Awareness vital for preventing crisis recurrence

Nowadays the global financial crisis dominates the media as new issues triggered by the crisis keep cropping up. This means that many points need to be clarified to understand them and reduce the impact of the crisis.

A good example is the privileges enjoyed by high-risk hedge funds, which were a key factor contributing to the global financial crisis. These funds operated out of the control of central banks all over the world. They were practically states within states.

How did that happen? And how did central banks and finance ministries, particularly in the US and the European Union (EU), allow these establishments to operate out of their control, which is exceptional in the modern financial system? And who is responsible for this?

These questions must be thought about carefully, as reforming the global financial system will not suffice, but measures must be taken to prevent mistakes from recurring.

These funds managed to inflate fortunes in an artificial way through money derivatives and high-risk speculation, with billions of dollars being circulated around the world in an unprecedented way.

Hedge funds are now trying to defend themselves in every possible way to avoid taking the blame for the crisis. They accused Western central banks of negligence in an attempt to return to the markets after thousands of billions of dollars evaporated from global markets.

Luckily for the GCC and Arab countries, the activities of hedge funds were limited since the laws of these economies forbade working outside the financial system and away from central banks' control. Otherwise, the losses of Arab countries would have multiplied as a result of the crisis. Interestingly, representatives of hedge funds were touring the region a few weeks before the crisis, apparently looking for new investments and assets, while they were fully aware of the looming crisis.

It is odd that these fund managers have not been questioned in their own countries.

Their managements are still participating in international forums and seminars and their CEOs are demanding the protection of their allocations and bonuses, which exceed hundreds of millions of dollars yearly. It's as if they had done a great service to the global financial system.

Strangely, the heads of these funds still have enough power to challenge and reject federal decisions in the US and the EU. US President Barack Obama had to apply pressure on the Congress to issue a decision imposing a huge tax of 90 per cent on the bonuses of CEOs of hedge funds and other financial institutions, after he failed to convince the boards of these institutions to reduce the amounts allocated to CEOs.

Earlier, there was an alliance between the former US administration, especially former Vice-President Dick Cheney, and the financial lobby, including hedge funds.

However, the new administration is trying to rectify this situation, and this has contributed to a sense of relief over the possibility of putting an end to high-risk speculation and manipulation of money derivatives to inflate fortunes.

Since the problem is global, and hedge funds operate in many countries around the world, the corrective procedures must include the EU and Japan to curb the violations.

Furthermore, hedge funds suffered big losses, and perhaps they have been surprised by the rapid spread of the crisis, which left no time for them to take precautionary measures to avoid these losses. Needless to say, these losses were mainly shouldered by the investors.

Addressing the reasons and repercussions of the crisis is important for all kinds of investment in all countries, especially oil-exporting countries, which have big cash reserves that cannot be absorbed by their local markets, and where foreign investments are an important source of income to finance development projects.

The writer is a UAE economic expert.