The whole financial system has to be broken down and rebuilt so that finance
serves the real economy – and if the private sector does not deliver this, then
the government must intervene, Heinner Flassbeck, UNCTAD’s chief economist has
said in a wide-ranging interview with Riaz K. Tayob. A recent report from UNCTAD
calls for ‘much more regulation’ to avoid ‘excessive speculation’ which treats
commodities as an asset class. Flassbeck slates the G20 for its ‘traditional’
approach, which he says does not go far enough to address the misallocation of
resources caused by ‘overshooting’ currencies and commodity prices.
Government intervention needed to ensure financial sector serves real
Riaz K. Tayob: UNCTAD (United Nations
Conference on Trade and Development) has recently issued
a report on the financial crisis. Could you give us some of the key messages
from the report?
HEINNER FLASSBECK: Well, the key message of the report is that what has driven
the world economy into such a difficult situation was mainly what is sometimes
called ‘casino games’ or ‘casino gambling’ on several markets. It was not just
the subprime market, the famous housing market in the US, and the derivatives of
that. It was much more, gambling in the commodity market and gambling with
currencies, and this all has collapsed now and we see a huge amount of debt,
outstanding debt and defaulting debt, because most of the players in these
markets have indeed gambled with foreign money and not with their own money.
RIAZ K. TAYOB: When you say casino economy, most people think about the economy
as something very complicated. Recently there has been talk about the ‘real
economy’ and the ‘financial economy’, so is everything gambling?
HEINNER FLASSBECK: No, no, there is a real economy that is productive and that
is producing goods and reasonable things that people need. But on top of that,
in the last ten, twenty years, a huge casino was built, where gambling was the
most important activity. And people really expected that they get a net effect,
a net gain, a net income, out of this casino, but every reasonable person knows
that that is not possible, casinos are what economists call ‘zero sum’ (games) –
what one guy loses the other one wins, and the other way around. The fact that
they played with commodities and currencies and houses gave them the illusion,
for a time, that they really could get a net gain out of this casino game. But
it is impossible and that has been shown now. After all the speculative pyramids
collapsed, we see there is no net gain left.
RIAZ K. TAYOB: But these are financial markets that are regulated with oversight
and have central banks. People put their trust in regulators to look after their
pensions and investments on the stock exchange. What were the regulators doing?
HEINNER FLASSBECK: The regulators were ‘sleeping on their hands’, as some people
They did not realise what is going on. And they did not realise, mainly, how big
the casino has grown over the last years – this virtual casino. And, so far,
they did not see there were huge ‘systemic risks’. It is very simple to
understand. If the oil price is driven up by speculators to a hundred and fifty
dollars, at a certain point of time the normal people cannot afford oil anymore.
And if house prices are expected to rise forever, we will see the ordinary
people cannot buy houses anymore. And the same with currencies, if you drive up
currencies, currencies get overvalued. Then at a certain point of time, the
country has lost so much of its competitiveness that it is a running a huge
current account deficit. It cannot export anymore and it has too many imports
and it cannot afford these imports anymore, and the whole thing collapses.
RIAZ K. TAYOB: But besides regulators, there were also accountants who check the
books of public companies and private companies. Should not the accountants have
picked this up?
HEINNER FLASSBECK: They should, but what we see – we have the normal banking
system which is regulated to a certain extent, but we have a ‘shadow banking
system’ that consists of hedge funds and investment bankers – we see that there
were ‘off-balance-sheet vehicles’, where banks engaged in gambling. And this was
‘off the screen’ of regulators to a certain part. But on the other hand,
regulators did not fully understand what is going on, and in so far, regulators
were overwhelmed by the huge amount of new and sophisticated complex structured
products on these markets, which were all created, so to say, to disguise the
character of gambling behind it.
RIAZ K. TAYOB: And the other safety net the people had is the media – to what
extent did the media pick up on the issues and report on the risks?
HEINNER FLASSBECK: Yes, not enough obviously, but it is not only the media. The
other ‘helping hand’ for the ordinary people should be economists, academics who
look through the whole thing. But unfortunately there were too few who were
warning, who saw the systemic risk, and most, the mainstream, of economics was
enthusiastic about free flow of capital, and the efficient allocation of savings
all around the world. There was a whole paradigm of economics that supported
this sophisticated gambling, and so far it was difficult for the media and for
journalists to understand what is going on.
