Australian Prime Minister Kevin Rudd accused Wall Street of “obscene failures” in corporate governance yesterday and blamed “extreme capitalism” for the financial crisis that is gripping the world.
A day after announcing an urgent A$10.4 billion (US$7.4 billion) surge in spending to protect the Australia economy from recession, Rudd blamed the meltdown on failures in lending standards, risk management and corporate governance by the world’s major lending institutions.
“In fact, obscene failures in corporate governance which rewarded greed without any regard to the integrity of the financial system,” Rudd said in a speech to the National Press Club in Canberra.
“These failures weren’t limited just to businesses on the margins of the financial system. They happened in our major global financial institutions — the Wall Street investment banks that were the pillars of the global financial system,” he said.
He said the “absurdity and the obscenity” of lending practices in the subprime mortgage market gradually led to a complete collapse in confidence in the financial system.
“What we have seen is the comprehensive failure of extreme capitalism,” he said. “Extreme capitalism which now turns to government to prevent systemic failure.”
Rudd said the world was now wrestling with the “twin evils” of fear and greed. The huge government bailouts were aimed at dealing with the former, he said, and taking aim at huge salaries and payouts to executive would come later to deal with the latter.
Governments around the industrialized world have pumped billions of dollars into their financial sectors to bail out institutions, leading to charges that capitalism privatizes profits but socializes losses.
Governments should act so that greed and lax regulation were never allowed to put the world in the same position again, he said, adding that Australia would press for this at a meeting of the G20 group of 20 rich and emerging nations next month.
Rudd said Australia would push for new global rules that banned excessive pay for finance industry executives and linked bank capital requirements and good corporate behavior to executive salaries.
Global financial institutions need to have clear incentives to promote responsible behavior rather than unrestrained greed, he said, calling on the Basel II accord on banks’ capital adequacy to incorporate such requirements.
“Specifically ... regulators should set higher capital requirements for financial firms with executive remuneration packages that reward short-term returns or excessive risk-taking,” he said.
Rudd said his government would work with the Australian Prudential Regulatory Authority (APRA) to bring fat-cat pay packets under control.
“This is not just a question of fairness and perceived fairness in the system, it goes actually to the kernel of the incentive structures around risk-taking,” he said.
Canberra and the APRA will consider new policies that would “deal with the problem of executive remuneration” in financial institutions.
Rudd reiterated what has become his government’s mantra — Australia will not escape unscathed but its financial institutions are sound and the country is better placed than many to weather the storm.
One reason was that while countries such as China and India would be affected, emerging economies remained strong.
“Asia is the fastest-growing part of the global economy, by a long shot,” he said.
“Further, Chinese leaders have indicated a willingness to lower interest rates to stimulate their domestic economy — an important signal for the global economy, he said.
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