Can Gold Reserves Rescue the World?

 The world is in financial crisis and the economies including developed, developing and underdeveloped are struggling to survive the recessionary conditions. Except perhaps Gold, the prices of all other assets have nosedived creating panicky situation and leading to erosion in the confidence of investors to find alternate avenues of tangible investment. Gold is emerging as the safest and dependable investment to hedge against inflation and erosion of confidence in the whole system and values in every sense. There is an unusual rush to invest in gold and the price of  the yellow metal has been skyrocketing. Investments in gold beyond some prudential limits either at individual levels or national levels or central bank levels in the present day crisis conditions only takes the situation from bad to worse.  Is it justifiable or warranted in the present world economic conditions is a billion dollar question to fiscal and monetary authorities of all countries that are expected to provide the much needed confidence and reliefs through appropriate measures to revive the sagging economies. Even there are reports that some of the leading Central Banks are accumulating gold instead of liquidating gold and providing monetary liquidity to support the liquidity starved economies.

 

 As per the data  at the end of 2004, Central Banks and official organizations held 19% of US $ 4.39 trillion  of gold ever mined as  a reserve asset  (http://en.wikipedia.org/wiki/official_gold_reserves). This is the time for Central Bankers to come together and do an introspection on the need to keep so much of gold reserves when the real economies are in doldrums and  are badly in need of liquidity for both short and long term investments.  No doubt gold serves as a hedge against high inflation and other intangible assets but too much of attachment to gold in these times of crises is neither economically desirable nor socially acceptable. These investments in gold by those who can afford help only to widen the chasm between the haves and have nots.  Unfortunately even the poorer countries try to amass gold at any cost irrespective of their capacity and the need for the same from the economic, social and cultural angle. The love for gold needs to be reviewed and it is time for all central bankers to review their gold reserves and liquidate part of the reserves and improve monetary liquidity in the system. The heavy fiscal deficit incurred by various Governments and monetary concessions offered by Central bankers can be to a great extent offset / adjusted by liquidating part of the gold. Gold reserves any where should be viewed on par with Non Performing assets as far as the economies are concerned and there should be a prudential limit fixed on such assets. The approach of countries, their central banks, IMF and the World Bank should  be to review the position of Gold in the fast changing global scenario and take away the excess glitter it enjoys and use it to provide the much sought after happiness and welfare in society through creation of employment opportunities.

 

  

 What the world requires badly today is  a golden age and not gold reserves. The build-up of gold needs to be discouraged and concerted  efforts have to be put to convert gold into liquid monetary resources and utilize  them for  productive investments in avenues capable of creating massive employment leading to massive consumption. It is time for various governments and central bank authorities to think differently in respect of investments in gold and initiate appropriate measures to liquidate part of the gold, improve liquidity in the system and encourage productive investments. What the world is facing today is an unusual situation and this has to be countered only with an  unusual solution. May be the gold reserves can rescue the situation. International Monetary Fund can take the initiative in the matter.  The wisdom lies in converting the gold reserves into social good for the welfare of humanity.            

Fraud Mitigation Fund

Frauds in Capital Market occur at regular intervals and volumes are written on the modus operandi of the frauds, the losses suffered by many on account of frauds and preventive steps to be followed to ensure against recurrence of frauds. The detection of frauds makes sensational news and people not affected by the frauds enjoy the excitement, criticize the system deficiencies, evaluate the efficacy of our law enforcing  authorities apart from indulging in characterization of all those  connected with the regulatory and supervisory mechanism. With the visual media being very active in exposing the people behind the frauds, the whole thing becomes a time pass for many. The ultimate sufferers on account of these frauds are the Government, the economy, and some innocent share holders. Every time a fraud comes to light the government becomes a defendant and puts all efforts to cover up the case, salvage the image and put up a brave face as if nothing serious has happened although  the loss of confidence and the pecuniary loss on account of these frauds are something serious and cannot be easily quantified.

Some of the major frauds detected during the last two decades and the amount involved roughly are given under.