RIAZ K. TAYOB: What do you mean by systemic risk?
HEINNER FLASSBECK: The systemic risk is as I said that normal people cannot
afford things anymore, or the normal economy – the real economy, the productive
part of the economy – cannot afford to pay the gamblers and the bankers anymore.
In the US, the share of profits of the financial sector has dramatically
increased in the last years up to a share of 40 per cent. So, at a certain point
of time, if too many people are just going in the casino and are not working
then the real world cannot afford to pay them anymore and this is the systemic
risk and at that point the system…implodes.
RIAZ K. TAYOB: When people start talking about ‘recovery’ and ‘stimulus package’
to get the economy going, what do they mean?
HEINNER FLASSBECK: They mean that now the government has to step in, that the
government has to compensate for the falling expenditure of the speculators,
other people, the banks, the problem of investors to get credit. And so that all
leads to downward spiral of cuts in spending and the more people cut spending
the more the economy goes down. There is no self-healing, automatic, mechanism
that will bring the economy to a recovery, and so far governments have to step
in all over the place and in all countries of the world, to compensate for the
fall of demand coming from the financial sector, and the next step coming from
the demand for investment goods, and the big consumer items like automobiles.
RIAZ K. TAYOB: There’s a lot of talk about a recovery coming, and what are the
signs of a recovery for you?
HEINNER FLASSBECK: At this moment in time, there are not yet any signs of
recovery. We have no clear strong and reliable indicators that show that the
slump is over, that the downswing is over, not yet.
The only thing we see is speculators are going back to casinos, are playing in
stock markets and playing in commodity markets and currencies in the last two
weeks – because they expect that the recovery is round the corner. But this is
absolutely unreliable, nobody should believe this is a clear signal for a
recovery. It is just the attempt of the speculators to gain if recovery would
come. As a famous saying says, out of the last five recoveries, the stock
markets have forecast twenty! This shows that they always try to forecast a
recovery, but very rarely they (were) successful with that.
RIAZ K. TAYOB: What should ordinary people be pressing their governments to do
given the mainstream of economics does not know what is happening?
HEINNER FLASSBECK: In all countries of the world, that finance should be a
servant to the economy, not the master. So this whole idea about investment
bankers being the ‘masters of the universe’ was flawed and has to be clearly
abandoned in our thinking, and so the first thing is finance has to serve the
And that is very important for developing countries, not mainly – and in Africa
– not mainly the question of too much casino gambling – there the private banks
often has monopoly – there is not enough competition, lending rates are
extremely high, are prohibitive for investment. The whole financial sector has
to be fixed and has to be put back in the right order, which means indeed that
finance should serve the real economy and if it is not delivered by the private
banking and financial system, then the government has to engage directly and the
government has to intervene, either by creating public banks as a competitor to
private banks, or in other ways, by discretionary intervention to bring down
lending rates for example.
I think for Africa that is the most important measure to be taken economically,
but unfortunately it is not even discussed!
RIAZ K. TAYOB: Previously you said that wages were an important determinant, at
one of your other presentations. What do you mean by wages? Is it just salaries?
HEINNER FLASSBECK: The second thing is that, we have to begin to understand, or
‘again to understand’ that wages increases, wages increasing with productivity
is the most important by far, the most important driving force of any successful
economy in the world. It is not just trade, exports, its not just investment
without overall demand, its wages, salaries, for ordinary people, and the
increase of these salaries wherever there is a productivity increase, the
increase of the real salaries of the people with the productivity, that is a
sustainable and best driver of any economy.
That is true for all levels of economies, true for least developed countries
(LDCs), true for middle income and for the most developed economies, this we
have to understand. The hype about the financial sector detracted us away from
this fundamental idea that we need the mass income, the income of the masses has
to rise, to support the economy through their demand. Their demand is the most
important driver of the economy, not trade and not artificial investment and not
foreign direct investment (FDI).
