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	The triumph of greed by Clive Dilnot New Statesman   The events of the past few months have shown with stark clarity that the financial models pursued in the sub-prime mortgage industry were so deeply flawed that they call into question the economics on which they were based.   Yet to date there is precious little evidence of any fundamental rethinking taking place, either in the financial industry or by the economics profession, much of which still seems in denial about the gravity of the present crisis.   With few exceptions, the argument from all sides – and from most in politics, too – seems to be for a return to business as usual as quickly as possible. But is continuity in how markets operate what we want? Or even what we can afford? Or are the costs of doing business this way – and the moral and social, as well as financial, costs – more than we should be asked to bear?   Consider this story. It concerns the collapse of Northern Rock in 2007. The tale is by now well known, but it still bears repetition. Here is Iain Macwhirter"s version from the New Statesman of 20 October 2008: "The Treasury minister Yvette Cooper discovered to her dismay that Northern Rock didn"t own half its own mortgages: £50bn had been hived off to a Jersey-based company, Granite, registered as a charity benefiting Down"s syndrome children in the north-east of England." The arrangement was sanctioned at the highest levels of the company.   The story should be an acute embarrassment for an industry which, only a few months ago, was hailed by Gordon Brown as perhaps a more significant force for creating prosperity than the Industrial Revolution. But it is more than an embarrassment. Whether it is technically illegal or not (though it is clear that the Down"s Syndrome Association North-East was at least subject to identity theft), most of us would say that what happened at Northern Rock was, at minimum, a serious moral crime. Instinctively and surely correctly, we feel there is something fundamentally unforgivable in using a charity for Down"s syndrome children as a tax-evasive park for distressed mortgages.   Not only is it a moral crime: it is a step too far towards the criminal per se. Like with Enron and many others before it (a litany that is now getting much too long for comfort), Northern Rock"s act is in danger of blurring the line between business and crime. We are all aware that this is a line crossed with increasing frequency. Corporate scandals of the past few years have involved many, if not most, of the world"s major global accounting firms as well as major corporations and financial institutions.   Caribbean tax havens run on tax evasion and money-laundering, as do their British counterparts, something their governments no longer bother to deny. (Barack Obama had a telling line in one of his campaign speeches: "By the way, did you know that there"s a building in the Cayman Islands that supposedly houses 18,000 corporations? That"s either the biggest building or the biggest tax scam on record. And I think we know which one it is.")   In Europe as a whole, crime is now one of the largest single sectors of business, with the Mafia alone controlling, through "legitimate" companies, roughly 15 per cent of Italy"s GNP (worth as much as $800bn a year). We know this, but we pretend - along with our governments - that the institutionalisation of crime within the "mainstream" economy does not matter; that it doesn"t come with acute costs. This is nonsense. The global cost of tax evasion and avoidance is estimated, conservatively, at roughly $500bn. When more than 40 per cent of the value of African bank accounts is in Swiss banks, we know that looting and corruption - the politics of spoil, as Oswald Spengler named it nearly 80 years ago - has taken place on a huge scale. The (failed) reconstruction of Iraq, with almost no new infrastructure or working institutions to show for it, will be recorded as probably the largest site of embezzlement in history.   One could go on. This should merely serve to remind us that crime is indeed a redistribution of wealth, but there is nothing of Robin Hood about it. It is the most regressive form of "taxation" and the one most debilitating, in all its consequences, to social well-being. It is also - though we tend to forget this - economically destructive, and even incompetent. After all, crime is nothing but theft; by definition it does not make, it takes. It leeches monies out of the economy and it erodes the conditions for real economic life, because these are dependent on the structures of trust that crime destroys.   To slip towards crime, therefore, is to slip into an economic model in which wealth is no longer created in any real sense but only extracted from what already exists. In fact, the much-vaunted "creativity" of the financial markets since 2001 boils down to little more than the invention of extraordinary mechanisms which increase the circulation of capital through the system (enabling revenue to be skimmed from each stage in the process) but which do not actually create wealth.   