Financial Crises why we faced, why we could face?

By Adv. Prof. Dr.  Gurumurti Balakrishnan Pandipeddhi

 

Factors

 

Financial Economics history is forgotten

 

1930s

1960-1970 financial crisis –  when interest rates  (by  the standards  of the day) were relatively  low made a greater impression  on market participants  than  did  the crisis  that occurred  during that decade :

 

‘when the first time  in the post war period, institutions experienced  substantial  disintermediation  during the crisis  – credit crunch – of 1966, fears abounded – a kind of financial paralysis     came over (fell over)  the financial markets.’ even though the ‘prime  loan rate  at its peak reached only  6 %  and (high grade corporate bonds  moved to 6.3%) – when Penn central railway failed  in 1970, – the market  went  into a deep shock.       

p.8 (Henry Kauffman – Road to financial reformation @ 2000  -John Wiley & Sons Inc)

1966 – Post war period

 

Both crisis  caused financial  system was closer to  being ‘immobilized’ than  when prime  loan  rate  reached 21%.

 

1980s – financial system closer to being immobilized than  when the  prime  loan rate  reached 21 ½ %  early in the 1980s

 

Volitalitality of securities prices  and the currencies  had become deeply rooted   feature of the new financial world (emerging) – markedly different  from earlier times – fixed -income markets.

 

Dramatic increases in volatility  is readily apparent -high and low yields –  of high grade bonds (corporate) for each year  since 1920.

 

Difference averaged well under 50 basis points  from 1920  through 1969 , rose beyond to 98 basis points  in 1970s, and then just jumped  to 273  basis points by 1980s.  

 

Ref: professor  Benjamin  Cohen: ‘In  Whose Interest?  International  Banking  and American Foreign Policy’ (New Haven , CT , Yale Univ press  1986)

 

Credits jumped to finance Edward I and Edward II  and the King of Naples in the 14th century –

 

Lenders never could get  at the collaterals that  was extended to secure the loan , when Florence  was the world’s  key banking centre in 14th century.

 

“ instead of being repaid , the lender was willy-nilly  forced  to lend more and more and to throw good money after bad (debt) in the hope to save  what he had already  lent.’

 

When England pioneered  new horizons in international  finance in the 19th century, many  initial successes were followed  by debt  default problems during the numerous crisis  involving  countries and financial Institutions.

 

Eg. Bearing Brothers  bailed by (British) Bank of England and by other institutions , when Bearing.. over extended  itself to the weakening Argentina  in 1980

 

 

Adam Smith rightly diagnosed , ‘No part of  society can surely be flourishing  and happy of which  the ‘far greater part of its members are poor and miserable’.

 

It is very interesting to note  he did not  favor or advocate ‘a flat tax’.

 

He also said, ‘The subjects (today citizens)  of every state ought to contribute towards the support of government, as nearly as possible, in proportion to their respective abilities’.

 

In his ‘Theory of Moral Sentiments’ when he was just 36 years old, (work hardly remembered today) – an investigation of considerable  range and insight  that earned Smith  great renown in his day, indeed.

 

He expounded on such matters  as the proprietary of action, the objects of reward and punishment , the character  of virtue, and the  practice of philosophy.

 

These are hardly  the subjects economists would delve deep into today.

 

In his 53rd year he wrote Wealth of Nations, being a Scottish social philosopher in 1776 – written in grand style –  and completely ‘free  of the kind of mathematical apparatus common to today’s learned journals –

 

it endured the test of time -born the world’s greatest  capitalist Nation – America

 

–  it is one of the most perceptive and influential treatise (work)   of the Modern Age.

 

His eloquent argument

 

-it is part of human nature to strive for economic growth

 

– best be achieved  through ‘unfettered competition, the division of labor, and free trade’.

 

He believed the State should play a very limited role.

 

Governance should be properly confined to safeguarding society from violence and invasions, to protecting every member of society  from ‘injustice’ oppression.

 

It has  to provide certain  ‘public works and institutions’ only.

 

In his death in 1796(?)  , He made it clear , ‘he would no doubt applaud  the rise in ‘living standards;

 

and the rapid industrialization in many parts of the world – that has been;

 

–  driven  by the ‘kinds of innovations and divisions of labor , he advocated, (yet far beyond even his imaginings, one might say).