And too many countries in the world have been relying in the past based on the
hype of financial markets and open markets and trade and FDI, have been relying
on external sources. We all have to reconsider our own, our domestic sources of
growth and of strength – this is the participation of the people in the progress
of the economy – and this has been lacking in three quarters of the developing
world in the last 20 years.
RIAZ K. TAYOB: Some media commentators have been asking for wage restraints,
that unions in this time of uncertainty should not be pressing for wage
increases. This seems to be directly in contradiction of what you are saying.
HEINNER FLASSBECK: That is exactly the opposite of the truth – if now wages are
restrained then we will definitely fall into a deflationary trap. Anyway
deflation is most important danger in the world economy right now. Not inflation
as most people say. To talk now about inflation now is absolute nonsense in my
There is a deep deflationary danger for the world economy, because what we have
to see is that with falling commodity prices, with trade falling, with demand
falling, there is anyway a huge pressure on prices to go down. If this then
accelerated by a fall in wages, everywhere, in most countries of the world, that
would be absolutely disastrous. Then we would be very quickly in a deflation.
That can hardly be healed by government action because then the additional
domestic demand that governments have to produce and have to create to
compensate for the fall of private demand is more or less impossible. That is
going beyond the abilities of governments as we have seen in the second largest
economy in the world in economic terms – Japan – in the 90s, the lost decade of
Japan. Namely we had deflation and we had falling wages all over the place, and
the Japanese economy was stuck in stagnation and recession.
RIAZ K. TAYOB: What do you mean by deflation and inflation?
HEINNER FLASSBECK: Inflation is a general increase in prices that is driven
sometimes spiralling upward by rising prices first, then falling wages second
and again rising prices, further and so on and so on.
This is not something that anybody should try to achieve. Inflation is
dangerous, inflation should be avoided. But deflation, namely the general fall
of prices, the fall of the price level is much more dangerous, for the reason
that I mentioned. It is very difficult to stop demand from falling – because
people are waiting till prices go further down, they do not advance their
purchases of goods. But they do the opposite, they delay their purchases of
goods and that is sending the economy down further into recession.
RIAZ K. TAYOB: The Europeans countries have been criticised for being too
‘hawkish’ on inflation, meaning they are trying to prevent inflation. Do you
think some of these concerns valid?
HEINNER FLASSBECK: Yes absolutely. Europe is focused too much just on inflation.
Compare, for example, the mandate of the American Central Bank, the Federal
Reserve, and the mandate of the European Central Bank. Then it is clear that the
Federal Reserve always had a mandate that mentioned both targets namely,
inflation and ‘employment and growth’, whereas in Europe the priority of the
European Central Bank is the fight against inflation. And that is too simple a
target. Because to fight inflation is a simple thing, you raise interest rates
and so you fight inflation. And in the end the central bank will always win this
fight, so that’s a very primitive solution. What is the ‘art of central
banking’, or the difficult thing, is to keep inflation low and having high
growth, and positive employment growth at the same time. This is the difficult
thing, and in so far the mandate of the European Central Bank is not adequate.
RIAZ K. TAYOB: Ordinary people are wondering why there wasn’t enough money for
health and education in government budgets, even in the US. Where is all this
extra money coming from that wasn’t there for very necessary things?
HEINNER FLASSBECK: Yes. That shows that it would have been there but nobody was
willing to take it. It is always in the capital markets and now with the pyramid
of speculation collapsing in the capital markets, there are not many assets left
that are attractive to the savers of the world. And clearly, the government
offers rather riskless papers and offers not too high returns. But it offers
stable returns, and in so far, government money is absolutely attractive and
people are investing in it.
So far there has never been a problem for the government to raise money. It was
just the ideology of not being too expansive, of not having too high government
deficits, not having too high a share of government in the overall economy, that
hindered governments to do reasonable things and now this all is gone. And
suddenly it is possible to raise money, much more money than anybody could
RIAZ K. TAYOB: In short government is going into debt and printing money?
