Many global bodies led by the World Bank, the International Monetary Fund and the World Trade Organization, are now fearing that the recent indications of economic improvement, evident thus far through the timid growth rates seen in France and Britain – not to mention the steadiness shown by the U.S economy last week – will slow down governmental efforts and prevent them from carrying on their proposed reforms of the global economic system. This was acknowledged by the Group of Twenty's summit in London last April. Also, the United Nations' various institutions are urging governments in many instances to finish what they started, and not to relinquish their efforts at the first sign of recovery shown by the global economy. Meanwhile, there is a divergence manifested in divided opinions between economists and analysts worldwide, particularly those involved in economic issues, which may very well alter the proposed approaches to the crisis. Some of these analysts deem it necessary to modify the economic system, the latter having rendered institutions untrustworthy to consumers, and shown that governments were indifferent to the cumulating violations led by the commercial banking system. This is in addition to the abuses by investment banks, hedge funds and sovereign funds which all led to an unrestrained financial “swelling” that destroyed gains and proved fatal to companies. On the other hand, other analysts believe there are basic underpinnings in the pre-crisis economy that led to global growth rates of 5 to 6 percent annually over almost a decade, despite the seasonal growth-altering crises. To them, these foundations are worthy to be upheld and continued, while acknowledging the need to enact tighter regulations. In the book “Financial crisis and reform” by Michel Aglietta and Sandra Rigot (Paris, March – 2009), the current financial crisis is described as being “a serious crisis, and not just a cyclical crisis like the ones we have seen before. Instead, this crisis is exhibiting symptoms of an end of a financial era, which has hitherto been based on the reduction of inflation, and the free movement and investment of capital, since at least the eighties. This era was also characterized by a great rise in debt growth in the private sector, in addition to enhancing the value of assets, but that has now reached its end”. In fact, it was the post-WWII phase that engendered the model of retail banking - based on securing loans and assuming risks - in Western economies, in particular those in Europe. While this model served growth very well, it contained the surplus in lending through the inflation (which lowers the value of loans), and allowed the latter to crawl from one economic cycle to the next. However, the tragically high inflation of the eighties collapsed this banking model, with catastrophic crises occurring in the retail banking sector in the two decades that followed. At the same time, the freedom of financing gave investment banks a distinctive role, since investment lending practically means “securing loans and selling risks”. Subsequently, investments governed capital markets following the creation of complex credit derivatives, and the securitization of mortgages. This is because this pattern does not lower the value of debts, but rather injects them into a financial cycle by converting debts into bonds. As such, derivates gradually expanded into the circles of shareholders and bondholders. The problem with this financial model however, is that it does not fully recognize risks, or that it obscures the realities of these risks from the investors. At the same time, this leads to the deviation of debts from their actual value, for instance, when central banks protect these debts in times of crises by increasing interest rates – as long as inflation in its conventional sense does not fundamentally threaten the economy. Furthermore, this model heavily camouflages risks and conceals them from those dealing in instruments and bonds, and is subject to collapse as soon as auditing shows any contraction in the budgets of companies and institutions. It is for these reasons that we are now facing the current crisis, which is the greatest one since the end of World War II, according to Aglietta and Rigot. The fact of the matter is that as much progress and development grew, as much as the instruments of risk-transfer were developed and put in the service of financing assets markets, in particular during the presence of low-cost credit and surplus liquidity in the global economy. Furthermore, the emerging market countries accepted these conditions necessary to growth, following the Asian financial crisis. However, the conversion of raw materials markets to assets at a time when the dynamism of credit led to the inflation of the prices of assets led to the formation of hybrid fortunes combining commodities and minerals. These fortunes then entered in the calculations of the consumer price index, pushing inflation upwards and leading to alarm and apprehension during the crisis. In the middle of this imbalance in both retail and investment banking (which is threatening the United States of losing alone about 400 to 1500 banks), the global banking system is seeking to reduce its “swelling” and adjust its lending regulations. It is not true that worldwide banks are refraining from injecting liquidity into institutions, but rather, they are now firmer in lending money, which is the expected procedure after the crisis. As such, loans will become more expensive, and will stifle the benefit of intermediaries in the capital markets, exclusively through the constraints of the new regulations. These will allow the economic effectiveness of market financing to survive. The world economy meanwhile will need massive financing, not only in order to boost the excessive American consumption, but also for long term investment in emerging market countries to become on par with those in Western countries. The emerging countries will be the driving force that will require significant shares of global savings over the long term, in the form of bonds and equities, most of which to be provided by investment funds, especially sovereign funds.
