N EED TO HAVE A NEW GLOBAL

FINANCIAL ORDER
OM PRAKASH YADAV
The crisis at Wall Street has spread like a contagion and miseries
are felt now within walls of each street in the world. Slum in bourses
gradually travelled and crossed the ocean; the crisis is trans-
continental. The economic slowdown is gradually metamorphosing
into a ‘worldwide recession’. The architect of ‘economic and housing
boom’, Allan Greenspan, former chairman of US Federal Reserve
(1987-2006), has also candidly accepted ‘mistake’ in the free
market ideology. Green span, hailed as the ‘genius of serial bubble
maker’ and sometimes ‘harbinger of post-war economic boom’ has
become villain now. The ‘housing bubble’ did burst, because
financially, it was ‘inherently malicious’ based on ‘excessive fiscal
leverage’ and ‘un-principled greed.’ Results, as we witness today,
are devastating both in terms of money, morality and mundanely.
The burst led to withdrawal spree, which Banks and other financial
institutions failed to withstand against, culminated into bankruptcy
of a number of Banks like Lehman Brothers, Stanley-Morgan, and
Merrill Lynch etc. Most of the Banks in America by now had moved
far away from the basic preamble of Glass-Steagall Act of 1933,
which was the first legislation to keep the Banking industries away
from the investment ventures. Even the ‘bailout packages’ have
been misappropriatedby many Banks, and reports suggest that
Bankers might instead use this money in giving dividends and bonus
to its executives, buying other banks etc. FBI is probing into the
matter; it is also probing into the ‘mortgage fraud’ in general and
role of ‘Fannie Mae and Freddie Mac’, the mortgage giants of
USA, vis-a-vis ‘burst of bubble’ in particular. It is important therefore
to understand the workings of the Banking system of USA, because
the collapse of the Banks was largely due to inherent weakness in
the banking system itself. Here are some important bubbles in
economic history of world-

NAME OF BUBBLE PERIOD

TULIP BUBBLE 1600
SOUTH SEA BUBBLE 1700
MISSISSIPPI BUBBLE 18TH CENTURY FRENCH STOCK
MARKET CRASH
FLORIDA REAL ESTATE BUBBLE 1920s
GREAT DEPRESSION 1929
MARKET CRASH 1987
NIKKEI BUBBLE 1991
NASDAQ BUBBLE 2000

BANKING IN USA-

The Banking sector in America was initially based on ‘English

Model’, which advocated for separation of Banking and
investment. ‘Banks should not be allowed in Investment’, is the
crux of this model. USA adopted this model in 1865 and passed one
National Banking Act (NBA) of 1865. With passage of time, this
system felt the strain of pro-investment lobby. In response to the
growing competition from trust companies and the pressure of the
lobby, state-chartered commercial Banks demanded additional
powers from the state legislatures. By the early 1900s, legislatures
granted most state banks many of the same powers to engage in
investment activities already possessed by trust companies.
National banks, however, were left out, and they sought justification
for securities activities under the NBA. One of the first national
banks to engage in underwriting activities was the First National
Bank of New York. In 1908, in response to criticism from the
comptroller concerning its securities dealings, the bank formed a
securities affiliate, the First Security Company. The affiliate was
incorporated under state law and was arguably free to conduct
investment activities. In 1911 a second affiliate, National City
Company, was organized, and by 1916 that affiliate was actively.

Thus, it is clear that the restrictions imposed by NBA on Banks had

by now eroded almost completely. Banks started full-fledged
activities in securities and investments and had for all practical
purposes, adopted ‘German Model’ which advocated for ‘Banks to
venture in investments also’.

As it always happens, unless you are ill, you are not diagnosed. Here
came ‘great depression’ in 1930, and prescriptions were written to
cure the ‘ailing economy’.

Roosevelt came and saved the economy by injecting small ample of

‘socialistic drugs’ into the ‘liberal democracy blended with Laissez-
fairre’, in form of ‘New deal’. It was felt that Banking sector, which
keeps deposits of millions of citizens and are ‘the pulmonary arteries
of the economy’, should be protected against ‘unhygienic financial
exposures of speculative stock markets’. In this background, the
entire Banking sector was again overhauled. Senator Carter Glass
brought a law called Glass-Stegall Act (GSA), 1933. This Act was
based on twin features, firstly, it sought to insulate Bank’s
 depositors from risk involved when a bank deals in the securities
and to prevent ‘Bank collapse’ like one happened in 1930.

