgaged? No problem, the banks were ready to re-finance and allow you to take on a second or third mortgage.
Meanwhile, governments and central bankers continued to say that finally the era of boom and bust cycles had been overcome. Savings in the US dropped to about 1% of GDP.
Regulation gave way to unprecedented profligacy and a lawless market. Complex growth models were unveiled to assure the markets of the solid premise of their assumptions — even when the regulators could not quite understand them.
US household debt grew from $680b in 1974 to $14 trillion in 2008. In the UK in 2007, consumer debt in the form of mortgages, loans and credit card bills totalled £1.35 trillion and overtook the entire GDP of the country which stood at £1.33 trillion.
When you add the immense debts of the public sector and businesses, the sum is three times GDP. These are bankrupt nations.
Meanwhile, median wages in the US have fallen in real terms over the last 25 years while the bonuses paid to the titans of Wall Street reached the stratosphere.
Last year alone, Wall Street paid its executives bonuses totalling $18 billion — all this in a recession. This might be called strategic approaches to incentivising CEOs in business school, but it is naked greed, avarice, and insensitivity to the prevailing realities.
Profit cannot be sustained at the expense of other economic actors in the market; there has to be an element of accountability. This is going to be a key lesson from this crisis.
According to a study by the United Nations research institute, the richest 2% of adults in the world own more than half of all household wealth, and the poorer half of the world's population own barely 1% of global wealth. How can this inequitable system be sustained?
The role of the state is being enhanced in the translation and implementation of the current recovery initiatives.
It is, therefore, important to acknowledge that recovery cannot come from the tired old precepts of unfettered markets that lead to abuse and economic pain by greedy and impetuous leaders.
Greater policy sensitivity to these structural inequalities and their mitigation is a beginning point. As Abraham Lincoln said: “I don’t believe in a law to prevent a man from getting rich…..but we do wish to allow the humblest man an equal chance to get rich with everyone elseâ€.
C.S Lewis the well known Christian apologist once said that in the end there are really two kinds of people; the ones that say to God “let your will be done†and the others who God says “let your will be done.â€
In a world seemingly bereft of answers to the current crisis, I am rereading Paul’s first letter to the Corinthians and specifically the 20th verse: “Where is the wise man?
Where is the scholar? Where is the philosopher of this age? Has not God made foolish the wisdom of the world?â€
The writer is the chief executive officer Good African Coffee
FROM the USA, to Japan, to the EU, and other parts of the globe, economies are contracting, unemployment spiralling and businesses collapsing. Yesterday’s corporate titans are now teetering on the brink of collapse — their only hope, a government bailout.
Iceland’s economy collapsed so spectacularly that it has given economists a greater appreciation of ‘globalisation and its discontents’.
Africa’s vulnerability to this crisis is fast-becoming evident: revenue collections are down, there is a drain on foreign reserves, inflows of remittances have dropped significantly, food inflation is undermining already strained social safety nets, falls in export receipts and a general contraction of economic activity is leading to increased unemployment and the potential for social unrest.
As exogenous as this crisis is, we remain both exposed and vulnerable to the shocks.
The story begins with bankers in the developed countries who became intoxicated with cheap money flowing into their financial markets.
These banks packaged innovative financial products like subprime mortgages that advanced loans to mortgage seekers who did not qualify for the normal prime underwriting requirements. Couples could acquire mortgages that were six times their annual income.
The banks then packaged and traded these supposedly high yielding mortgage-backed securities on the international financial markets, thereby spreading the poison.
When analysts asked if there should not be reason for concern, the response was that house prices were rising — no need to worry.
When the market plummeted, banks were left with worthless assets and defaulting homeowners. These toxic assets led to a dereliction of interbank trust, credit froze and what began as a housing crisis quickly grew into a full blown economic recession.
A virulent consumerism drove this crisis too. If you wanted a bigger house or a better TV, a faster car or any other fantasy — no problem, just put it on your credit card or finance it through your bank.
Already mortgaged? No problem, the banks were ready to re-finance and allow you to take on a second or third mortgage.
Meanwhile, governments and central bankers continued to say that finally the era of boom and bust cycles had been overcome. Savings in the US dropped to about 1% of GDP.
Regulation gave way to unprecedented profligacy and a lawless market. Complex growth models were unveiled to assure the markets of the solid premise of their assumptions — even when the regulators could not quite understand them.
US household debt grew from $680b in 1974 to $14 trillion in 2008. In the UK in 2007, consumer debt in the form of mortgages, loans and credit card bills totalled £1.35 trillion and overtook the entire GDP of the country which stood at £1.33 trillion.
When you add the immense debts of the public sector and businesses, the sum is three times GDP. These are bankrupt nations.
Meanwhile, median wages in the US have fallen in real terms over the last 25 years while the bonuses paid to the titans of Wall Street reached the stratosphere.
Last year alone, Wall Street paid its executives bonuses totalling $18 billion — all this in a recession. This might be called strategic approaches to incentivising CEOs in business school, but it is naked greed, avarice, and insensitivity to the prevailing realities.
Profit cannot be sustained at the expense of other economic actors in the market; there has to be an element of accountability. This is going to be a key lesson from this crisis.
According to a study by the United Nations research institute, the richest 2% of adults in the world own more than half of all household wealth, and the poorer half of the world's population own barely 1% of global wealth. How can this inequitable system be sustained?
The role of the state is being enhanced in the translation and implementation of the current recovery initiatives.
It is, therefore, important to acknowledge that recovery cannot come from the tired old precepts of unfettered markets that lead to abuse and economic pain by greedy and impetuous leaders.
Greater policy sensitivity to these structural inequalities and their mitigation is a beginning point. As Abraham Lincoln said: “I don’t believe in a law to prevent a man from getting rich…..but we do wish to allow the humblest man an equal chance to get rich with everyone elseâ€.
C.S Lewis the well known Christian apologist once said that in the end there are really two kinds of people; the ones that say to God “let your will be done†and the others who God says “let your will be done.â€
In a world seemingly bereft of answers to the current crisis, I am rereading Paul’s first letter to the Corinthians and specifically the 20th verse: “Where is the wise man?
Where is the scholar? Where is the philosopher of this age? Has not God made foolish the wisdom of the world?â€
The writer is the chief executive officer Good African Coffee