Ethics is also about not preventing financial crisis at any cost

Sir Philip Booth in “Ethics alone will not prevent financial crisis” November 13 asks: “If I can make a few million from a securitization – is that creating a dodgy financial product to generate fees for the bank or does it reduce mortgage spreads for poor homeowners?” In some cases there can be no doubts.

In a business based on convincing risky Joe to take a $300.000 mortgage at 11 percent for 30 years and then, with a little help from the credit rating agencies, reselling that same mortgage in a securitized version to risk-adverse Fred in $510.000 yielding him an expected return of six percent, and pocketing as a result of it profit of $210.000, anyone should be able to understand that some sort of foul play was involved somewhere.

And in reference to the title of Booth’s article we should also never forget that preventing financial crisis from happening might be just as unethical, if with that prevention we stop society from taking the risks it needs to move forward. In this respect the current bank regulation which determine the capital requirements exclusively on the basis of perceived default risks, are, simply put, very unethical.

When in Rome, do not try to see every attraction but do not miss what has to be seen either

Sir Robert Zoellick making reference to a meeting among world leaders in Rome prescribes “A 10-point plan for the food crisis” May 30. That plan is somehow confusing in that it mixes immediately needed actions, the first three, that of fully funding the World Food Programme’s emergency needs; the support of vital safety nets and facilitating the access to seeds and fertilizers in poor countries, with other seven points, on some of which there is even an ongoing debate about whether they are right or wrong, like for instance whether to step up ethanol production from sugarcane, which consumes a disproportionate amount of water.

Since this food crisis relates more to economic growth and energy related than to unforeseen weather disasters, and there are many official watchdogs like the International Energy Agency, the Consultative Group on International Agricultural Research, even the World Bank, supposed to keep their eyes open, my suggestion of an 11th point, I believe far more important those point 4-10 suggested by Zoellick, is to figure out why world has been so taken by surprise with this food crisis and what can be done to improve the foresight.

But we did what the market told us to do not long ago!

Sir Martin Wolf tells us that “The market sets high oil prices to tell us what to do” May 14, but we should not forget that the same market, less than a decade ago, priced the barrel of oil under 10$, and according to some pundits it was heading for 5$, and that in fact many of our current problems are derived from doing exactly what those low prices told us to do.

Martin Wolf also quotes the International Energy Agency in order to establish a case for extremely tight oil markets but what was this agency saying just a few years ago? Why are they to be more credible now?

What Martin Wolf does not mention are the alternatives to the short term markets in oil and that some long term take up contracts between producing and consuming countries, based on some reasonable in between prices, could create stability and reduce volatility in the oil markets for the benefit of all...less the short term speculators of course.

Our first turning point has to be in the how we manage the world’s economy.

When I was an Executive Director at the World Bank 2002-2004 I am on the record complaining that there were no significant mention of energy plans in the country assistance strategies presented to us, when in light of the tremendous energy intensive growth occurring in places like China and India, we could very well be facing 100 dollar per barrel of oil in a short time. And I do not yet understand how the International Energy Agency was not capable of mustering sufficient strength to warn the world of the upcoming imbalances with the supply and demand of oil.

For more than a decade I have been also been voicing, sometimes quite noisily, that in fact we do not have a workable regulatory framework for our financial systems, since it should be clear to anyone that our real objectives for it must reach much further than the current limited and almost silly objective that Basel has in mind, that of just avoiding defaults.

Also, from the very first moment I heard about officially empowering the credit rating agencies to do the risk measurements that determined the capital requirements of banks, I have repeatedly stated that this would just lead some participants to let down their guard and end with many investors following, sooner or later, the credit rating agencies over a precipice.

I mention these three aspects, though there are many more, like the “scandalously wasteful biofuels programmes”, in response to Martin Wolf’s “A turning point in managing the world’s economy”, April 23, in order to emphasize that the first turning point we really need to make has to do with the how we manage the world’s economy. Obviously we must break lose from the habit of blindfolding and ossifying our institutions. Perhaps we need to impose term limits on the bureaucrats too, especially since their first rule for survival seems to be…do not ask questions and do not answer what you have not been questioned.

Sack some in the IEA!

Sir, Martin Wolf in his “Why the energy revolution will continue to power ahead”, June 28, concludes “anybody who thinks it will be easy to reduce global energy consumption is simply dreaming” and asks “where might all this energy come from?”, and he promises to tackle this monumental upcoming crash of trains in future columns. Nonetheless, though thankful for Mr. Wolf’s efforts, we should remember that is exactly why the OECD countries set up the International Energy Agency (IEA), that intergovernmental body that describes its mission on the Web as “advancing security of energy supply, economic growth and environmental sustainability through energy policy co-operation”.

Since we so recently could read in the world press about oil heading down towards $5 and the end of the oil age, and never heard an IEA representative forcefully negating such predictions, may I advance the idea that the first thing to be done, specially in times when we preach the worth of accountability, is to publicly sack some IEA bureaucrats, as incompetent lazybones, or worse, for misrepresenting the facts. This is no joking matter as hundreds of millions of persons around the globe will suffer if IEA, and others like them, do not get their act together.

IEA