Secondly, it prohibited commercial Banks from owning full service

brokerage firms. The GSA of 1933 remained guiding principle for the
Banks, but it too, gradually faced rough weathers due to changing
politico- economic milieu after 1990s. The ‘post war boom’ as
evident from the USA’s share in global GDP (graph attached)
necessitated some drastic changes in the Banking industry.

GDP of G-20 Nations at a glance-

Country GDP IN TRILLION USD

USA 13.84 TRILLION USD
JAPAN 4.30
GERMANY 2.81
BRITAIN 2.14
FRANCE 2.05
ITALY 1.79
CANADA 1.27
CHINA 6.99
INDIA 2.96
RUSSIA 2.09
BRAZIL 1.86
MEXICO 1.35
SOUTH KOREA 1.20
TURKEY 887.96 ( IN BILLION USD)
INDONESIA 837.79
AUSTRALIA 760.81
SAUDI ARABIA 564.56
ARGENTINA 523.73
SOUTH AFRICA 467.08
EU COMBINED TOGATHER 14.71 TRILLION USD

Increase in NNP and GDP in USA, during contemporary period

emboldened the financial system of entire Europe and America, if
not whole globe. Graph attached suggests that the wars in any part
of the globe have by and large benefitted US economy. The post
‘first gulf war’ with Iraq has helped American economy to
experience ‘boom’, which further instilled pseudo-confidence in the
policy makers of entire western world.

In fact, It is in this background, Bill Clinton got a legislation called

Graham- Leach Bliley Act (GLBA) passed on 12 November, 1999,
further unfettering the financial system to a ‘maximum level’.
GLBA did away with most of the restrictions imposed on Banks by
GSA and a ‘new era of freer and unbridled Banking industry’
ushered in. Here lies the difference between Indian and US banking.

INDIAN BANKING- RBI Act of 1934 is the corner stone of banking

industry in India. Ours is also a democracy, but flavoured with a
socialistic pattern.

Even in 1990s, when the Liberalisation, Privatisation and

Globalisation (LPG), became new mantras of development, we did
not let the Banks completely free from the clutches of the
government. Narsimghan Committee formed to bring reforms in
banking sector gave its reports and the Cash reserve ratio (CRR)
and statutory liquid ratio (SLR) were rescheduled. These jugglery
(CRR AND SLR as per section 42 of RBI Act) for a common man is
that the Banks have to keep a minimum cash with RBI and with
themselves respectively, before lending and doing some other
businesses. It ensures safety of depositor’s money, an element
conspicuously absent in American Banks.

On contrary, in USA, the Banks can lend up to 8 dollars, as against 1

dollar deposit. Such is the risk and such is the unbridled state of
affairs. This unjustifiable risk played a vital role in the ‘mortgage
crisis,’ and banks after banks failed because every bank knew about
other’s liquidity.

Nevertheless, this crisis came and came with great intensity. Some
called it great depression, some economic tsunami and other
economic slow or meltdown, but the after-effects and pains
emanating from it, does not seem different owing to this different
nomenclature. It would however be financially naive to prescribe
remedies for what had happened, because, it is easy to write
‘prescription in retrospection’. But certainly, this does not mean that
no inference is drawn from this ‘economic catastrophe’.

It would be however be wastage of time to further analyse the

causes and circumstances which led to this fiasco, but it would be
great injustice to the economic history also, if some glaring
aberrations and maladies of this financial order are not enunciated
and diagnosed. ‘Crisis is the engine of change’; therefore, this crisis
would also bring about changes in the global financial order, an
order which came into existence after ‘Bretton-wood conference, It
is therefore; when the global economy is facing the threat of
recession and global financial order has failed, the demands are
being made not only by the leaders of the developing nations but
also by developed nations like UK and France to change the global
financial order.

BRETTON WOOD CONFERECE 1944- ‘Bretton Wood system’ of

monetary management came into being after a meeting attended
by 730 delegates from 44 allied Nations who gathered in Mount
Washington Hotel in Bretton wood, New Hampshire on 22nd July,
1944.

