Crisis is not restricted to the US dollar but has affected all financial institutions of the world.

Trigger was the downgrade on August 5, 2012, of United States rating from AAA to AA+ by Standard & Poor, (S&P) a private rating agency. The consequence has been that all stock markets in the world recorded massive declines.

The downgrade complemented the turmoil in Europe with the debt problems faced by PIGS (Portugal, Ireland, Greece, Spain). PIGS joined by France and Germany who have their own Euro-dollar problems to cope with.

World Economic History snapshots: impoverishment of the world

India and China accounted for 50% of world GDP for all of the past 2000 years. (Now they account for only 25% of world GDP). The impoverishment was caused by colonial exploitation.

US economy: some history lessons

26.5?cline in GDP (from 1929 to 1933). Unemployment: 24.9% (1933), >20% (1932-35). 85?ll in stock prices; 47?ll in industrial production; 80?ll in home building (1929-33). Double-dip recession of 2011 evokes these memories.

Why is US $ a big deal in global finances?

US $ dominates currency circulation in world economy. $ Forex holdings are held by countries outside USA. US trade deficits and consequent increased supply of US $ to the world meant that over 66% of US $ (1980- 2005) are held outside USA. Two- thirds of US $ (Over $1 trillion) are in circulation outside USA.

Total Forex business: $3.98 trillion (US$ accounts for $

After the formation of OPEC and Petroleum products carry 69 trillion or 42.5%; Euro accounts for 19.5%).

Causes for dominance of US$tel, Kissinger ensured that these petro-dollars were stated in US$ terms and recycled in the world.

Thanks to forex, trade, investment, financial derivatives (puts and calls, credit swaps, participatory notes), petro-dollars, US $ is the dominant currency.

Total Forex reserves: $9.7 trillion (i.e. 16.7% of World GDP 58.26 trillion). Of these reserves, 2/3 are in US $, held and transacted in financial markets.

Keynesian economic model

Keynes was instrumental in introducing the current mainstream economic thought, in the wake of the First and Second World Wars.

He wrote two works:

The Economic Consequences of the Peace (1919)

How to Pay for the War: A radical plan for the Chancellor of the Exchequer (1940)

Keynes wrote in 1919: “If we aim deliberately at the impoverishment of Central Europe, vengeance, I dare predict, will not limp. Nothing can then delay for very long that final war between the forces of Reaction and the despairing convulsions of Revolution, before which the horrors of the late German war will fade into nothing.”

He attacked the post World War I deflation policies with A Tract on Monetary Reform in 1923 – an argument that countries should ensure stability of domestic prices, avoiding deflation even at the cost of allowing their currency to depreciate.

Keynes’s predictions of disaster were borne out when the German economy suffered the hyperinflation of 1923, and again by the collapse of the Weimar Republic and the out- break of World War II. Only a fraction of reparations were ever paid.

How to pay for the war (1940)

At the height of the Great Depression, in 1933, Keynes published The Means to Prosperity, which contained specific policy recommendations for tackling unemployment in a global recession, chiefly counter cyclical public spending and contains one of the first mentions of the multiplier effect.

Keynes’ General Theory of Employment, Interest and Money (1936) argues that demand, not supply, is the key variable governing the overall level of economic activity. Without government intervention to increase expenditure, an economy can remain trapped in a low employment equilibrium. Keynes advocated activist economic policy by government to stimulate demand in times of high unemployment for example by spending on public works.

One consequence was the US announcement of Marshall Plan. Key argument was that war effort should be largely financed by higher taxation and especially by compulsory saving (essentially workers loaning money to the government), rather than deficit spending, in order to avoid inflation. Marshall Plan finally ended up in the formation of European Community with Euro dollar as their common currency.

How to overcome the present economic mess?

(1) Promote public works, reduce unemployment

US and developed economies of the world should pause and learn lessons from history of the last 20 centuries. Impoverishment of colonies by the colonial loot should be recognized. Developed economies owe reparations to the impoverishment developing world which has come out of colonial dominance. One solution: Just as European Community and Eurodollar were formed, an Indian Ocean Community and Mudra as common currency of IOC should be instituted.This will lead to employment generation in ALL economies of the globe.Law of the Sea now expands territorial waters to 200 nautical miles, opening up new zone for economic exploitation. Projects are ready to link Vladivostok and Bangkok through Trans-Asian Highway and Trans-Asian Railway – projects which will provide the multiplier effect made popular in economics by Keynes.

