There is nothing small or trivial about this financial crisis. According to the Bank of England’s recent Financial Stability Report, governments worldwide have already pledged more than $7 trillion in loans, guarantees, capital injections, and other assistance in their coordinated effort to prop up the global financial system. And the ILO estimates the crisis will cost 20 million jobs by next year.
This is not the first financial crisis the world has seen over the past century. The worst, of course, resulted in the Great Depression in the 1930s. But there have been numerous others, all of which carried painful economic and human costs. For example, the crises in Argentina (1981-1990), South Korea (1997-1999) andThailand (1997-2000) all cost more than 30% of those countries’ GDPs.
But even by historical standards, the 2008 crisis is BIG. In what’s been dubbed “Wall Street’s Red October”, the S&P 500 plunged 16.9%, or 198 points, for the month. That’s the worst-ever monthly point decline for the S&P 500. The Dow similarly dropped 14.1%, or 1,526 points. And the ILO estimates that the crisis will bring the total unemployed to more than 210 million for the first time in history.
The key difference is that, unlike the Asian and Latin American crises in the 1980s, this crisis is truly global. Some countries, likeIceland and Pakistan, are threatened by bankruptcy. Others, likeJapan, have been hit by huge volatility in the markets. And even the cash-rich, high-flyers like China are seeing their growth suffering as a result. But what does any of this have to do with corporate social responsibility (CSR)?
The Links to CSR
Irresponsible banking – I’d like to suggest a multi-level approach to this. At the first and most obvious level, we can say the financial crisis is a direct result of irresponsible banking. According to the Mortgage Bankers Association, the number of sub-prime loans offered to risky borrowers increased more than 15 times since 1998. Essentially, the banks got greedy and compromised good banking practices of credit risk assessment.
Irresponsible financial markets - At another level, the crisis is the predictable consequence of irresponsible financial markets. Since the deregulation of the 1980s, the derivatives market has grown to around $600 trillion dollars, almost 10 times the value of global GDP. This speculative trading (which some call the “casino economy”) is meant to hedge risk, but it also increases the volatility and systemic risk of financial markets.
We would do well to recall economist John Maynard Keynes’ warning: “Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”
Irresponsible corporations - Others argue that the crisis is the inevitable consequence of irresponsible corporations. This is linked to the short-termism of shareholder value driven public companies. At the extreme, authors like Joel Bakan suggest that corporations have “a legally defined mandate to relentlessly pursue—without exception—its own self-interest regardless of the often harmful consequences it might cause to others.” This behaviour in humans, he notes, would be characterized as pathological.
Irresponsible executives - The financial crisis has been further inflamed, some claim, byirresponsible executives, as evidenced by their outrageous pay packages. In 2007, the CEO of a Standard & Poor’s 500 company received, on average, $14.2 million in total compensation, according to The Corporate Library. United for a Fair Economy reports that, in 2006, CEOs received more than 364 times the pay of the average U.S. worker (up from 42 times in 1980).
More specifically, it seems the leaders of Wall Street’s top banks are still in line to receive pay deals in 2008 worth more than $70bn, a substantial proportion of which is expected to be paid in discretionary bonuses. “Many critics of investment banks,” reports The Guardian, “have questioned why firms continue to siphon off billions of dollars of bank earnings into bonus pools rather than using the funds to shore up the capital position of the crisis-stricken institutions.”
Irresponsible capitalism - Some would even go so far as to say that the current financial crisis represents a systemic failure of shareholder-driven, free market capitalism. Among such critics is European Central Bank President Jean-Claude Trichet, who argues that the current financial crisis is partly a result of the demise of the original Bretton Woods’ agreement, after deregulation since the 1970s.
Trichet’s conclusion is unequivocal: “It’s absolutely clear that financial markets need discipline: macroeconomic discipline, monetary discipline, market discipline.” British Prime Minister Gordon Brown and French President Nicolas Sarkozy agree, stating that the turmoil has shown the world’s post-Second World War financial architecture is not fit for the task of controlling today’s global financial system.
Continued in Part 2