This agreement led to establishment of two important financial

institutions viz IMF and IBRD. This ‘duo’ played very important roles
with respect to economic and financial order of the world thereafter.
Although, this system sought to establish a just and equitable global
financial order, it was hijacked by US and some European countries
right from the outset. The IMF and IBRD (it later became 5th Wing of
World Bank) failed to serve the interests of the entire globe,
 especially poor and developing nations. The succession list of
Managing Directors suggests that no Asian has ever been made MD
of IMF. These figure suggests that how the IMF is working and how is
the discrepancy.

MEMBER COUNTRIES OF IMF( total VOTING RIGHTS SPECIAL

members are 185) IN % DRAWING RIGHTS
(SDR) million US
dollar (USD)
USA 16.77 37149.30
UK 4.86
FRANCE 4.86
CHINA 3.66
INDIA 1.89 4158.20
GERMANY 5.88
AFGANISTAN 0.08
BRAZIL 1.38
SOUTH AFRICA 0.85

Similarly, World Bank also failed to represent the globe in real sense of
term. See the figure-

NAME OF MEMBER COUNTRIES OF PERCANTAGE OF VOTING RIGHTS

WORLD BANK
USA 16.41
UK 4.31
JAPAN 7.9
GERMANY 4.5
FRANCE 4.31

The workings of world Bank has always been under severe criticism,
even the chief economist of this organisation Joseph Stieglitz
criticised it by saying ‘so-called free market reform policy’ is often
harmful for the developing nations’. It proved correct in this crisis
also. Even the ‘President of the World Bank’ is nominated by US
President and the world on the other hand, has no say whatsoever,
on this issue.

So far as the monetary policy adopted during the Bretton-Wood

Conference is concerned, it was agreed upon that all nations would
adopt monetary policy that would maintain the exchange rate of its
currency within a fixed value in terms of gold, but it 1971, US
created a unique situation by resorting to suspension of
convertibility from dollars to gold and made dollar as ‘reserve
currency’. Today USD has become an undeclared ‘world currency’ so
much so that monetary health and even budget statements of many
countries of Asia, Africa and even Europe are explained in terms of
USD. Such is financial hegemony on America. Until this crisis, world
was apparently comfortable with dollars, but now situation has
changed, although, US is trying to convince the world that ‘it shall
again be comfortable with it’, but ‘much water seems to have spilled
over’ and it is ‘too late’. Demand to have a new global financial
order is being made surprisingly not by Asia but by the west, the
‘trusted economic satellites’ of US.

The ‘feeble hatred’ of west is not unfounded and the roots are lying
in post gulf war situation. The post 2nd Gulf war situation slanted
strategic balance of power towards US, and these international
financial institutions came under almost total control of the US. The
eclipse of USSR in the 1990s paved the way for unipolarisation of
world both militarily and financially and the financial order slanted
favourably towards US.

The American military, financial and economic hegemony were by

now, established totally and unquestionably. The ‘first gulf war’,
‘which actually did not take place’ as coined by Baudrillard, a French
philosopher, further encouraged America which resulted in 2nd
Venture of USinto Iraq by Junior Bush in 2002-03. This proved ‘too
costly’ for America, because it increased the war debt by 79%.
Grounds were being prepared for ‘this crisis’, which unfortunately,
no one including US Federal reserve could understand. This graph
suggests how Europe and America have made fortunes during
concerned periods.
 The crisis has surfaced all the inherent weaknesses in the liberal
democratic economies based on ‘unbridled and unfettered financial
order’. Now the demand for a more just and equitable global financial
order is not going to halt. Brown and Sarkozy have unambiguously raised
this issue and called for a ‘global summit’ in New York to discuss and find
solutions to this problem. The problem emanated from America, therefore;
solutions should also be found here. Bush was virtually forced to accept
this proposal. Europe is hobnobbing with powers of Asia to garner support
and ASEM held in China may be seen from this angle also. The developing
nations are also set to raise demands of their ‘due share’ in the ‘proposed
financial order’. China, India, South Africa, Brazil, South Korea etc are
poised for ‘take off’. IMF and World Bank, the engine of economic
development, hitherto driven by west and America, need new co-drivers,
because the drivers alone have failed to drive it smoothly.
SUGGESTED CHANGES IN PROPOSED NEW GLOBAL FINACIAL
ORDER (PNGFO)-Now the wheel has turned and no one can prevent
change of guard. Following changes can be made so that the PNGFO fulfils
aspirations of billions of under-nourished and starved people across the
world-

