To understand the recent financial meltdown, Mr Vishwanath Pandit, a former vice-chancellor of Sri Sathya Sai Institute of Higher Learning ( www.sssihl.edu.in ), turns the pages of the epic Mahabharata, which he calls ‘a tale of ruin caused by individual and collective greed, with scant regard to discretion.'
The financial crisis of contemporary times, he adds, is rooted in similar human weaknesses, causing grave losses.
Level of innovation
“We may diligently and meticulously work out a detailed system of governance and regulation but this will serve no purpose unless those at the helm of the concerned organisations are committed to ethical norms in all facets,” frets Pandit in one of the essays included in Ethics and the world of Finance , a publication brought out by the Institute compiling the presentations at a conference on the subject held in August 2009.
Looking back at the financial crisis, he identifies as a foremost key factor the level of innovation which resulted in drastic change to the very nature of what financial institutions do and deal with. As a result of innovation, the traditional role of financial institutions — namely, the sale and purchase of financial assets — has increasingly been replaced by trading in contracts, enabling them to bypass regulations which were put in place under the earlier and now somewhat obsolete environment, observes Pandit.
Of great instructional value is the speech of Mr D. Subbarao, the RBI Governor, where he raises questions such as: Is the financial sector different from other fields by way of ethical dimensions? Is there a greater opportunity or larger temptation to deviate from the straight and narrow path? Is it people of looser ethical standards and values who succeed in the field of finance? Arguing that the financial sector is, after all, a reflection of the society in which it operates, he says that the approach to bringing ethical values into finance has to begin not by special efforts to enforce or regulate ethical standards in finance but by fostering a value system in society at large.
However, Mr Subbarao underscores the special ethical dimension of the financial sector in contrast to other businesses by stating that banks and financial institutions have a greater responsibility of being conscious of the obligation they have of not jeopardising the larger public interest. What Mahatma Gandhi said — that businesses hold public money in trust — is truer of the financial sector than others, he avers.
Networks and circuit-breakers
The lecture by Mr Y. V. Reddy, former Governor of RBI, raises fundamental questions about markets. Such as, if there are only two rating agencies what sort of a market is that for global finance; or if there are only two important news agencies which provide information for the whole of the financial sector, what sort of global market is that? Educative read for the finance professionals.
Networks and circuit-breakers
And, if there are 15 global institutions which control 70 to 80 per cent of the global finance and cross-border capital flows, are we sure that it is a real market, Reddy demands?
An interesting insight Reddy discusses is about networks. While in telecommunications and electricity we were able to recognise what a network means and, therefore, introduce circuit-breakers, something similar was not done in finance, he rues. “This is a very serious intellectual failure… People are very knowledgeable. So obviously there is something other than knowledge which explains all the events that have led to the crisis…”