Derivatives are the most famous of these inventions, but in the sub-prime mortgage market it was the creation of complex devices for enabling the packaging and perpetual selling-on of securitised loans. For the companies that deployed them, these models permitted a whole new model of banking in which a bank"s profit comes not from deposit-and-lend in the old sense, but from its ability to generate increasing flows of capital by packaging and selling on loans, these made possible by leveraging the banks deposits at ever higher ratios. If you can leverage deposits in this way (at ratios of up to 30:1) it allows for astonishing short-term profit. The downside is enormously extended and intensified longer-term risk.   For all their apparent mathematical sophistication, the models that Northern Rock and others used are considerably closer to pyramid selling rackets – or to the fantasy of perpetual-motion machines – than their operators would like to admit. The simple proof of this is that, as Paul Volcker (chairman of the Federal Reserve under Jimmy Carter and Ronald Reagan and now chairman-designate of Obama’s Economic Recovery Advisory Board) and others have noted, these models failed their own test. That is to say, they failed in the market – and they did so not just marginally, as a result of adverse circumstances, but spectacularly, as a result of their own internal contradictions.   If you believe that markets can be accounted for almost wholly by their internal mechanisms, it is a short step to begin to say that this is how they should operate in the world. It is then an even shorter step to thinking that these models can be transposed directly to messy and impure reality.   If you also believe that equilibrium is now equivalent to perpetual growth, and if you then believe, or create, a model which says that there is spare capital in the economy to which you can gain access (even if it is essentially through debt that you will create), if you add to this an ethos in which high-level risk is acceptable (because you have found a profit incentive for passing it on endlessly), you have three of the conditions for the sub-prime debacle..   * Clive Dilnot teaches at New School University in New York, visit the link below to access the complete article. Visit the related web page
	Financing Development: From Monterrey to Doha by Alison Evans, Simon Maxwell Overseas Development Institute   Dec 2008   For the world"s poorest nations, the United Nations conference on financing for development (FFD) in Doha on 29 November - 2 December 2008 is the most important economic summit in half a decade.   Even before the financial crisis erupted, this meeting was likely to be marked by recrimination. Developing nations feel that they have been hit first and hardest by oil shocks and food-price surges, and failed by G8 promises on aid that have not materialised. The aid shortfall already amounts to some $30 billion a year, or 30% of pledges made at the Gleneagles summit in 2005. The stakes are now much higher, as the financial crisis bites. Research from the Overseas Development Institute (ODI) suggests that total financial flows to developing countries are likely to shrink by ten times as much as the extra promised by the G8 in Gleneagles: $300 billion - or 25% of current flows.   Growth forecasts have been cut repeatedly in autumn 2008. The International Monetary Fund (IMF), for example, predicted growth rates for the different regions of the world in October and again in November. In just a few weeks, global growth for 2009 was downgraded from 3% to 2.2%, and for sub-Saharan Africa from 6.3% to 5%. The next round of estimates may well be even more pessimistic.   There will certainly be job losses. There will also be an increase in poverty, adding to the 100 million driven back below the poverty-line by the sharp increases in food prices in 2007-08. The World Bank estimates that for every 1% drop in growth, another 20 million people slide into absolute poverty.   Developing countries have not yet felt the full force of the hurricane that is about to blow through the world economy. But it is time to start nailing shutters on the windows.   The Monterrey model   The FFD conference in Doha is not the arena for a global programme to fight recession. That discussion is ongoing at the G20, the group of wealthy nations and emerging economies which met in Washington on 15 November 2008 and will reconvene under British leadership (probably on 2 April 2009 in London). For the same reason, there is unlikely to be much progress on the core G20 issue of financial-sector regulation. What, then, can be hoped for?   It is important that this is a United Nations event in which all countries are represented, not just the largest economies. Thus, Doha will agree a statement about global solidarity. This could be a bland homily about how we are all in this together, with no concrete commitments; or it could be a strong vision of global social justice, with specific agreements to share the pain and reduce global inequality. Expect the first.   The outcome document will reaffirm the basic bargain agreed at the first FFD conference in Monterrey in 2002. This meeting, just six months after 9/11, marked a turning-point in relations between rich and poor countries. For their part, developing countries made a commitment to good policies, good governance and the rule of law. Developed countries matched this with a commitment to debt relief and increased aid. The guiding principle was one of partnership. As a model of international cooperation, that still holds.   