Back from the Brink: Report from Inside the World Bank Meeting
The stock markets rebounded after this weekend's emergency action to pour billions into the banking system and shore up confidence.
Following the European model, U.S. Treasury Secretary Henry Paulson is now saying the U.S. government will purchase equity shares in banks. This policy is more likely than his previous plan to get credit flowing again and give taxpayers hope of reclaiming some of the billions we are investing.
Meanwhile, the World Bank and IMF were holding their annual meeting in Washington, DC, this weekend, and of course the global economic meltdown was on everyone's minds. John Cavanagh, director of the Institute for Policy Studies, sent this fascinating report from inside:
I just came from a surreal scene at the World Bank/IMF annual meetings.
The scene: I got "civil society" credentials to go to the World Bank and IMF meetings. We had to be approved ahead of time, and I bet about 200 were.
The thing that was most surreal (it was all surreal, given the global crisis) was that the several blocks around the meetings were cordoned off with high-level security and metal barricades. I have no idea if this came from the DC police or the IMF and World Bank security.
But, it was absurd, even more absurd given that local governments need to be saving every penny for schools. If they have phoned me, I could have told them that the only protest planned was 20 people doing a photo op press event on Friday. Otherwise, there were no protests planned and none occurred. There were none planned because our movements largely feel they've marginalized the Bank and Fund, and their anger is much more steered at the Bush administration and Wall Street.
I went to a panel at the World Bank, where Martin Wolf of the Financial Times was interviewing George Soros along with Lewis Alexander, chief economist for Citigroup, Christine Cummings and Roger Ferguson from the Federal Reserve, and Mohamed El-Erian, Co-CEO of PIMCO. About 350 people were in the audience, and I was one of about 5-6 civil society representatives.
As you read this, keep in mind that for 30 years, these people (except Soros) have been telling the government to get out of their affairs. Now they are begging them to get in.
By and large all of them were in agreement (Soros was by far the best), and here is what they said:
1. The underlying problem was that financial instruments evolved too fast, creating too much credit and too much leverage in the system. They were way ahead of the regulators. In some countries this went further than in others, and the countries getting hit hardest are where the leverage was the greatest. Overall, financial markets were hypercharged with financial innovations.
2. There were other problems that came together in a perfect storm in September:
- Huge macro imbalances in the world leaving the U.S. as a huge borrower and China and others as huge lenders;
- A housing bubble in the U.S. (that would trigger the giant bubble of leveraged markets);
- Too much deregulation;
- Too little corporate governance;
- A sense on Wall Street and in the U.S. Treasury Department that nothing could go wrong.
3. A trigger was the Lehman Brothers failure that threw the ordinary payments and settlements system out of whack. It also created uncertainty and destroyed confidence in the system.
4. Soros did name "market fundamentalism" (the notion that markets can correct themselves and don't need regulation) as a core problem.
5. All think the worst could now be over, since governments finally acted decisively today. The funny thing is that it was the Europeans who acted decisively, called together by Sarkosy in France. They have agreed to guarantee loans between banks, and several governments are taking equity shares in banks.
6. Soros is very happy that governments will be taking equity stakes in banks. He says that $700 billion should be plenty to recapitalize the banking system. He says we need regulators to come in and set new margin requirement and new capital requirements; they must deal with the over-leveraged markets.
7. All of them think these actions have a good chance to re-establish some confidence and order. Until today, government has lagged behind in what it should do, further weakening confidence. Today, they acted decisively. They said this came at the last moment, with the system teetering on the verge of total panic. They say that government will need to try to stay ahead of the crisis in the next period.
8. All say we need more regulation.
9. All say that we'll still have a long recession because the bubble has burst, all assets are being revalued at lower values, and the real economy will suffer for some time.
The session was then opened for questions, and I asked the only question that got into what all this means for ordinary people, for the outraged public, for Main Street. Specifically, I asked if those on the panel would back a large green jobs stimulus package paid for by the ones who created the problem on Wall Street.
Several said that there was plenty of room for a big stimulus, and they seemed to think it made sense. One finance guy said he understood the outrage that the financial profits were privatized for years, and now the losses are being socialized. They understand that there is widespread outrage. None except Soros seemed to get the irony that these guys hated government until they desperately needed it, and now they are frustrated that a weakened and beleaguered Bush administration is acting too slowly.
We then retired to the atrium for exotic fruits, and drinks, and hors d'oeuvres.
YES! both on-line and in print will continue to bring you articles on the big picture of the financial crisis and what it means to ordinary people, to the real economy, and to the natural world in which all this economic activity resides. Look for David Korten's follow up to Main Street Before Wall Street in the upcoming issue of YES! magazine.