HEINNER FLASSBECK: Yes, in part printing, which is necessary if you fight a
deflation. You have to print money, that’s the opposite of inflation. If you
fight inflation you destroy money. To fight deflation you print money. That is
absolutely okay, there is no problem with that. That government debt is building
up, is necessary because private debt is going down. There is always
interdependence between government debt and private debt. If the private people
are reducing their debt, the government has to increase its debt because
otherwise the economy is collapsing.
There is always someone who has to be indebted and we cannot force the private
sector to be in debt, so they reduce their debt. Or if they are over-indebted,
already then the government has to step in. That is absolutely normal and that
is not a problem and that increases the overall government debt into the future.
So the debt ratio – the ‘debt to GDP (Gross Domestic Product)’ or other ratio or
‘debt to overall income’ increases. But that is not a disaster, that is
something that can be healed once we go back into a normally expanding economy,
which is driven by the expansion of private debt. And government debt can be
reduced. That has happened many times in many countries.
RIAZ K. TAYOB: The printing of the money is done by central banks, and some
central banks are now saying they are weak, that they do not have the
instruments to deal with a crisis of this proportion. Who are the central banks
and what is their role?
HEINNER FLASSBECK: The main problem that we have is a split between central
banks of the big developed economies that central banks in developing countries
cannot do – or are said they cannot do. Let me explain in a minute.
The point is indeed that the central banks of the big developed economy like the
US and Europe are rather independent. They can act, they have the confidence of
the market and their currencies are not a major problem because neither the
dollar nor the euro will fall dramatically, because there are not many
alternatives for people to go into rather safe havens – or money that is rather
stable – there is no money from the moon or money from Venus. As long as this is
the case – that there are only three currencies around – the rather stable yen,
the dollar and euro, these currencies will not fall.
But for developing countries, it is different. They have currencies that can
drop like a stone. In this case, it is very important to rethink the whole
mechanism through which the currency is stabilised. We have written in our
report that this is the most crucial question. And after the G20 meeting in
London, it is even more crucial, because now the IMF (International Monetary
Fund) is tasked with stabilising many more countries with much more money. And
that means we have to rethink the mechanism.
The traditional mechanism is that whenever a currency is weak in a developing
country or country in transition, then the IMF comes in. It gives an assistance
package, which means credit to stabilise the economy. But for the IMF to be
‘credible’ – and ‘credible’ I say in inverted commas – the IMF says this to be
‘credible’, this has to be combined with an ‘austerity package’. Namely cutting
government deficits, raising interest rates and cutting wages. This is exactly
the opposite of (what) we consider to be the right approach. Because this is
just an attempt to convince the markets, the speculative markets, that the
currency should not drop further. This is in our opinion, UNCTAD’s opinion,
absolutely the wrong approach. We should think about an international monetary
system where we do not leave the currency to the speculation of the markets
anymore. We see that all systems that we had in past, either absolute fixing or
absolute floating, have failed. And so far the only solution is to have a
government steered system, which is clearly a multilateral task. But in a system
where the governments agree on certain rules of the countries involved, how
exchange rates should follow the fundamentals of the countries involved. And if
this were in place, you do not need all these assistance packages and you do not
need the restrictive, the austerity, conditions that come on top of the
assistance packages of the IMF.
RIAZ K. TAYOB: The IMF and World Bank in Africa are regarded as problematic
because they imposed structural adjustment programmes (SAPs) that forced
liberalisation of financial markets. Do you think NGOs (non-governmental
organisations) that have criticised the IMF and World Bank have a point?
HEINNER FLASSBECK: Yes surely, there is surely a point. One point I mentioned
already is that the IMF packages have been unnecessarily restrictive in the
past. I very much hope that is going to change now – but as long as there is no
global monetary system, it will be difficult for the IMF to change. The IMF is
in objective difficulty. That has to be acknowledged. The other thing is this
structural adjustment was not helpful. It was too much of a ‘one size fits all’
approach. Not all countries are the same, not all countries have the same
institutions, traditions and other ‘rules of the game’, internally written and
unwritten rules of the game. And so far, one has to give countries much more
freedom to find their own way for an efficient system – and we have seen with
the crisis in the financial markets, the financial services in the financial
markets are not following the traditional view, the mainstream view of
economics, and this has to be revised dramatically.