                                   

 

Scamster	Year	Amount (Rs Crores)
Harshad Mehta	1992	4000
Bhansali	1995	900
Dinesh Dalmia	----	595
Abdul Karim Telgi	2000	171
Ketan Pareikh	2001	1500
Ramalinga Raju	2008	8000

 

 

Apart from these few detected frauds, there are several other irregularities which go unnoticed. Institutions also had to be closed down/forcefully merged with some healthy institutions to save deposits/investments of public   and restore the confidence level in the system. They include Global Trust Bank Ltd, Madhavapura Coop Bank, United western bank Ltd, Lord Krishna Bank Ltd and several small and medium sized cooperative banks and financial companies.   There are several instances of companies which have raised huge funds from capital market and were allowed to be liquidated, vanished. Public have lost heavily and the economy has suffered very badly.  SEBI should be having the list of companies which have raised capital and vanished subsequently without compensating the gullible public who were lured to invest in capital market through IPOS. The overall loss,  on account of scams, frauds, irregularities and fudging of accounts with the knowledge and without  the knowledge of the authorities, to the exchequer  and ultimately to the public runs into thousands of crores directly and indirectly.     

Unless and until some very concrete measures are in force to compensate the innocent shareholders  / investors / depositors who become victims of frauds perpetrated by promoters of companies such as Satyam, they will not have confidence in capital market. Investors are often taken for a ride by promoters, market operators and even by regulators by either not adhering to the regulatory prescriptions or taking advantage of the loopholes in the supervisory system.  Apart from compensating the share holders  for their losses on  account of frauds committed  by promoters, there should be severe penalty for any irregularity observed in capital market related transactions and it is advisable in this regard for SEBI to have a separate FUND mobilized from all listed companies / those connected with companies and market operations. Promoters, Board of Directors, Accountants, Auditors, Bankers and others including Regulators who are party to any irregularity should be made to compulsorily contribute towards this fund.  Penalties should be imposed depending on the magnitude of irregularities / loss to the exchequer. SEBI should maintain this fund and make it transparent for public to see. The size of the fund over a period will turn out to be a good indicator for all to see to what extent the listed companies adhere to the regulations and what type of irregularities are being committed / detected. This will prove to be a mechanism to discipline accountants, auditors, bankers and all connected with the companies' operations. The fund can also be utilized to meet the expenditures connected with detection of fraud or subsequent investigations and finally to compensate the investors... This will go a long way to restore the much needed confidence in capital market.

Public investors need compensation in the form of money and that alone will satisfy them. This requires a fund and it should come from the perpetrators of fraud and not from the Government. The Message should be very clear to promoters of companies, Board of Directors, top executives, accountants, auditors, bankers, regulators and who ever is connected with the affairs of the companies. This is the social responsibility of the Government and part of the corporate governance of the companies.

 

Dr.T.V.G.Krishnan    

World Financial Crisis, Global Recession and the role of Twin institutions viz; The World Bank and the IMF.

World Financial Crisis, Global Recession and the role of Twin institutions viz; The World Bank and the IMF.


The world is in financial turmoil and the global economy is in recession. Economic slowdown, Unemployment, Loss of income, Erosion of confidence in the leadership and regulatory system are the results. Because of the inter-linkages of various economies, the contagion effect is faster and the resilience of individual economies has limitations. This has adversely affected both the developed and developing economies. In US and other developed countries the financial sector crisis got passed on to real sector and in some developing countries like India the real sector crisis gets passed on to the financial sector. Fiscal and monetary measures taken by various Governments and Central banks of different countries have not helped to tide over the crisis. Situation is worsening day by day and the fear of facing a depression comparable to that of 1930 world depression is being talked around. Is it so bad and really unmanageable as is made out to be? The conditions in 1930 and the present conditions have no comparison what so ever taking into consideration the developments witnessed in the world’s political, economic, social and technological scenario particularly during the last four decades.

