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 economy

Heinner Flassbeck

2009-04-30

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 say.
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 real economy.

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 opinion.

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 expect.

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 engaged.

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 model?

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 decisions?

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 the problem.

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 inefficient?

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 direction.

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