Two of the US’s finest heterodox economists have done us all a favour. Radhika Balakrishnan and James Heintz have knitted together the seemingly disparate topics of the financial crisis and human rights, showing how the two are linked and why rights have for too long been scandalously absent from discussions about the economy. It’s readable, rigorous and, above all, right. More below the fold.
What does the financial crisis have to do with human rights? When we hear the words “human rights,” we may think about Darfur, stifled dissent in Burma, or the killings of protestors in Guinea, yet, here the biggest economic meltdown in the US since the Great Depression continues to erode fundamental human rights. The collateral damage of the financial crisis is stupendous. The current crisis has destroyed jobs, reduced standards of living, heightened economic risks for ordinary people, and driven people into poverty, especially women and people of color. Globally, the total costs are higher. The World Bank estimates that, between 2009 and 2015, an additional 200,000 to 400,000 children will die before their fifth birthday every year compared to the number that would have perished in the absence of the crisis. The Universal Declaration of Human Rights includes civil and political rights as well as economic and social rights. Economic and social rights include such things as the right to work, the right to rest and leisure, the right to an adequate standard of living, and the right to education.
The Senate and House are debating new legislation to regulate financial markets in the aftermath of the global economic crisis. But the question remains whether these regulatory changes are sufficient for the government to fulfill its obligation to protect our human rights.
All governments are obliged to advance their people’s human rights. One of the specific obligations under international law is to protect the rights of their residents. When an individual business or institution threatens to interfere with someone’s basic rights, the government must step in to protect economic and social rights.
Three of the five largest investment banks failed or nearly collapsed in 2008, sending shock waves throughout the economy. This happened because they had been allowed to borrow excessively against too little capital and to grow excessively large. They had also become deeply intertwined with other huge financial institutions. The economic crisis was caused by the risky behavior of these institutions and the failure of the government to take steps to prevent the risky behavior from happening. Even after the fact, it is not clear that an effective and just government response to this disaster is forthcoming. Incentives remain perverse, with those responsible for the turmoil benefiting from bailouts. Financial institutions which were deemed too big to fail are getting bigger. Bad behavior has been rewarded, with the result that nothing has yet been done to stop the behavior from happening again.
Regulation in the U.S. has been skewed in favor of certain interests. It is not that there was a simply deregulation of the U.S. economy. Instead a re-regulatory process that was and is biased toward the interest of banks rather than workers and families was put in place. This biased regulation comes from deliberate government policy changes and the failure to extend its supervisory role in the context of social and economic change.
The government also failed to prevent financial executives from taking actions which resulted in the current economic crisis in the first place. In the not-too-distant past it removed regulations governing financial markets which may have helped contain the damage and safeguard the welfare of the population. During the Clinton Administration under the watchful eye of Larry Summers, the director of President Obama’s National Economic Council, Congress removed many of the safeguards put in place after the Depression through such legislation as the Financial Services Modernization Act (1999).
The government also failed in its vigilance and monitoring of the financial system when new financial products, such as mortgage-backed securities and associated derivatives, were introduced. Private enterprises are innovative, but like the sorcerer’s apprentice, when not effectively monitored, their innovations can quickly spin out of control and wreak enormous damage. Innovative financial products fell into a regulatory void, as efforts to protect the economy from excessive risks lagged far behind. “Over the counter” (OTC) derivatives – financial products which are not traded on exchanges, but are rather custom-designed for specific clients and purposes – accounted for many of the high-risk assets that triggered the collapse. Yet, these transactions were subject to less oversight and fewer safeguards than securities that are more openly exchanged.
Individuals and families holding mortgages have been particularly hard-hit by the government’s failure to protect. Federal mortgage regulation has been fragmented and has become increasingly lenient, with some mortgage lenders experiencing no effective federal regulation at all. Perverse incentives encouraged lenders to exploit vulnerable borrowers while the government looked the other way.
While the current crisis has been decades in the making and there is enough blame to go around, the actions of the Obama administration has been uneven at best. In response to the crisis, regulators have not placed insolvent banks with government guaranteed deposits into receiverships, as required by the Prompt Corrective Action law adopted after the Savings and Loan crisis of the 1980s. This is a US federal law says that that FDIC regulated institutions are required to maintain the level of capital that is at least 2% of their obligations. Simply put, the Prompt Corrective Action law states that institutions that do not meet this criterion have to be taken over by the FDIC. Instead, they have been bailed out and their senior management retained with little or no direct accountability and instead continue to be rewarded with bonuses.
The Federal Reserve System – itself an independent government entity therefore having human rights obligations – has extended its emergency powers in response to the crisis, but at the same time refused to disclose to us, the people, the details of its bailout operations. Indeed, the Federal Reserve is a paradigm of opaqueness and unaccountability. The Government Accountability Office is restricted in its ability to audit the Fed; the Fed enjoys critical exemptions from the Freedom of Information Act, and the banking industry advisors (the Federal Advisory Council) are allowed to meet behind closed doors and not report on what they are doing.
The new regulatory legislation must take the required obligation to protect seriously. The failure to do so over the last few decades created the economic problems that have engulfed the nation and the world. We need reform that protects the economic and social rights of people and safeguards them from the avarice of the financial market.
The Political Economic Research Institute has outlined the steps to meaningful reform. Regulations must be transparent and increase the accountability of financial and regulatory institutions. They must be comprehensive and include all financial actors, markets and products. The legislation which Congress adopts must reduce conflicts of interest and eliminate perverse incentives by strengthening oversight and imposing sanctions on risky behavior. Capital requirements on risky financial assets must be strengthened. Individual institutions must be prevented from becoming too big to fail and holding the government hostage. We need new consumer protections which reduce the complexity of financial products, impose safety standards, and ban products that lack economic benefits and pose enormous risks. Perhaps most importantly, financial institutions must be made to pay for the consequences of their own irresponsible behavior.
For too long the regulation of financial markets has been biased toward the narrow interests of the financial sector and not the public. Even financial regulation is accountable to human rights obligations, something absent from the Congressional deliberations. We need a paradigm shift that holds our government accountable for these basic human rights.