Who is bailing out small investors?

The latest EU summit concentrated on the urgent financial crisis that seems to have sparked a revolution in the international financial system, in theory at least. EU leaders agreed on a financial warning system and on reforming the international financial institutions and rating agencies that had failed to flag this financial crisis.

Nicolas Sarkozy and Jose Manuel Barroso took the next flight to the US to sell the idea of an urgent global financial summit to the lame duck President George Bush. After all, the avalanche of failures of banks and other financial institutions started with the US sub-prime problems.

Predictably, the European leaders found a less-than-keen Bush, although he agreed to host a summit on the crisis in the near future, with the proviso that the "foundations of democratic capitalism" be preserved, whatever that meant. It certainly did not mean the complete overhaul of the international financial system as called for by the French President.

The sub-prime crisis prompted the domino pieces to fall and they are still falling. No one knows where this will all end. In the meantime, a combination of takeovers by governments and stronger banks together with an unprecedented bailout bonanza on both sides of the Atlantic ensured that the situation stabilised.

Yet there was little mention of the small investor who thought that his hard earned savings were invested securely for any future need or retirement. There was also little mentioned until the EU summit of the role of the international financial institutions and the rating agencies. Now there are calls for the close scrutiny of both.

While the world's leading banks that escaped elimination were rewarded with the unprecedented largesse of the bailouts, the smaller investor was the major loser in this mess. The spiralling down of the stock markets resulting from the financial institutional burnout played havoc with the 'safe' investor who thought that the world's leading firms and enterprises were always a good risk.

Those who wanted more return than the usually modest saving accounts in reliable banks ventured out for a couple of more percentage points return on their money by investing in mutual funds, money market funds and some strategy funds that had a good record of steady and long-term growth.

These funds usually had a large percentage of equities that enabled them to grow modestly but regularly in the past. Since the crisis also hit the usually 'safe' equities, nearly every one lost out. As if to add insult to injury, taxpayers' money was used for the bailouts. Did the EU summit consider this? Is anyone thinking of how to bail out the man in the street?

A Financial Times/Harris opinion poll carried out during the first half of October mainly blamed the commercial and financial banks for this financial turmoil. It was not a surprise to find that central banks were also to blame for playing the fiddle (tinkering with interest rates) while the empire was burning. The emphasis now is rightly on how to prevent any future disasters. The European leaders, maybe more than the US, would wish among other things to reform the international financial institutions.

The Bretton Woods agreement of 1944 laid the framework for the international economic order and the World Bank and the International Monetary Fund (IMF) came out of this agreement in the midst of the main concern of the developed countries - namely the reconstruction of Europe and the discovery of raw materials and markets for their products.

The French and British ideas to reform these institutions, and the reluctance of the US to do so need to be seen in the context of the 1944 agreement. The circumstances are now different, but for the US and Europe, the IMF and World Bank continue to represent "the foundations of democratic capitalism" that Bush wants "preserved".

The IMF was the brainchild of Keynes of the UK and White of the US. Although both eminent economists managed to include most of their ideas, one of White's proposals was left out. He had wanted the IMF to deal with the problem of monetary stabilisation, especially in the face of wide currency fluctuations, the speculative capital movements and the bank failures that plagued the world after the First World War.

This looks like what Sarkozy and Brown want now. If they can convince Bush and his successor that White's proposal can be implemented by the IMF without disturbing the "foundations of democratic capitalism", the Europeans may still get what they want.