RIAZ K. TAYOB: What would be your advice to countries that have followed the
mainstream view in terms of liberalising their exchange rate, current account or
even their capital accounts? Do you think there is a need for a review or what
should the approach be?
HEINNER FLASSBECK: There should be a big review, not only now in the crisis. We,
in our (UNCTAD) trade and development reports, time and again have shown that
the traditional approach is not very helpful and that more heterodox or
unorthodox approaches like intervention in the financial markets, in the money
markets, in the capital markets have been very successful in Asia. Take China.
China never had a fully liberalised economy. Neither the external capital market
has been liberalised, nor internal market. Internally China has always
controlled the lending rates and the deposit rates of private banks.
And this is for many other developing countries one of the biggest problems. The
margins are too large, so the spread between deposit rate and lending rate is
huge. This is prohibitive for investment. It is very clear that in most
countries that without government intervention, you cannot fix this problem. You
cannot bring lending rates down to reasonable level so that normal, the common
people, are able to take a loan, or invest in agriculture, or wherever they are
RIAZ K. TAYOB: When you say the margins are too large between the lending rate
and the deposit rate, that means that ordinary people are paying far too much
for their cars they bought on credit?
HEINNER FLASSBECK: Yes, absolutely.
RIAZ K. TAYOB: So who is making the extra money?
HEINNER FLASSBECK: The banks obviously. If you compare the spreads between
deposit rates and lending rates and central bank rates and the lending rates of
the private bank then you see, if you take five big regions in the world – for
Africa, Latin America and eastern Europe, you find that these spreads are
extremely high so that lending rates are really prohibitive to investment to
real investment to fixed investment and fixed capital. And you find two regions
where the spreads are normal, and that is Asia, which was extremely successful
in developing its economies in the past, and the other one is the developed
world. So in the developed world and Asia, we have normal spreads. And in all
the rest of the world, we have extremely high spreads. We have shown that in our
2008 report. I think this is one of the most important findings for developing
countries, that despite liberalisation of their financial markets, of their
financial services, they have not delivered. And this is what is needed, they
have to deliver the ‘right figures’, not just to be private.
In some African countries for example, you have a number of private banks –
mostly coming from the North, coming from Western economies. So they are there,
they have established themselves – but they are close to monopolies. And they
are exploiting the system of not having enough competition. And in so far they
(are) getting very high profits without doing anything. This cannot be just left
aside, (saying) it’s done! The job is done, because financial services are
liberalised. Well if they do not deliver, then the whole liberalisation did not
mean anything, and ‘deliver’ can only mean reasonable interest rates for
reasonable loans, and if this is not possible then who can fix it? Then only the
government can step in and do something about it.
RIAZ K. TAYOB: At an earlier presentation you mentioned that there was a
particular type of good bank, where you said they had a low appetite for risk,
other factors. What are good banks, because people are worried about putting
their money under the mattress or putting it in a bank?
HEINNER FLASSBECK: The example was the ‘3-6-3’ bankers. These are banks that
take in the money, they pay an interest of 3 per cent for the deposits that they
hold, they demand 6 per cent for the loans that they give, and at 3pm everyday,
the director of the bank is on the golf course. That is ‘3-6-3’ banking. Which
means that is normal banking without gambling, casino and everything. If you
look at the Financial Times there was a nice article by Gillian Tett, who said
exactly that. Bankers have to ‘relearn’ the old kind of banking – some people
say ‘old fashioned banking’, traditional banking or ‘boring banking’. That is
exactly what we need, banks that serve the real sector and if it is boring then
it is boring. Then they have to engage elsewhere but not in gambling.
RIAZ K. TAYOB: Have there been banks that have survived this crisis using this
HEINNER FLASSBECK: Sure if you look at the German Spaarkassen, that’s quite
famous, I am from Germany and it is very close to me. We have banks that are not
quite state-run, they are organised with the participation of the communities,
of the society at large, so to say. And they have done quite well, because they
have not engaged very much in this casino and in gambling and so they are out of
it, they have given loans to ordinary people and at reasonable terms. And this
is exactly what we need.