1. IMF and World Bank’s functioning should be overhauled to make

them more democratic. Voting rights of member countries should be
changed and ‘bossism’ of west should go. ‘Each Nation equal vote’
theory should be enshrined into.
2. Appointments in IMF especially on the post of Managing Director
(MD) should be made in a more transparent manner so that poor
nations should also get a ‘comfortable say’. The system of
nomination to President of World Bank by US President should be
done away with.
3. World Bank and its different organisations should also undergo
radical changes. The basis of percentage of voting in World Bank
should be changed so that developing nations should have a
‘greater say’ in fund distribution and other administrative matters.
In nut shell steps to evolve mechanism of, what Dr. Man Mohan
Singh says ‘substantial increase in multilateral institutional funding
of economies’ should be taken.
4. Some short of ‘global financial regulatory body’ may be set up to
ensure proper monitoring of global monetary health and to ‘inject
curative drugs’ when necessary. The fate of global market can no
longer be left in the hands of elements of ‘excessive financial
leverage enjoyed by greedy speculators and fund managers.’
5. United Bank of Switzerland (UBS) or Swiss Bank has been depository
of hundreds of trillions dollars from across the world. Corrupt
politicians and big business men have used ‘Banking Act, 1934 of
Switzerland’ in their favour, because this law enables this Bank to
maintain secrecy with respect to money deposited into it. Tons of
gold deposited during ‘Nazi’s Nuremberg trial’ can play vital role in
tiding over this crisis. Time has come to amend or repeal this law
altogether, so that the ‘rich men from poor nations’ cannot drain the
wealth and make the citizen to suffer. According to data of Swiss
Banking Association about 1456 billion dollar of Indians has
been deposited in UBS; followed by Russia 470 billion USD,
UK 390 b USD, Ukraine 100 billion USD, China 96 b USD.
6. Radical changes are required in WTO also. Protectionism and
favouritism should be done away with. The present food crisis is
likely to be metamorphosed into ‘global food crisis’ if not addressed
to immediately. The ‘bio fuel’ and US role on this issue is going to
create an unprecedented situation in the world very soon. It is
 allowed to ‘go unabated’ will be more devastating that this
economic crisis also. The humanity has to decide that whether
‘vehicles would be allowed to move at the cost of poor man’s
stomach’.
7. The unequal distribution of wealth and prosperity has resulted into
creation of a number of economic blocks in the world. SAFTA, NAFTA,
IBRA, ASEAN, SAARC, OPEC, OIC, EU etc are manifestations of
growing tendencies of group-ism and bloc-ism, which ultimately are
proving hindrance to free flow of trade and commerce, harming the
world at last. If PNGFO addresses all such issues, such groups and
blocs would render useless and prosperity would transcend to all
sections and all territories across the globe.
8. If we see the graph (GDP of India, China, America etc), we find that
the 16th, 17th and even 18th centuries were the time of India and
China, the Asian giants. Hopefully, history would repeat itself and
‘this duo’ would occupy the driving seat of the future ‘International
financial institutions’. Permanent membership in Security Council to
countries like India, Brazil, Japan and Germany should be given so
that this world forum may not arbitrarily be used in one country’s
favour and against other.
9. The West’s honeymoon with ‘west type liberal and free economy
and American type democracy’ seems to be on the verge of divorce,
therefore; world is set to emerge with new set of ‘politico-strategic-
economic ideologies’ based on weltgeist, which is more equitable
and less discriminatory. Market is a good servant but bad master,
therefore; regulation and restriction on servant is essential.
10. Prioritisation of development has to be rescheduled, after all in spite
of all sorts of sky soaring achievements, Bread, Cloth and Shelter’
would remain on the top of the list. No civil society can afford to
ignore the equitable distribution of ‘these basics’ otherwise, the
social fabric will tatter like what is happening today.