(2) Promote savings

Avoid the temptation to print US dollars. Slow down the US $ money circulation. Institute steps to reduce US and other Developed Countries’ Current Account Deficit by increasing their exports of services for public works’ financing in Developing countries, for e.g. IOC.

US current account deficit (1976 to 2009): $8.5 trillion which becomes forex reserves of nations outside USA.

Promote savings in USA and other Developed Countries.

Promote investment of $ held as cash by corporate.

(3) Ban financial derivatives

Financial instruments such as options, financial derivatives, and participatory notes create a false sense of financial health.They do not provide insurance cover, they only promote the development of excessive greed. To promote greater corporate social responsibility, take lessons from millennia-old Dharma- dhamma institutions which promote social responsibility through sreni dharma (corporate responsibility) (e.g. makamai, a voluntary contribution of a percentage of turnover to social causes).

Are Indian companies missing out on investment and business opportunities?

With an expanding home market many Indian companies tend to focus on domestic growth and looking to expansion in markets where successful Indian establishments has been made earlier, like UAE, and where quite a few Indian NRI HNI’s are strong links to opportunities.

In both US and Europe the markets are slow, to say the least, an FDI from these regions into India have dropped during the last one to one and a half year. The later is because of several factors; the perceived risks related to investing in emerging markets, lower risk investing in known markets and companies, but more interesting and important because there are “better” investment opportunities to be found in Europe and the US. And, from an Indian investors point of view many of these investments can make even more sense.

A company with relatively low valuation, a proven advanced technology being used by world-class customers could in many ways be the perfect acquisition. Or, a brand with a strong position in the local market who has not taken the step into the enormous Indian market due to lack of knowledge, contacts in India or temporarily slim financials.

According to our experience, in Europe, the geographical belt from northern Italy, Switzerland, Germany and Scandinavia are were the most attractive opportunities are. Throwing a glance at Netherlands and the UK might make sense in some cases. In the US there are typically industry specific clusters with different locations depending on industry.

Leveraging a higher margin customer base, moving manufacturing and development to India to further improve margins, bringing the products to the high end market in India and applying the Indian knowledge of down-scaling the product to match the requirements a cost sensitive volume market in Indian and as a next step go global with a superior product with an attractive price-point is a viable and proven strategy. Indian companies are uniquely positioned to implement such a strategy.

What we have seen though is that many Indian owner/promoters and executives tend to go for the cheap acquisitions, technology transfers of joint ventures – losing strategic and long-term advantage, unnecessarily sharing profits and being held back during implementation by foreign partners looking to their local needs and the past. Also, there is an reluctance by many to do, and pay for, the quality upfront research and evaluation work of available strategic options and acquisition opportunities – an initial investment that typically has an amazing return.

As examples – how many researched the Swedish market for green-technology, renewable energy, agriculture equipment, defense technology, medtech, auto-components or IT? – a region with a history of being at the frontier in clean energy, environment, medicine, vehicle manufacturing, telecom equipment…. Who has not heard of ABB, AlfaLaval, Bofors, Gambro, the Nobel price, Volvo, and Ericson. Is it likely to find interesting acquisitions or partners in their supplier base? Where are the clusters of companies, technology and brands related to your industry and business? Why miss out on an opportunity in a life time to leverage 150 years of development in Europe and US and bring it into, to, the future in India?

– R Vaidyanathan (Writer is Founder & Chairman of EXTEND, LLC)

It’s presidential inauguration time in Washington. Not for the person who will helm the federal government that comes in six months but instead for Dr. Jim Yong Kim, the man taking the reins of an organization even more lumbering, and far less accountable: the World Bank.

And according to dozens of interviews over the past few weeks, atop hundreds more over the past five years, plus a review of thousands of pages of internal documents- problems have gotten worse, not better, at the World Bank despite more than a decade of reform attempts. Kim, the Dartmouth College president tapped by President Obama to lead the bank, stands little chance of fixing things, say insiders, unless he is prepared to completely revamp the cur- rent system. “The inmates are running the asylum,” says a former director.

Part of the problem is philosophical: No one, starting with outgoing president Robert Zoellick, has laid out an articulated vision for what the World Bank’s role is in the 21st century. For example, economic superpower China remains one of the bank’s largest and most valued clients, even as it doles out development money to other countries and bullies the bank from aggressively investigating corruption.

Part of the problem is structural: Internal reports, reviewed by FORBES, show, for example, that even after Zoellick implemented a budget freeze some officials operated an off-budget system that defies cost control, while others used revolving doors to game the system to make fortunes for them- selves or enhance their positions within the bank. Why not track all the cash? Good luck: Bank sources cite up to $2 billion that may have gone unaccounted for recently amid computer glitches.