RIAZ K. TAYOB: I ask the question because pensioners are very concerned about
the loss of value of their money that they have. Would this be a model that you
would advocate in terms of where do we now start putting money in investment
HEINNER FLASSBECK: Pensions are a big problem. Let me say like this. There are
two models competing. One is called pay-as-you-go. That is the model where you
give the government a certain contribution and you get a pension when you are
old and it is going through the government. In the last 20 years, this was
characterised as being old fashioned and being bad because the government is
involved. And so the fashionable thing was a funded system, which means that you
save your money on your personal account and you invest it. And the problem is
where to invest it. The financial crisis reveals that it is not simple to invest
it. And the financial crisis should reveal that it is not possible for a single
person to move money into the future.
Its not possible because whatever money we save today, has to be taken by
someone, a debtor. If we are a creditor, there has to be a debtor that takes the
money and invests the money – and that we cannot control. We can’t just put the
money in an account and hope that a reasonable person comes and invests it in
productive activity. That is not guaranteed or warranted by anything and this is
We are not saving in terms of saving real things. We are not saving in kind, we
are saving money. But this saving does not mean we are transporting this money
into the future. We are giving this money to someone who owes it to us, and we
just hope that this person uses it well. It is not transported into the future.
This is a big misunderstanding and this misunderstanding was created by this
idea of funded pensions. And many people that have based their retirement
provision on such accounts are now seeing that nothing is left, and that is
really bad. And then again the government has to step in to prevent the people
from starving and dying. So the government did not get any contribution but
government in the end gets the burden. And we see we have old age poverty in the
many countries of the world – and mostly in countries where we had such funded
systems, because too many people did not contribute and engage in the savings.
In the end who is taking the burden? The governments again.
RIAZ K. TAYOB: If you had a message for trade unions who now participate as
trustees on pension funds, what message would you give them about their
allocation decisions to safeguard workers pensions?
HEINNER FLASSBECK: Safeguard workers pensions – they should rethink the model of
pension funds. Pension funds are not the right way to do it. Pension funds were
in many countries of the world the drivers of this casino capitalism. Because
the pension funds were competing for high returns. And they all, for a time,
believed that they could earn 10 or 15 or even 20 or 25 per cent, which is
absolutely impossible. The real world economy is growing by say 3 per cent so by
the end, everyone can get 3 percent increase, but not 25 percent. It is
impossible that a big sector that is not productive at all takes such a huge
slice out of the cake. So, what is needed is to rethink the whole model and to
be sure that the people get something at the end. And I still think that this
system that goes through the government (pay-as-you-go) is much more reliable
than any other system that we know. We cannot transport this money, not
productive(ly), into the future. We have to make a contract with the government
and it gets a contribution and pays pensions now to old people and promises to
pay to the then elderly again. This is the only way to do it reasonably well
because all the private experiments have failed.
RIAZ K. TAYOB: The people who manage this money are taking huge bonuses, even as
these funds collapse. What is your view on this? Is this crony capitalism?
HEINNER FLASSBECK: Yes, sure this is a form of crony capitalism. Because it is
not competition and it is not a market result. The bonuses that they get is just
their power to determine their own incomes, and their bonuses. And that it (is)
all a big family that decides, so to say, that part of the family gets more at a
certain point of time and the others the next time.
So this has nothing to do with the market and we should not stick to the fiction
of having competition there, and having just wages or bonuses, there nothing
like justice in it. It is just a power game and it is important that we have
strong unions, and that unions fight for the workers right to have a share,
always have a full share in the productivity increase. And there is no reason at
all, not in the globalised economy, not due to globalisation, or anything else,
that would prevent workers from getting their fair share and the others getting
their fair share too.
The productivity, if it is rising by 3 percent, is available for all, for
capital and for labour, and they should all get the 3 percent. But they cannot
get 20 per cent, and not for a prolonged period. Only those with a really good
idea, a productive idea, for a time, can get a bit more. But overall everybody
can get only three.
But three is not bad. If you get 3 per cent for sometime, after thirty years
your income has doubled. That is something, if it is possible. And in some
countries, we have more than 3 per cent. Developing countries – look at Asia –
they had 8 or 9 per cent increase of productivity over a longer period of time,
and your income doubles in ten years and that is much better.