 

US industrial worker toiled 10 hours day, six days a week to help him bring home $.375 a  year.

 

Adam Smith studied mathematics, natural sciences , philosophy and classical  writings.

 

One can see his erudition of his reading reflected  clearly ‘ in his comprehensiveness of his economic thought’.

 

A professor in Glasgow university in moral philosophy.

 

Potential excesses of capitalism he warned could be potentially dangerous to society.

 

The individuals need to pursue  their ‘self interests’ ; society would benefit  as long as ‘self interest is restrained by competition.

 

He warned ‘competition could be compromised

 

   

 

There was a congressional testimony before US Congress( in the light of 2007-08 financial crisis) by  Dr. Henry Kaufman of what shall be financial reformation in the light of the crisis:

 

He said, he believed:

 

  1. ‘Many of the current regulatory bodies should be eliminated.  In our rapidly changing

           financial  system, in which  institutions perform  multiplicity of  services , is  it efficient  to

           have  so many regulators  on both federal and state levels?

 

These regulators are vestiges  of our past  financial  development.

 

At times, they  compete  with each other , and they do not  have an integrated (approach)        

view  of today’s financial world.

 

2 Centralised  monitoring and  regulation  of our financial system should be established.(I

           continue to urge as I  did in the Congressional testimony …2008 , a year ago),;

 

that the prudential (norms) responsibilities of the Fed Reserve should be enlarged  to encompass    institutions other than banks

 

;or the National  Board of Overseers should be  established that would monitor  and promulgate – codes of minimum  behavior for all major financial

          institutions.

 

  1. Financial  institutions  should be  required  to report  their assets, at the lower cost  or    

           market value.

 

Losses  would then be quickly recorded , including  managers of financial      

           institutions  (have ) to turn (around) toward  more conservative policies.

 

  1. There should be  much greater disclosure  by financial market  participants – including

           institutions and corporations  –  in their  fin statements.

 

Assets and liabilities  should not be netted out.

 

Contingent liabilities  should be reported  in detail , thus providing  creditors with the

opportunity  to improve  their ability  to assess  the credit  standing of debtors.

 

  1. If this type of disclosure  (assessment ) continues to be inadequate , then  the official  

           regulatory agencies  should be required  to rate  the creditworthiness  of the financial    

institution under their jurisdiction.

 

The ratings  should be made public after a (some)  delay , thereby  allowing  the institutions time  to remedy  any problems  before the public is appraised.

 

  1. We should    adopt  tax policies  that foster  the enlargement  of equity  capital rather

           than  the excessive  use of debt.

 

In this regard,  the double  taxation of dividends  and capital gains tax  on equity  shares  

should be eliminated (to encourage equity participation if investors are interested).

 

  1. The official regulatory  agencies should issue  regulations  that require  the gradual  

           enlargement of  capital base of the institutions under their supervision (review).

 

  1. To contain the debt problem , international  cooperation and coordination must be  

            strengthened (augmented) . A new  official international agency  consisting of  key

            central banks  and other officials , should be  established.

 

This organisation  should  work  toward achieving  uniform accounting , capital , and  

reporting  standards  of major  financial institutions.

 

It  should  monitor  more and more closely  international  capital flows  by

            promulgating better reporting  standards.

 

In the world with  a rapidly  growing web of financial linkages, such improvements are

essential not only to rein in debt  growth but also to achieve  monetary policies   

(balances).”

 

Designed to structure  world of finances of a  past few decades ago, might be conservative  but needed today to remedy the current problems as present standards are not adequate safeguards for fiduciary interests.  

 

Too big to fail standards being a promoter of very large institutions; that get bail out from

taxpayer’s exchequer funds – indeed most ‘unethical process’;

 

that need to be avoided, is the theme;

 

besides no institution would ‘not make merry go rounds’ with taxpayers’ funds.

 

If it is done, naturally another financial crisis might be forced on people.

 

Conclusion:

 

It is high time governments all over need be conservative least another financial crisis surfaces; one need to be warned under any calculations, if any more financial crisis with in 20 years from 2007-08 it would make whole world very poverty stricken as no one would accept another’s credibility, a great chaos that would be; besides end of ‘paper currency’ the great idea of Maynard Keynes would just abruptly end, back again to great Barter,
No economy could move any faster! (Ends)

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