The United Nations Conference on Trade and Development (Unctad) has warned of a new financial bubble fueled by banking greed and called for urgent, far-reaching reform of the world’s financial system and foreign exchange markets so they serve the people and productive economic investment, rather than the other way around.
The Unctad report questions the extent to which there is a genuine self-sustaining economic recovery going on, arguing that falling wages present a huge danger to the world that is being too often ignored by many economists and policymakers.
“All these rises in markets are said to reflect economic recovery but it is just another bubble,” said Heiner Flassbeck, Unctad’s chief economist, introducing a new report on financial markets. “These markets are reflecting a recovery that is not there. Wage deflation is a huge danger everywhere and this is not being recognised.
“Banks have been rescued by the taxpayer and are just returning to casino-style speculation that brought us trouble in the first place. We need to focus banking on supporting investment in productive businesses.”
The report argues commodity markets, which have seen big rises in prices recently, are not reflecting a genuine increase in manufacturing output or trade, simply that speculative money is flowing in to them.
It devotes a chapter to what it calls the “Financialisation of Commodity Markets”. Its analysis of causes of the financial crisis, and how to prevent another one, is a fine piece of work and does not pull its punches with regard to G20 policymakers.
“Policymakers should have been wary of an industry that constantly aims at generating double-digit returns from an economy that is growing at a much slower rate, especially if that industry needs to be bailed out every decade or so,” it will say.
Because financial markets are more complex and risky than markets for products, it argues, “a greater degree of prudence and supervision is necessary, including more regulation – not deregulation as in the past. It is therefore surprising that the G20 has paid so little attention so far to the necessary reforms of the financial system.”
Unctad comprehensively rebuts the arguments that what’s good for finance is good for the country.
“Financial markets in many developed countries have come to resemble giant casinos; which almost always win and when they lose they get bailed out, while everybody else loses.
“A large segment of their activities is entirely detached from real sector activities. The crisis has made it abundantly clear that more finance and more financial products are not always better, and a more sophisticated financial system does not necessarily make a greater contribution to social welfare.”
The point is we are all going to pay higher taxes and see cuts to public spending for at least a decade as a result of this mess and many people may never get another job. Therefore we have a right to cut the City down to size if we want to. It’s our money, remember.
Unctad is no less scornful of academic economists who, it argues, should have known better than to believe the argument for free markets.”In view of the vast literature and rich empirical evidence on financial markets’ proneness to excesses and crises, it is surprising that there was so little challenging of the popular belief in the supposedly unchallengeable wisdom of unfettered market forces.”
The report lays out a prescription of how supervision of markets can be hugely improved and how the foreign exchange markets could be reformed to prevent speculative, damaging swings in exchange rates in many countries that bear no relation to the underlying economic health of a country.
Whether governments will pay heed to this important report remains doubtful.