Thursday, 25 June 2009

Why consumer protection must spur the financial recovery - Part two


In a two-part blog feature ahead of a major UN summit on the global economy, CI’s Senior Policy Advisor, Robin Simpson examines why consumer protection must spur the financial recovery.

In part one he looked at why a lack of consumer protection precipitated the financial crisis. Now in part two he goes on to show how consumer rights must be at the heart of the recovery.

Part two…
Consumers have been blamed for the crisis because of irresponsible borrowing. They are now blamed for the lack of recovery as a result of their lack of spending. We are told that they need better financial education to cope with the financial market place. But it is clear from the quotes in part one that regulators and even financial service providers themselves did not know what was being sold. The customers of Bernard Madoff and Societe Generale were rich and influential. But they were swindled.

Of course basic consumer protection and consumer education must be intensified. But let us not kid ourselves that these are at the root of the crisis. As John Kay indicated, there needs to be safeguards so that consumers deposits are not used to finance speculative bubbles of the kind that resulted in housing price bubbles in rich countries like the UK, US, Ireland and Spain. The failure was systemic and the regulators were asleep at the wheel.

Or perhaps one should say they were driving the wrong vehicle. Paul Krugman, the Nobel Prize-winning economist, criticises the regulatory system not just for deregulation, (although he does consider as mistaken the repeal of the American Glass-Steagall Act which separated retail from investment banking). The problem rather was that regulation did not keep up with the evolution of banking structures, and the crisis was set in train by the new ‘shadow banking’ system, “institutions that were never regulated in the first place”. The ‘shadow banks’ ended up surpassing the regulated conventional banks. In this sense the new European emphasis on ‘macro-regulation’ could be step in that direction.

The degradation of consumer protection that has run through the crisis did not just consist of the micro-failures of ‘conventional’ consumer protection, but also the macro-failure of economic management.

Consumers are paying three times over for this as:
  • borrowers and pensioners,
  • taxpayers, and
  • potential consumers of other services now being starved of resources because of the scale of public debt.
We have to consider this big picture in laying the basis of the global consumer movement’s position on the crisis, and our recommendations for a viable recovery plan.

CI has been making ongoing contributions to high-level discussions at the UN’s Stiglitz Committee and the OECD. We are building consensus with our membership across the world, and will be taking our latest position paper to the UN Conference on the World Financial Crisis in June.’

For more on CI’s work in this area, visit www.consumersinternational.org/financialcrisis

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