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South African policymakers must fix the country's financial sector

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South African policymakers must fix the country's financial sector

12th February 2010

By: Seeraj Mohamed

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There has been very little discussion on reform of the South African financial system. Most people assume that it is working well and, therefore, should be left alone.

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However, we have seen South African financial institutions not only become more like US financial institutions but some have even been involved in doing business there. Before the crisis, South African banks, many academics and even the business media held up the US financial system and its deregulation as the benchmark for South Africa. The proposed reforms by President Barck Obama show us not only that financial-sector reform is economically necessary, but also that it is politically crucial.

Obama recently shocked the financial community by announcing plans for far-reaching reforms of the US financial system. The announcement came about a year after he has been in office. It also came shortly after the Democrats lost an important election in Massachusetts to the Republican Party. Many people have become disheartened by the lack of change during Obama's Presidency. Obama's election slogans spoke about change. Many people are now saying that more of the same is not change. Until Obama announced significant financial changes, the lack of change was most evident in the financial sector. The financial institutions were quickly back to their old tricks but, this time ,they were using bail-out money from government to line their pockets. Big bonuses for bank executives continued throughout the worst parts of the crisis. At the same time, the unemployment rate in the US shot up to over 10%.

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The middle class in the US has dwindled and middle-class Americans are in pain. They had hoped Obama would lead them out of the economic hardships the financial system and their own lack of financial management had brought on them. Their hopes and faith dwindled as more of them lost their jobs and houses. Newspapers report of people who had owned homes but are now living on the street. Obama is also losing his bid for healthcare reform at a time when more and more people in the US are unable to pay their mortgages or rents and are forced to put off medical procedures and are not buying necessary medicines. It is not surprising that Obama's approval rating has steadily declined.

Obama's response to his troubles and the growing perception that he is not changing anything is to announce significant financial-sector reforms, particularly of the banks. He had initially brought in people who seemed sympathetic to the financial sector to lead his government's response to the crisis.

When he made his recent statement about changes to bank regulation, he had Paul Volker, former head of the US Federal Reserve system, at his side. Volker is seen as tough in financial circles. He raised US interest rates about 11% during the early 1980s to deal with high inflation. He has opposed his successors, Alan Greenspan and Ben Bernanke, for their sympathies to Wall Street and their inadequate regulation of US banks.

Volker at Obama's side signaled a change in approach to the banks. It was a clear message to his constituents that he is going to bring in change that will be meaningful for them. He tried to show them that the pain caused by avaricious financiers to them and their families will be dealt with. He tried to say that the wealth bankers who were helped with huge bail-outs will be held accountable. He realises that his political future and his agenda for change depend on showing that his administration is not captive to finance.

The global financial crisis was an opportunity to fix a broken financial system in the US and South Africa. The US now finally seems to be waking up and talking about practical change. Hopefully, events in the US will wake up South African economic policymakers.

 

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