The IMF “Gets” Ethics

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Christine Lagarde, the French-born boss of the International Monetary Fund (IMF) made a remarkably outspoken speech on Tuesday 27 May in London at a conference for “Inclusive Capitalism”. In it, Christine – forever under the shadow of her predecessor, the inimitably priapic Dominique Strauss-Kahn – described recent capitalism: “Most recently, capitalism has been characterised by ‘excess’ – in risk-taking, leverage, opacity, complexity, and compensation. It led to massive destruction of value.” For much of the day the IMF website inadvertently quoted her as saying “I led to mass destruction of value”, a faux pas that no doubt led to an IMF minion being sharply rapped across the knuckles. It’s a bit of a sore point, compensation, given that for running the great behemoth she takes an annual salary of almost £350,000 – tax-free, annually adjusted for inflation. Well, it’s a big job, isn’t it?

Nevertheless, Lagarde positioned herself and the Fund on the side of the angels: “Since 1980, the richest 1% increased their share of income in 24 out of 26 countries for which we have data…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.” She even quoted Pope Francis, contemporary society’s favourite humble priest: “he called increasing inequality ‘the root of social evil.’” Naturally, she ignored the IMF’s own role in value destruction – the human cost of many of its structural adjustment programmes, imposed on debtor countries that seek IMF support.

Instead Lagarde laid into the easiest of targets, the global banks deemed ‘too big to fail’ (aka ‘too big to jail’), although she was far too polite – or astute – to mention any names. Here her recipe for improvement was that wearisome mantra, tougher regulation and tighter supervision.

We are now almost six years into the financial crisis and I’ve lost count of the number of cock-ups, mis-selling scandals, outright frauds, money-launderings and on-going litigation settlements  that can be laid at the door of most of the major international banks – all conducted under the umbrella of supposedly toughened regulation and tighter supervision. Some of the bail-out boobies who knocked on government doors in 2008/2009, cap in hand, have subtly mutated back into the large swinging appendages who, Lagarde correctly said, are waging a “fierce pushback” against any and all regulatory drive that might constrain them. As they would.

In any event, adding to the regulatory rulebook governing global banks has not and will not change their culture; it will simply drive the sharp-elbowed indifference underground. Wading through the swamplands of financial regulation will add to the cost of banking, which ultimately means all of us. In such a nightmare landscape, only those financial institutions who can afford hundreds of compliance officers – a form of job creation, if you like – will thrive. The paradox is that banks will need to make ever-bigger profits to bear the costs of compliance. Nor can ever-bloated rule-books restore trust and confidence in a sector that, for individuals, is more tricky to navigate than Berlin’s streets in May 1945. Lagarde acknowledged as much: “People who want to skirt the rules will always find creative ways of doing so…The industry still prizes short-term profit over long-term prudence, today’s bonus over tomorrow’s relationship.” That’s the nature of the beast, as things stand. The sting in the tail was came towards the end of her speech: “ethical behaviour is a major dimension of financial stability”. For which there is no regulatory rule-book; just a sense of conscience.

It’s nice to see the IMF apparently ‘getting’ at long last the fundamental relationship between ethical behaviour and financial probity. But for all Lagarde’s tough words, there’s still a huge gap between identifying the problem and coming up with a workable solution. More rules just mean more money for those clever enough to come up with ways of getting round those rules.

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