RIAZ K. TAYOB: Is this the only form of favouritism that is going on in the
financial sector? We heard that AIG used its bailout money from the US
government to pay out its friend Goldman Sachs. So when loans are given, are
these given on a favouritism basis, as you have said the allocation system is
HEINNER FLASSBECK: The system is opaque, it is not transparent. It is not
showing who gets what under what conditions. And there are many other examples
of favouritism in the system. As I said, it was a big family, and they all try
to help each other and this has to be abandoned. It has to be broken down, the
whole system. The system was based on the fiction of productivity and
sophistication, but it was not productive at all in real terms, and so far, this
we should say very clear.
And this is what I am missing in the G20 results. For example, they do not
address the question of the casino, they do not address the question of the
misallocation of resources due to overshooting currencies, and overshooting
commodity prices. All these things are not addressed. They do it in a very
traditional way. In my opinion, that is not going far enough.
RIAZ K. TAYOB: You mentioned the G20 and the position on commodities. This is
very important for Africa. What do you think Africans should do about
commodities that are traded on futures markets, on commodities exchanges? The
derivatives problem is just a problem recently, but for Africa this has been
going on since the 1980s.
HEINNER FLASSBECK: UNCTAD has been engaged in that question all the time. In our
report we say we need much more regulation and we have to avoid ‘excessive
speculation’ where commodities are treated as an asset class. Commodities is one
of the asset classes, the other one is derivatives from the housing market, the
other is stocks and currencies. These are all asset classes. This is not
acceptable, because this drives, as we have seen very clearly, commodities up
and down – absolutely unreliable for the producers of these commodities. So the
producers have to stand up and have to say very clearly that we cannot accept
that scheme, because we cannot invest anymore. We cannot rely on our revenues,
we cannot educate our people based on revenues from commodities.
All these things are well known. But now it is much more clearer than ever
before that they are driven by speculation. This should be taken by the
developing countries that are producing commodities to claim, to ask for, to
demand a new system where this overshooting, due to speculation, is not
possible. Because it is not a market result and it is a not a good market
result. If prices are driven far beyond the equilibrium prices – what economists
call the equilibrium prices – then nobody can say this is a market result. No,
it’s a pathological phenomenon. It is a market that should not exist in this
way. We have to correct it and it can only be [done by] governments and can only
be done by multilateral cooperation.
RIAZ K. TAYOB: You speak of regulation of commodities and this pathology. What
form should regulation take and what should people ask their governments to do?
HEINNER FLASSBECK: There are two forms of regulation for the commodity markets.
One is to look deeper into the kind of business that is taking place there and
to identify the amount of financial investors engagement and then to say we need
to redress that. To reduce the share of financial sector’s engagement by, say,
putting higher capital requirements, or other measures, that reduce the return
of these investors – ‘investors’ in inverted commas. The second is direct
intervention in the markets. If prices are rising, governments should have a
‘war chest’ of certain crucial commodities and intervene and dramatically
increase the risk for the financial speculators. If they do that then the whole
business is less profitable, and this is exactly what we want.
RIAZ K. TAYOB: It is less profitable for who?
HEINNER FLASSBECK: The speculative investors.
RIAZ K. TAYOB: Finally, are there any economists that are interesting, not
necessarily that you endorse, but who should people be listening to, and looking
out for, besides UNCTAD reports that have predicted this crisis well before?
HEINNER FLASSBECK: UNCTAD reports are important. We work closely with Joseph
Stiglitz, Jean Paul Fatoosi (phonetic) from France, and a number of other
economists. Normally Paul Krugman is very reasonable, and a number of others.
But, indeed one has to listen very carefully. I can only recommend to the
ordinary people, people who are not economists, to use their own brains and to
think about it, and see whether there is logic and whether it makes sense to
them what the people say. To understand that, the financial business is not a
business in the traditional sense, but most of it, 89 per cent was indeed
gambling – and everybody understands that gambling cannot be productive – and
has to collapse if too many people are doing it, based not their own money but
on debt. These are rather straightforward lessons that we have to learn and very
much hope to convince more (people) to listen to us and to go in the right