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Global crisis led to breakdown of trust in fin system: RBI

Last Updated: Friday, August 28, 2009 - 18:31

Puttaparthi (AP): Reserve Bank Governor D Subbarao on Thursday said the ongoing global crisis has resulted in a massive breakdown of trust in the financial system and that the study of economics could lose its value base.

"What the crisis has done is to cause a massive breakdown of trust: trust in the financial system, in bankers, in business, business leaders, investment advisers, credit rating agencies, politicians, media and in globalisation," he said at a conference on `Ethics and the World of Finance` here.

Saying that current financial crisis has called into question the ethical foundation of the financial world, the Governor at Sri Sathya Sai University said the crisis has exposed an issue of moral hazard in the banking system.

"Something that has come to be called privatisation of profit and socialisation of costs," he said. Governments can hardly afford to have large institutions fail as they would be bailed out at tax payers expense, he added.

The `too big to fail` syndrome enables financial institutions to take risks a soap maker cannot take, he said.

The crisis, he said, has triggered a soul searching debate on whether the malaise in the financial sector could be a result of the flaws in the direction that economics, as an academic discipline, has taken over the years.

"I have raised the issue of economics, as an academic discipline, losing its value base, and conjectured if that could be at the root of the malaise in the financial sector," he said.

Bureau Report

First Published: Friday, August 28, 2009 - 18:31

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