fixing or pampering the EU banking sector?

The new Banking union created by the EU in order to improve regulation of the big European banks is proposing banks to have the minimum level of capital – 8%. When Lehman Brothers went bankrupt, their level of capital was  11%.

Moreover, in case a government of an EU country will want to tighten the regulation and increase the minimum level of capital, they will need to seek permission of this central Banking Union. Imagining the level of lobbying and influence by the financial sector on this Banking Union, it is not hard to figure out whose interests will define this regulator.

I might be too quick to draw conclusions, but i’m afraid, this will be yet another missed opportunity to address the real issues in the sector – size and complexity of financial institutions and their products, quality and riskiness of investments, and more importantly – making banks 100% responsible for their failures. Negotiations on levels of capital clearly demonstrate that the attention has been elegantly shifted from the real causes of financial crisis withing the banks to various external institutions and processes, which therefore predetermines failure of preventing financial crisis in the nearest future.

we are all in this together..

so David Cameron, Obama & Co said few years ago referring to the recent financial crisis and austerity measures cutting public services, freezing public sector salaries and increasing unemployment.

but are we?

from 2009 to 2012 the total wealth  of world’s billionaires has doubled – from USD 3.1 trillion in 2009 to USD 6.5 trillion in 2012, writes MarketWatch.

 

IMF economist: medicine against next financial collapse – income equality!

“Unless countries reduce income disparities the next financial collapse is inevitable.” This is the main message of the interview with the IMF economist Michael Kumhof, published by Eurozine few weeks ago.

I am surprised, to say the least. I am surprised not about what was said, but said by whom. This is the first time, as far as i am aware of, when the IMF staff would come in public with such conclusions. I bet, though, it does not reflect the position of IMF in general; however, having somebody inside the organization and be courageous enough to challenge the traditional IMF position, is something new (is it Christine Lagarde’s effect?). Muddying the waters inside the IMF in terms of what policies to apply when addressing global financial problems may help to critically review success (or lack of it!) in dealing with financial crisis so far and eventually start looking beyond just management of crisis and think more about root causes and necessary preventive actions to avoid crisis constantly repeating.

Kumhof argues that the increased income gap leads to increased debt and thus also eventual debt crisis. The richer the rich become, the more they need to spend. After buying all they can possibly buy + a bit more and investing in all possible good-enough profit-making enterprises, there is still money left, which they then lend to the poorer people via banks. The poorer are borrowing to maintain the consumption level they have been used to (or in some cases, just willing to have some sort of normality) meanwhile believing that the stage of ‘cant afford’ is only temporary. This results then in this vicious circle of supply of money from the rich and demand for money from the poor which due to dependency on each other contains a risk of crisis whenever one of the sides either cant supply or dont demand enough.

As the causes of inequality economist mentions weakening labor unions, global competitiveness, global trade imbalances, deregulated financial market, tax havens (!!!).

He is less talkative when it comes to solutions, but suggests that it is either about increasing the income of the poor or taxing (intelligently) more the rich. Education works in long term, but possibly due to increasing global workforce mobility, this actually may not be the sole answer to the problem nationally.

He is clearly unique IMF staff as among other things he is also agreeing that a) in order to stimulate economy you have to bring in more money in public treasury instead of cutting costs, b) there is no point developing theories after theories and keep defending them without relation to real life.

this is sensational.