Riot Is The New Right: Fighting Financial Irregularities

Posted in Finance Articles, Total Reads: 4083 , Published on December 12, 2011

People all over the world have been increasingly taking to streets in retaliation to absolute oppression and appalling social evils like corruption, income inequality, etc. to manifest their sheer discontent and demands that can’t be penned down on a paper. It’s the job of their “representatives” to understand these unsaid demands and work in the favor of those who elected them. Be it the recent “Occupy Wall Street” riots or the Iceland protests as its economy continues to deteriorate due to the credit crisis and slips deeper into recession or be it the huge protests in Ireland majorly by the middle class rallying against a levy on their retirement or be it the protests in Greenwich outside bank CEO’s luxury homes by busloads of protestors demanding justice. Although demographically diverse, their underlying objective of bringing down the appalling inequality is pretty much the same.

Financial Irregularities

We are the 99%

The fact that is clearly evident from the statistics provided by Congressional Budget Office regarding the income levels of Americans that the incomes of top 1% of the population grew by an average of 275% while that of an average middle class American family that forms 60% of the populace grew by a mere 40% is not just indicative of a deep systemic rot that favors the rich and penalizes the poor but also shows that those who set the US economy on fire are still at large and nothing significant has been done to penalize the culprits who have got richer for being criminal. The Government has failed to hold the line against moral hazard by issuing a blanket guarantee to all the reckless constituents of the financial services industry except for Lehman Brothers.

Riot is the new right. People are getting increasingly frustrated of seeing democracy being reduced to a mere function of casting votes every few years and then leaving the system at the mercy and influence of the filthy rich. One of the major demands of the OWS protestors is the reduction in the corporate influence over politics and policy making. As aptly pointed out by Gylfi Zoega, the Icelandic economist who actively contributed to the economic policy debate during the Icelandic financial crisis 2008-10, said that the government went as far as travelling with the bankers as a ‘PR show’ extolling the benefits of the financial innovation that gave rise to complex financial instruments like Collateralized Debt Obligations or the CDO’s now correctly referred to as the Chernobyl Death Obligations.

The alarming statistics of spending:

The US government has already spent a whopping US $ 6 trillion to contain the recent crisis that is about 10 times of what was spent on New Deal (US $ 500 billion) that was put in place to contain The Great Depression eight decades ago and it also beats the previous record of World War II that stands at US $ 3.6 trillion. The government committed to spending an additional US $ 7.8 trillion a year ago when the total spending stood at US $ 4 trillion bringing the total cost of the crisis close to a shocking US $ 12 trillion. US government cannot afford to print its way out of the crisis without provoking the specter of inflation; neither can it raise taxes or cut spending without fueling recession. All this as a consequence of the reckless actions of some over-leveraged Wall Street firms, outright fraudsters, vast Ponzi schemes, government inaction, lax supervision and regulation and falling corporate governance. Where does the American tax payer who foots the bill feature in this list? Yet the huge cost of this crisis finally has to fall on the backs of the diligent tax payers.

The public debt of US that reached an all time high with a debt GDP ratio of 122% in 1946 would make today’s debt GDP ratio of 99% appear somewhat better. But there’s a catch. In 1946, US was a superpower, untouched by the World War II, blessed with an immense pace of development, had a manufacturing base envied by the world, ran current account surpluses and the dollar had just become the world’s reserve currency. All these developments were instrumental in helping US pay its way out of the debt back then in 1946. But today the situation has reversed. The US dollar is flowing out making place for China’s Renminbi, it is running large account deficits, the manufacturing base is getting weaker, there is no pace in development and it is scathed by problems all around the world, especially due to the political instability in oil-rich countries and its own relentless war against terrorism. Thus, Keynesian economics of stimulating spending to achieve growth in aggregate demand in today’s scenario does not bear much relevance. Nouriel Roubini, the famous economist who warned of the impending crisis clearly pointed out that it was a hugely expensive crisis given the extent of destruction of equity wealth, housing wealth, income, jobs and the terrible fact that 50 million people could end up below poverty line again. This is enough reason for people to protest and justifying their protest does not require us to be a genius.

Regulations -The way out:

What the US government really needs to do is not just assure the people that the financial industry that got them into this mess will be dealt with. Rather concrete steps need to be taken to regulate the financial services industry first by regulating derivatives which is a US $ 300 trillion market (20 times the size of US economy). Next, securitization needs to be brought under vigilant supervision to block sub-prime loans from getting into the chain that can throttle the entire system. Next, the pervert systems of compensation that reward for taking on risk need to be replaced with better systems that take into account the losses made by the trader before bonuses are awarded. Lastly, the ratings agencies need to be watched closely and the previous system of making the investor pay for getting an opinion on a security needs to be brought back in place of the current system that makes the issuer of security pay for the same as we have already seen the bizarre consequences of the latter.

India and Inequality:

Corruption in India is no less a reason for people to take to streets. Again the same evil of inequality is at play here. The recent movement of Anna Hazare that received nation-wide acclaim shows that corruption affects all except for those who have the money to contain it. The estimated amount of black money arising out of corruption if bought back to those who own it will wipe off 25% of the fiscal deficit of India that currently stands at Rs. 2.74 trillion. Anna Hazare’s commendable efforts of holding a fast unto death for implementing the Jan Lokpal bill that will hopefully get corruption under control is just one consequence of what happens when social evils afflict majority of the populace.

People become policy makers:

The idea of democracy as a form of government by representation has taken a severe beating given the misuse and abuse of political powers that result from the nexus between politics and business which is at the root of all the problems. The recent movement lead by Anna Hazare should not be dismissed by the Government as a once-in-while incidence of government engaging people on policy issues and doing so would be a huge mistake as people are increasingly seeing it as their right to be engaged on policies that will affect them. Critics of embracing the larger citizenry directly may argue that they lack the ability to decide rationally on complex issues that require a level of deliberation and thought. But it doesn’t require more than the “deliberation and thought” of a third standard kid to see that if the policies designed by the government to contain, say for example corruption, are toothless, they will simply add to government expenditure and be of no help to the common people who suffer the most from it

To add to it, does it take one to be a genius to understand Planning Commission’s bizarre statement that spending more than Rs. 32 per day does not entitle you to receive government benefits for poor? It rightly attracted nation-wide criticism. These and blunders alike can only be contained with participation from the people. That brings us to the conclusion of participatory governance as a solution.

Referendums – The way out:

Irrespective of the country, religion or any other sub-division, it can be clearly seen that the government needs to make a provision of involving people in making major policy decisions that affect their life instead of provoking them to riot and then asking them their demands. Referendums would be one of the solutions of achieving a somewhat satisfactory system of policy making. Referendum basically is a direct vote in which an entire electorate is asked to either accept or reject a proposal according to its Wikipedia definition. It can be initiated by the citizens via petition called the initiative. It is not a new concept. It’s been tried and tested before in US’s Oregon, California, Colorado, Arizona, North Dakota, Washington and all over the world. Since 1904, citizens in 24 states of the US have placed over 2051 initiatives of which 840 (41%) were adopted.

Critics of this idea of participatory governance argue that such a system may throw the country into anarchy. But the point is that in absence of radical remedies, anarchy and chaos will continue to reign anyway in the form of ever more violent riots and outbursts.

This article has been authored by Anagha S. from Welingkar Institute of Management, Mumbai.

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