The present days problems are basically man made and have come out of greed. The financial system which is to provide only a supportive role to the real sector is unfortunately allowed to take a lead and the result is there for all to see and experience now. In the name of innovations under the guise of Risk Management several exotic financial products were introduced and encouraged without examining the essentiality of such products and ensuring adequate regulatory system so that the products really served to support the real sector and emerged as something to be proud of. On the contrary the so called innovative financial products vanished from the scene without any trace leaving the real sector in doll rums .The problem in the real sector is a reality now and nobody knows how to come out of it. The reasons for 1930 depression and present day recession are therefore strictly not comparable although the results are more or less same.

The failure of regulatory system and the lack of initiatives from the world renowned institutions like the Word bank and the IMF who have played a key role in reconstructing the world economy from the devastations of the 1930 depression and the world war, have in a way contributed to the present state of affairs. The twin institutions with their expertise and knowledge of the economic and various other conditions of different countries could have visualized the dangers the world was facing the moment symptoms appeared in the US and come out with some concrete measures to prevent the present world crisis. They could and should have played a pro active role and initiated measures to sustain the growth momentum in some of the developing countries particularly the BRIC group which has the potential to support the world economy in its present crisis. Billions and billions of dollars have been spent and earmarked by various central banks and governments to bail out their respective economies and financial systems, but there are no indications of any tangible outcome as production of real goods and related services have come to a stand still or declined considerably may be due to lack of effective demand from developed countries in particular. There is basically crisis of confidence every where and this is where these two institutions have to take the lead and resolve the crisis. This is the time for these world level institutions to muster resources, identify the gaps and potentials for real sector development taking the positive sides of linkages of integrated economies. This is the best opportune moment to transfer technology and technocrats from advanced countries to developing and underdeveloped countries to develop the very essential infrastructure in these countries which can sub serve the needs of even the developed countries. Such a measure will help to solve the unemployment problem in the developed countries and at the same time take care of employment of huge human resources scattered all over the world. Some of the specific areas where these twin institutions have to seriously think and be pragmatic in solving the present global crisis are as under.

Physical infrastructure.
Development, upkeep and modernization of infrastructure like public transport system i.e; land, air and water particularly in underdeveloped regions, developing nations and including developed nations should be taken up on top priority basis seeking cooperation of all. Similarly other infrastructure like generation of electricity, provision of shelter and clean drinking water to the whole population of the world irrespective of the region where they belong to will go a very long way in arriving at some solution for the present crisis and the whole world would become a lovely place to live and enjoy. There are about 185 countries in the world and they are in different stages of economic development and some countries for no fault of theirs suffer for want of some basic needs for their human race to survive. This is the best opportune moment for all to join together and come to the rescue of the human race who suffers for no reason of their own. Development of all possible physical infrastructure will automatically increase the demand for money, men and materials and help transfer of best technology of the world to places where they are needed. Monetary resources have to be found from through out the world and this is not the time to be commercial minded and self centered. World Bank and IMF can take the lead and with the cooperation of all countries, the present crisis can/should be easily overcome for the benefit of mankind in any part of the world.
Social infrastructure:
This is another area, where world attention is called for. Education, health, general living standards, social systems, customs, civilization, culture, ethics and values etc vary from country to country impeding the economic progress. World Bank and IMF can take some initiatives to identify the problems in different countries and take some pro active measures to improve the living standards particularly in developing and undeveloped regions. This step alone will increase the demand for social goods and help the nations to prosper. These two institutions have to take a lead to think out of the box and come out with really innovative measures in all areas of social development without leaving any scope for greed and exploitation. This is the time for these institutions to have more of a philosophical approach rather than purely commercial to overcome the present crisis. The result will be tremendous bringing economic prosperity every where.


Ups and downs are natural and the present crisis should be taken as a god given opportunity to bring all nations together irrespective of their economic, social and political status and work for the welfare of humanity as a whole irrespective of their religion, caste and creed. These twin institutions with their experience, expertise and knowledge of the economic social, political and technological conditions of each and every country can do wonders and once again prove their mettle in saving the entire world from the present crisis. Technology particularly information technology should be put into optimum use to save the whole world from the present rut. Human welfare through out the world should be the long term vision and getting out of the present global crisis as early as possible should be the short term mission of these world class institutions.

Dr.T.V.G.Krishnan