The lessons of the crisis for Latin America

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Wall Street and the Fall of the Myths
The lessons of the crisis for Latin America
By Bernardo Kliksberg, 16th October 2008
Latin America needs to reexamine the regulations, speculative practices, elevated inequities, role of public policy, and many other important affairs that underline the tragic collapse of Wall Street. The region should immediately leave behind narrow economics, and visualize what basic components of the social capital like trust and ethics have an enormous weight on the economy. It’s time.
(From New York) THIS IS IN LINE WITH WHAT THE NEWS PAPER The New York Times calls the biggest rescue operation of modern times, that, as noted, is able to redefine the role of the United States Government in the market for years.
Following the general guidelines, the United States would buy 700,000 million dollars of toxic bank assets, basically paid for by tax payers. This arrives after the collapse of the two of the five most important investment banks in the United States, Bear Stearn and Lehman Brothers, “The necessity to act immediately surpassed all ideological consideration” the sale of the other, Merryll Lynch, the multimillion dollar rescue of the largest mortgage firms Fannie Mae and Freddy Mac, the purchase by the government of 80 percent of the of the shares of the major insurance company, the American International Group (AIG), the severe difficulties of the remaining investment leaders, Goldman Sachs, and Morgan Stanley, and the precarious situation of the largest saving and home loans in the United States, Washington Mutual.
Many of these organizations had assets in their balance sheets, but they lost one central element of the social capital of a society: the trust.
The necessity to act immediately surpassed, as noted by Ben Bernanke, the president of the Federal Reserve (Central Bank), all ideological consideration. “It seems time to revisit the hard drive of infallible economic recipes that have dominated in Latin America during the eighties and nineties” So far this year 600,000 people have lost their positions in the United States, the impacts have also been felt in the European economy and now also in the Asian markets.
Latin America should draw some lessons from these tumultuous events that are shaping history.
It seems time to revisit the hard drive of infallible economic recipes that have dominated in Latin America during the eighties and nineties and have affected the daily life of the people in an amount of the poor of 137 to 200 million, of which many are the marginalized youth (25 percent), and of the levels of inequality (today the worst out of any continent)
The crisis is already extremely complex, but the things most frequently highlighted today by the most acute observers, with implications for our region, are as follows:
1. There was a very important gap in regulations. The New York Times editorial: this crisis is the result of a voluntary and systematic fault of the government to regulate and to monitor the activities of banks, lenders, investment funds, insurers, and other market players. They played a high stakes game of poker with our financial system, without adequate transparency or overview. The Prime Minister of FranceFrancois Fillon –calling Washington to act–said: we will not agree to pay for damage brought on by a lack of regulation. “In Britain, the Financial Services Authority was banned from taking new positions in equities or short-term finance companies”
2. Speculative factors precipitated the collapse of some major institutions. The manager of the State of New York’s publicly controlled finances, DiNapoli, said about the operations of short sellers (traders who borrow shares, sell them, thus pushing down their prices, then buy at deflated prices, and whomever loaned them the money earns the difference): These sales have speculative pressure on our stock market and threaten to push our national economy deeper into recession
The Security Exchange Commission (SEC) prohibited the act of short selling over 800 shares, and made it obligatory to make these sales transparent. The president, Cox, emphasized that these methods were necessary in order to ensure that the surrpetiusous manipulation, the illegal “naked short selling” (in which the shares are never actually transferred) or the illegitimate business practices do not lead the market or undermine trust.
In Britain, in the same direction, the Financial Services Authority banned from taking new positions in shares or short-term finance companies, and forced it to be more transparent if these positions represented 0.25 percent of preferred shares of the company. “The Americans have had the courage to make a healthy purge nationalizing when necessary… This shows the limits of the ideology of financial liberalism”
3. The debate has resurfaced on the income of top executives. The journalist, several time Pulitzer Prize winner,Nicholas Kristof reports that senior executives in the U.S. three decades ago earned 30 to 40 times what the ordinary worker earned. In 2007 it was 344 times. Kristof points out that taxpayers are subsidizing 20,000 million dollars a year in overpayments. He emphasizes that this money is enough to lower the maternal mortality rate by two thirds in the world, and provide ionized salt to prevent tens of millions of children that suffer from retardation.
Warren Buffet, one of the most successful investors on Wall Street, says, to judge whether corporate America is serious about reforming itself; the remuneration of the CEO’s is the most acidic test.
4. Many myths about the possibility of dispensing with the rule were dropped. The demand for public policy has been very strong, and has surpassed all ideological discussion. One of the chief ministers of France, Jean-Pierre Juyet, wrote in the newspaper Le Monde: The Americans have had the courage to make a healthy purge nationalizing when necessary … This shows the limits of the ideology of financial liberalism, and the necessity of interventions.
“The complex globalized world requires now more than ever public policy that is properly managed, transparent, and responsible” In Latin America that would amount to a reexamination of currently perceived practices such as: the necessity of regulations, speculative practices, high inequities, the role of public policy, and many others underlining the crisis. Also to leave behind at once narrow economics and to visualize what basic components of the social capital, such as trust and ethics, put an enormous pressure on the economy.
The complex globalized world requires now more than ever public policy that is properly managed, transparent, and responsible, and the systematic social responsibility of private industry.
One final matter should be recounted of the errors in these fields, these are not just mere academic points, the people who ultimately pay for this crisis are the consumers, the tiny shareholders, the small and medium sized business, the farmers, the middle class, the workers, with grave risks for their efforts of years.
Ten key answers, following the Lehman Brothers' bankruptcy
por Diego Fonseca
About the Author
Bernardo Kliksberg

Bernardo Kliksberg is one of the foremost world experts on the fight against poverty. He is a special advisor to the UN, UNDP, UNESCO, UNICEF and other international organizations, as well as being the author of hundreds of technical articles, and numerous books published worldwide, the most recent being an international best seller, “More Ethics, More Development”. He has advised the administrations of over 30 countries, including a number of presidents, and numerous public civil society and business organizations.
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