British professor: invisible hands rarely works

Special Report:Global Financial Crisis

LONDON, March 11 (Chinese media) -- "Don't follow us, we're lost too" was the

message sent out by a senior British professor for the less developed countries

in the current financial crisis on Wednesday.

"The invisible hand rarely works, considering the financial capitalists are

all doing in their own interests and thus it's natural to have the banking

crisis," said Professor Panicos Demetriades from Leicester University.

Hours before he delivered his speech at the Politics of Macro-Adjustment

and Poverty Reduction Seminar in Sheffield University, the professor said

policies, such as financial liberalization, bank privatization and

non-intrusive/passive regulation which have been prescribed to Less Developed

Countries (LDCs) by the U.S. Treasury through the International Monetary Fund

(IMF) and the World Bank, are the root cause of the current crisis across

developed nations.

He said that these policies have been forced on LDCs through structural

adjustment programs.

Demetriades, who has been urging for a bigger government in economic

development, said that market economy is good but needs proper regulations.

The crisis has forced governments in developed countries to once again take

a leading role in finance, though reluctantly in some cases, by taking over

major banks, which has highlighted the serious dangers of passive financial

regulation, the professor said.

"Developing countries should take stock, as should the IMF and World Bank,

who have been the key institutions promoting this set of policies." said

Demetriades, adding that "my research has shown that the role of government in

finance has been pivotal from the beginnings of financial systems in Europe and

Asia."

Assuming the new U.S. administration succeeds, Demetriades, people should

see better, less ideologically biased advice to LDCs, to help promote growth

worldwide, even if it does not protect the narrow, short-term interests of the

U.S. financial lobby in LDCs.

One positive development of the current global financial crisis, he said,

could be the recent election of Barack Obama as President of the United States

of America, who seems to be bringing a bigger government role in U.S. economy.

"The theory that, to promote financial growth, the role of government has

to be a limited, hands-off approach is probably gone forever", he said.

The new US administration should liberate financial institutions from these

views, he said.

China, whose economy is still trying to realize a 8 percent growth despite

the global crisis, is an example at least to the developing countries.

Looking at the future for the UK, Demetriades said, "I expect that,

eventually, politicians in Europe and the U.S. will realize that investing

billions in banks and running them at arms length will not work and we will see

a much more 'hands on' approach in future."

Individual banks, acting in their own self-interest, will not address the

massive market failures that currently exist, he said.

In a downturn, repossessions may be good for the bank but not for the

economy, as they push prices lower and deepen the recession, Demetriades said.

A nationalized bank can be instructed to re-structure loans in arrears

instead of repossessing, which may be less profitable in the short term for an

individual bank but it could be profitable for the banking system as a whole in

the medium term, Demetriades said.

Research suggests that nationalizing the greater part of the banking system

and running banks in the interests of the country rather than the shareholders

may be the only way forward, he said.