In his new encyclical, Caritas in Veritate, Pope Benedict XVI calls for an international political authority, “so that the concept of the family of nations can acquire real teeth.” He tasks it with issues like human rights, ensuring access to necessities including food and water, and managing the global economy. What might an effective international governing body look like?
Read more on International Governance in Caritas in Veritate and The Road to Serfdom…
Two weeks ago, French bank Société Générale announced that off-balance sheet speculation by a single “rogue trader” had cost the company 4.9 billion Euros ($7.2 billion). The scandal had enormous repercussions in international markets leading some commentators to decry the rotten nature of global “casino” capitalism and to call for the reversal of financial liberalization. However, the actual circumstances of the case do not justify more government intervention in financial markets but illustrate individual moral failings and poor internal governance on behalf of the bank.
A new report also suggests that a lack of internal controls and weak enforcement of existing rules may be the real source of the problem at one of the oldest banks in France.
On January 24th, Société Générale said that it had discovered a “massive fraud” through “a scheme of elaborate fictitious transactions.” The event caused a great stir not only for the magnitude of the bank’s losses but also because it is partly blamed for the worst European stock market collapse since September 11, 2001.
Jerome Kerviel, who worked as a junior trader in the arbitrage department at Société Générale, was responsible for betting on markets’ future performances. The bank claims that he had made unauthorized and concealed bets of around 50 billion Euros on European markets. According to the New York Times, Mr. Kerviel told prosecutors that his bets would have resulted in a profit of 1.4 billion Euros for the bank if they had been cashed out by the end of December. However, at the start of this year, stock markets experienced a sharp downturn turning the projected profits into losses.
The French bank discovered the bets in mid-January when auditors in the risk management office noticed a series of fictitious trades on its books. Société Générale then conducted a dramatic market sell-off operation in order to neutralize Kerviel’s deals. Traders estimate that the bank unwound contracts in the range of 20 billion to 70 billion Euros from January 21st to 22nd.
Many suspect that selling all these positions into an already volatile European market contributed to the shocking stock market performance in Europe around that time. This in turn, provoked an unexpected and controversial interest rate cut by the Federal Reserve of 0.75 per cent in order to protect the New York Stock Exchange which had been closed on the day when European markets dived. The curious series of events was summed up by a hedge fund manager who told Reuters that: “The real story here is basically, this guy, paid 100,000 Euros a year, sitting in some office at SocGen, forces the Fed to cut interest rates by 75 basis points, which is basically what happened”.
The huge and wide-ranging market repercussions have given ammunition to the critics of financial liberalization. An editorial of the French newspaper Libération sarcastically entitled “Casino” laments that no one controls the huge sums of money moving around in financial markets and demands tighter regulation of financial markets. It also claims that the scandal embarrasses President Sarkozy’s alleged embrace of laissez-faire capitalism. Read more on ‘Casino Capitalism’ or Personal Failure?…
Samuel Gregg, director of research at the Acton Institute, has a piece in today’s Detroit News titled, “Will Quran limit growth of Muslim nations?” The commentary addresses the economic outlook of Muslims, and Islamic nations, considering their religious position against the charging of interest. Gregg notes:
In the film The Pursuit of Happyness (review here), there’s a scene where Will Smith’s character arrives late for an interview with a stock brokerage firm and has no shirt on. The conversation goes like this:
How can developing countries best compete in a global economy? Humberto Belli, president of Ave Maria College of the Americas in Nicaragua, points to the power of education and human resources. In many cases, poorer countries have a long way to go. “This imbalance in the development of human resources, if not corrected, will negatively impact many countries, impeding them from enjoying the benefits of globalization,” Belli writes.
