Economist: Govts should not take on private debt

If governments take on private-sector debt created during the subprime crisis, the poor will be hardest hit, economist Iraj Abedian said in Cape Town on Tuesday. ”Heaven help us if it happens in developing countries,” he told a discussion on the global economic meltdown.

The United States and United Kingdom have already started to socialise what had been a ”private-sector party”, he said, adding: ”You are betraying the poor today and in future. It constrains the capacity of government to take care of the poor. They have to pay for this debt for years to come.”

He said the blame for the crisis cannot be pinned entirely on the private sector, as it is common knowledge that it was driven by greed and profit.

Governments have been ”ponderous and irresponsible”, even in the US. He said they have opted for the ”when in doubt, chicken out” approach, instead of finding solutions. There is a large leadership deficit and resources are being pumped into wars of one kind or another, destroying productive capacity instead of creating it.

”Unless some credible global political leadership emerges, the current challenges will only multiply.”

Deputy Trade and Industry Minister Rob Davies said South Africa can deal with the crisis by focusing on things that will raise long-term growth, like investing in infrastructure.

On a global level, the urgency of significant reform in ”highly distorted” agricultural systems has to be recognised. This will protect the poor from rising food prices.

Abedian cautioned against governments resorting to more regulation in response to the crisis, their usual ”knee-jerk reaction”.

”There’s regulation and there’s regulation. Financial global markets need not only regulation, but also coordination,” he said.

Illustrating how governments underestimated and misunderstood the effects of the subprime mortgage crisis, he said US Federal Reserve chairperson Ben Bernanke had told Congress that the total loss would amount to $100-billion.

The International Monetary Fund’s estimate however, for the US alone, was nine times greater.

”That’s how out of synch the government structures are from the pace and rate of financial innovation.”

Abedian said government ”snoozing” had resulted in their being unable to keep up with the pace of financial developments. The loans that had been extended to home buyers with poor credit histories, the so-called US subprime market, had been packaged into debt instruments and resold. These lost their value when the defaults began.

Belgian MP Francois-Xavier Donnea said banking management and boards of directors are struggling to understand sophisticated financial instruments created by mathematicians and technicians at lower levels of their companies. — Sapa

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