The Doha document is, for the moment, a tangle. But it will lay out the current agenda, and the main headings from Monterrey remain: domestic financing, private finance, trade, aid, debt, and systemic issues.   Much of the text will be aspirational: yes to trade deals, no to unsustainable debt, yes to donors keeping their promises. On past experience, it will not set out who must do what, and by when. Is there room for more than aspiration? There is nothing like a crisis to focus minds and make bold leaps seem more feasible.   Doha"s choice: four recommendations   In this light, four steps could be taken in Doha to create a new deal.   First, Doha should make specific commitments to safety-nets and social protection for the poorest people. Humanitarian relief should be guaranteed for the 90 million people already in need of food aid, and the millions more who will join them as the recession deepens. Beyond that, ODI research shows that options exist to deliver social protection in almost every country - through cash grants, old age pensions, targeted subsidies, or direct provision of goods and services.   Doha should therefore encourage all countries to develop and support concrete plans to create safety-nets for the most vulnerable, and commit the international system to providing additional financial support. But this financial support no longer refers to traditional donors alone. The international system now includes the new donors - such as China, India, and the oil-rich countries of the middle east. What a dramatic gesture it would be, at a time of global threats and falling oil prices, if those countries were to use Doha to announce timetables for increases of aid.   Second, Doha should build on the new enthusiasm for multilateral solutions, by putting the UN, the World Bank and the multilateral development banks (like the African and Asian Development Banks) at the heart of the aid system. At present, only about 25% of aid is reported by the Organisation for Economic Cooperation and Development (OECD) as multilateral, with 75% channelled bilaterally through a frighteningly large, confusing, incoherent and growing number of bilateral agencies and special-purpose funds. This has to change. A specific Doha commitment could be to stand the aid system on its head, with donors agreeing that 75% of aid should be multilateral by 2013.   The management of multilateral aid also needs an overhaul. Aid is coordinated by a donor club, the Development Assistance Committee (DAC) of the OECD, which, for all its good work, lacks legitimacy among developing countries and the bite to underpin enforcement. The UN has a separate body, the Development Cooperation Forum (DCF), which has suffered from association with the poor performance of the UN Economic and Social Council (Ecosoc), and the underfunding and political pressures that afflict the UN"s department of economic and social affairs (DESA). Could the best of both be preserved, if the DAC and the DCF were merged or more strongly linked?   Third, Doha should establish a new formula for mutual accountability between rich and poor countries. Conferences, with their tendency to produce declarations with good intentions, are a poor way to do this. An alternative is to look at the structures developed by the European Union with its (to date seventy-nine) African, Caribbean and Pacific partners in the Cotonou agreement signed in 2000. This is based on a treaty with the force of law, and its key principles are enshrined and backed up by an agreed arbitration procedure. There is political oversight, through a joint council of ministers, and a joint parliamentary assembly. The UN political apparatus provides a structure of this kind. What is missing is an arbitration procedure to monitor progress and hold countries to account.   Fourth, Doha should build on shifts in the provision of development aid. Governments alone cannot bear the burden of support to development. Philanthropic donations may - when debt-relief, humanitarian aid and technical assistance are removed from the equation - be outstripping official aid flows. Companies have taken up the cause of global corporate citizenship, looking not just at their charitable donations, but also at the impact of their activities on development. This is a win-win for companies, reducing costs and boosting their local popularity. Doha should celebrate this trend and launch a programme to codify standards.   At the height of another global crisis, in August 1941, Franklin D Roosevelt and Winston Churchill agreed the Atlantic Charter - a vision of a world that could, realistically, be created. From that vision stemmed victory in war, the Universal Declaration of Human Rights, the creation of the United Nations and the financial scaffolding of the Bretton Woods system. Can Doha exceed expectations and be the platform from which to launch a change of similar magnitude.   * Alison Evans is director of programmes for the poverty and public policy group of the Overseas Development Institute (ODI). Simon Maxwell is director of the Overseas Development Institute. Visit the related web page
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