Masthead graphic based on a painting by Gudrun Thriemer.

Friday, November 28, 2008

Paulo L dos Santos, "The World Bank, the IFC and the antecedents of the financial crisis," Bretton Woods Project, November 27, 2008.

[Few doubt that extreme liberal economic orthodoxy is a broken paradigm. This article moves the focus away from Wall Street and the US Congress. It sketches the relations between the World Bank (including the IFC which finances private projects in developing countries) and personal household debt. It also shows how "banks from developed economies have been central to the spread of the current financial crisis to middle-income countries." Housing bubbles and bloated consumer spending as a result of the entry of foreign banks are now endemic in, for example, Mexico and Central and Eastern Europe. The World Bank Group was providing "significant financial support to banks and other financial firms focusing on credit to individuals, including 'payday loans' to low and mid-income households, broader consumption lending, mortgages and mortgage Eastern Europe and Latin America." -jlt]

  ...across the developing world many vulnerabilities remain...

The World Bank wasted little time in using the financial distress gripping middle-income economies to promote an agenda of privatisation and cuts in state social spending. Yet the orthodox prescription of passing the costs of a financial crisis on to ordinary people through cuts in social services is especially objectionable in the current situation. It will make the recession worse, and it poses a breathtaking double-standard at a time when states in the US and Western Europe prepare to spend more to minimise the damage wreaked on their economies by an unfolding global recession. the US, credit systems became focused on lending to individual households, leading to growing personal debt, and to the transfer of rising shares of wage income to the financial system in the form of debt servicing payments and various fees.

It is also particularly offensive given that the World Bank's advocacy and programming over the past ten years directly contributed to the financial vulnerabilities now straining Latin American, East Asian and Central and Eastern European economies. Bank economists led the policy push for the entry of top international banks into middle-income economies. The International Finance Corporation (IFC) provided handsome financial support to the development of many of the financial models and instruments at the heart of this crisis, including consumer and mortgage lending, loan securitisation, mortgage-backed securities, collateralised debt obligations, and originate-and-distribute business models in those countries.

  The social provision of quality housing needs to be advanced as an alternative to private provision through capital markets, which has proven so damaging and expensive for ordinary people. The same applies to pensions, health-care, and education, where privatisation has increasingly forced individuals to access capital markets through banks, investment funds and insurance companies to meet their basic needs.

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