For long spells, Prof Joseph Stiglitz’s keynote speech at the 20th Joseph Mubiru memorial lecture sounded too foreign for the largely Ugandan audience at Speke Resort Munyonyo.
Stiglitz, a Nobel laureate in Economics and a professor of Economics at Columbia University, presenting his paper Market failures in the financial system: Implications for the financial sector policies, especially in developing countries, blamed the regulation policies of Allan Greenspan, the former chairman at the United States Federal Reserve, for much of the financial predicament the world finds itself in.
It was some of Greenspan’s loose regulation - or the lack of it - that led to the giddy days of the collapse of Lehman Brothers Holdings in September 2008, shaking the core of the entire global financial system and sparking off a frantic dash by the US government to bail out its banking sector.
Stiglitz also criticized Wall Street titans for designing such toxic derivative products like the complex Credit Default Obligations – whose definition and intentions were as fuzzy as the way they were structured – with the giant insurance firm, AIG, the biggest culprit in taking up too much risk through these assets.
He also touched on Barclays bank’s recent rate fixing scandal, where the bank offered bogus information in setting the London Inter Bank Offered Rate, which many central banks around the world look up to to understand the risks in the markets.
Stiglitz did not leave out JP Morgan either, the investment bank that last week announced a trading loss of more than $5bn, revised upwards from the $2bn that it had earlier estimated.
Yet, while most of Stiglitz’s examples were from Wall Street, the key message in his argument was something a trader along William street in Kampala will easily relate to - that the state needs to regulate its financial industry and it is high time other types of banks, such as development banks, are supported to offer alternative solutions to the greed that is so deeply rooted within traditional commercial banks.
“Banks don’t like transparency. When markets are very open, there are no profits,” Stiglitz said in his more-than-one-hour speech.
“One of the problems of banks is that they like to leverage; they borrow money to lend it. Leverage is simply shifting risk, which increases the probability of default.”
And these loans, he added, are short-term.
To the regulators, Stiglitz said, it is not enough to simply have good regulatory laws. He argued for the need for regulators who believe in regulation itself. At times his speech was intertwined with humour.
Still on regulation, Stiglitz who attacked Adam Smith’s invisible hand policy – the kind where markets regulate themselves – said: “The reason why the hand in the invisible hand appears invisible is because it is not there!”
Stiglitz’s idea for the need for development banks was spot on. By their nature, development banks lend to productive sectors like agriculture, where three out of four Ugandans earn a living, and which commercial banks continue to ignore.
However, the Uganda Development Bank, the institution that is rightly placed to lend long-term credit to the country’s productive sectors, is still struggling to make an impact, with the latest information from a credible source noting that a recent management shakeup at the bank has created some tension.
The discussant, Prof Mahmood Mamdani, responding to Stiglitz’s paper, made his remarks in exactly 33 minutes. He agreed with Stiglitz on some of the core arguments such as a free market being an ideological myth, and that markets are always imperfect since information is not equitably shared. Mamdani, a renowned political commentator, however disagreed with Stiglitz on the role of the state in regulating bank behaviour.
He said that “the tendency of the market, like that of the state, is to devour society” – more like saying that the politicians and the businessmen have become bedfellows - and that “the challenge is to defend society against these twin forces.”
He added: “The question we are facing today is not just about the market failure, but an all-around political failure.”
Mamdani pointed out that the state is guilty of holding back information from the public and that the challenge now is for society to fight both the state and the capitalists that rule the market.
For the Kampala traders who carried out a strike in January, protesting against high interest rates, Mamdani’s argument makes a lot of meaning. Perhaps nowhere will you find a perfect scenario to represent Mamdani’s argument like the moment when President Yoweri Museveni called both the bankers and the city traders to resolve their grievances.
With the bankers seated on one side of the table at State House, and the traders on the other, Museveni cut a figure of a man who held the final decision. Indeed, by the end of the meeting, the traders had agreed to call off the strike.
But the high interest rates never changed, and in all intent and purpose, the bankers won. Government plans to have a body to settle grievances between bankers and consumers, like the ongoing defaults in Uganda’s real estate market, which were mooted at the height of the traders’ strike, have not been implemented either.
Museveni, who made an impromptu attendance at the lecture – his first – was kind enough to say that he is not an economist, but requested to make his “small contribution” before he could embark on some “real work.”
The president added another twist to the debate, saying that the problem is not just that the market is imperfect, but rather, for Uganda’s case, “the market is not there at all!”
For Museveni, a sizeable part of Uganda does not take part in significant consumption of goods and services, a behaviour that is needed to generate tax revenue and drive growth. Bank of Uganda holds the Joseph Mubiru lecture to stumulate economic debate within the public.
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