Christine Lagarde, managing director of the International Monetary Fund, took the stage Tuesday to lash out at the financial industry accusing it of not making enough progress on banking reform since the onset of the global financial crisis that has taken over the world economy for over five years. “Progress is still too slow, and the finish line is still too far off,” she said in London speaking at a conference on ‘inclusive capitalism’. Her words echo a widespread criticism towards the banking industry for not making drastic changes since the downfall of major institutions — a time that highlighted risk culture in the sector and no fear towards systemic wrongdoing and unethical practices.
“The behavior of the financial sector has not changed fundamentally in a number of dimensions since the crisis,” Lagarde said, something “that continues to deplete the treasury of trust and could again destabilize the global economy,” she added in her speech. The culprit of such an unsustainable situation is “fierce industry push back, and from the fatigue that is bound to set in at this point in a long race.” One can read her remarks as a reminder of the power the financial industry still holds since it has been successful in impeding — or delaying — the introduction of tougher new rules.
We need investors and financial leaders taking values as seriously as valuation, culture as seriously as capital. http://t.co/Fr6kRNuAij
— Christine Lagarde (@Lagarde) May 27, 2014
Her words serve as an evaluation of how the multilateral organization sees the global financial sector and where we are today in regards to advancing towards a more stable and equitable financial system — a demand that is shared around the world. There is another reason the managing director is making such critical observations on the financial sector and that is to help redefine the IMF’s role in today’s interconnected economy after playing such a poor part in preventing the economic crisis in the years leading up to it – in 2011 the Fund admitted to downplaying economic risks ahead of the crash. Even if Lagarde wasn’t atop the IMF when the downfall began (she took over in July 2011) it’s clear that the organization should have at least raised flags as financial abuses were evident in the pre-2008 years — therefore is now trying to play a better referee role.
The financial sector remains surrounded by scandals that highlight the excesses in the industry, debilitate its image and illustrate how much room for improvement there is. The underlying issue is that the too-big-to-fail problem has not yet been solved. According to a recent study by IMF staff these banks are still major sources of systemic risk: “their implicit subsidy is still going strongly — amounting to about $70 billion in the United States and up to $300 billion in the euro area. “Some prominent firms have even been mired in scandals that violate the most basic ethical norms — Libor and foreign exchange rigging, money laundering, illegal foreclosure,” Lagarde stated in her presentation organized by the “Inclusive Capitalism Initiative” (ICI), and convened by a senior member of one of the world’s leading financial-capitalist dynasties, Lady Lynn Forester de Rothschild. Gathering in the heart of the City were men and women who hold some $30 trillion (£17.8 trillion) of assets under management — one third of the world’s investable assets.
After being so blunt, will Lagarde, the IMF and other leaders be able to translate the words into action? Wait and see if financial-sector wrongdoing disappears, something that will be hard if the same policy-leaders aren’t able to hold the irresponsible accountable. For now, ‘inclusive capitalism’ — a movement that seeks to respond to the serious dislocations caused by developments in the capitalism of the last 30 years — seems to be what everyone is talking about.