Tuesday, June 17, 2014

Christine Lagarde talks about inclusive capitalism. – “Ethical behavior is a major dimension of financial stability.”

On May 27, 2014, Christine Lagarde participated in the conference for inclusive capitalism in London. The Managing Director of the IMF spoke about economic inclusion and financial integrity.

My introduction needs some explanation.

First, what is inclusive capitalism? According to Christine Lagarde, it is a market economy in which trust, opportunity, and rewards for all prevail.

Second, inclusive capitalism faces which challenges, according to the IMF? Christine Lagarde says it’s the rising income inequality and the lack of an integer financial system.

Income inequality is on the rise.

“The 85 richest people in the world, who could fit into a single London double-decker, control as much wealth as the poorest half of the global population – that is 3.5 billion people.”

This is perhaps a shocking statement but, as such, not a major problem for inclusive capitalism. What matters more is, according to Christine Lagarde, the inequality of opportunities that comes with any inequality of outcome. Put differently: If you have less money, your education and health care will suffer; thus, you will get less opportunities in your life, compared to others.

“Fundamentally, excessive inequality makes capitalism less inclusive. It hinders people from participating fully and developing their potential.”

Another problem of income inequality is that it undermines solidarity and reciprocity in societies. Ultimately, this may threaten democracies.

The financial system is not integer.

“We are familiar with the factors behind the crisis – a financial sector that nearly collapsed because of excess. A sector that, like Icarus, in its hubris flew too close to the sun, and then fell back to earth – taking the global economy down with it.”

Every day, we can read in the financial press that the integrity of the financial system is a problem. So what can we do about it? Christine Lagarde presents four answers:

  • Avoid financial institutions becoming too big to fail: Increasing minimum capital ratios on systemic banks can reduce systemic risk significantly. In addition, an international agreement on a cross-border resolution of mega banks would also help.
  • Make better rules and better monitor shadow banks.
  • Make derivatives markets safer and more transparent.
  • Change the behavior and culture in the finance industry: Supervise banks stronger, allocate greater resources to independent supervisors, align incentives with expected behavior, and promote prudence and social consciousness as a core value of banking are the key words here.

“The true role of the financial sector is to serve, not to rule, the economy. Its real job is to benefit people, especially by financing investment and thus helping with the creation of jobs and growth.”

“Prudence has long been a byword of banking, and yet has been sorely missing in action in recent times.”

This is all nice and right. But it still remains pretty vague for me. And, in addition to being vague, Christine Lagarde says that the above topics will also take a very long time to be implemented:

“Just as we have a long way to go to reduce our carbon footprint, we have an even longer way to go to reduce our financial footprint”.

Something makes me think that this is not the last time that I write about these topics…

Some additional quotes