Sadly, the last part is cultural: The bank, those inside and outside it say, is so obsessed with reputational risk that it reflexively covers up anything that could appear negative, rather than address it. Whistle-blower witch hunts undermine the one sure way to root out problems at a Washington headquarters dominated by fearful yes-men and yes-women, who-wary of a quick expulsion back to their own countries- rarely offer their true opinions. Zoellick declined to speak with FORBES for this piece, though that’s not surprising. I’ve covered the bank for the past five years and have been ritually denied access to anyone in a mid-to- top-level post. The blockade ended just before FORBES went to press, when the bank conducted a carefully monitored conference call with two staffers who run the global “Open Data” initiative. The bank’s media relations spokesman was permitted to be quoted by name. That this is considered openness epitomizes the problems that Kim now inherits.

Like most out-of-control bureaucracies, the World Bank started with lofty and idealistic goals. Facing a planet in ruins near the end of World War II, it was created along with the International Monetary Fund at a conference of leading Western economists trying to find ways to address the economic instabilities that they believed led to war and to guarantee it would never happen again.

Having successfully helped rebuild Europe and Japan, the World Bank eventually expanded into a truly global agency, notably in the 1970s under the leadership of Robert McNamara, who took on the goal of a poverty free planet in his search for redemption after his role in the Vietnam War. Donor nations fund the bank with billions of dollars annually, which it then doles out to fight poverty worldwide.

In terms of its governance, the World Bank has always operated under a gentleman’s agreement that allows the U.S.-its largest shareholder with 16% of the vote-to pick its president, while the other 187 member-governments flow into a 25-member board. The process for its funding, grants and loans is absurdly complicated, but in essence it combines capital from its donor -countries, plus self generated income through the sale of bonds. While often confused with the IMF, which provides financial stability to governments, the World Bank’s role is at least supposed to be only development projects-like building dams, roads, schools, even fish farms-although it has muddied those boundaries over the last 20 years. Unlike the IMF, the bank deals with both the public and private sectors, and as the number of projects and amounts of money have escalated, so has the mischief, corruption and cover-ups, since no agency has the power to audit them.

In 2005 George W. Bush tapped Paul Wolfowitz as president to clean the place up. To his credit, Wolfowitz made rooting out corruption his primary mission. But the former Pentagon official also came in like an occupying power. According to internal documents obtained by FORBES, the board and Wolfowitz engaged in a game of trench warfare so vicious that the minutes of some board meetings had to be sanitized to keep the world from knowing what was really going on.

Perhaps Wolfowitz’s heavy-handed style would have eventually paid dividends. He did, after all, declare war on the bureaucracy. But he also fell prey to the insular culture, giving his girlfriend at the bank special considerations that undercut his credibility and led to his resignation.

So in came Zoellick. He had a stellar resume, serving as the U.S. trade representative, an assistant Treasury secretary and deputy secretary of state. Joining the bank in 2007 he immediately calmed the waters. Facing a global food crisis, followed by a financial crisis, he shoveled loans out the door at record levels to help keep the world’s poorest from being buried alive. He then turned around and sought-and last year received-healthy financial increases from the bank’s member countries. When arriving at the bank he was flabbergasted at the glass ceiling for women-despite 20 years of studies and internal promises to change it. Within five years he could boast that half of his top managers were female. Zoellick was also shocked to learn that the bank sold its old data and surveys in its 8,000 “datasets” going back 50 years. He ordered it to be given out for free and made available to all-except for the sensitive stuff under what he calls the Open Data program.

These moves, however, all fell at the margins. The bank’s core problems grew unabated. Zoellick appeared to continue Wolfowitz’s corruption battle, boosting the budget and the number of investigators in the bank’s corruption- fighting arm-which led to the bagging and debarring of a record number of companies for corruption and bribery, including Germany’s Siemens and Britain’s Macmillan Publishers.

But numerous managers and vice presidents that I spoke with inside the bank say that corruption continues unabated. Five years ago a commission led by Paul Volcker drilled into the bank and called it a massive problem. He recommended restructuring the bank’s corruption-fighting unit, including moving the leadership into a more powerful notch in the bureaucracy. Zoellick adopted everything in the Volcker plan, but there are big questions today whether it’s having a deep impact.

“Certainly the World Bank in its official attitude has changed,” Volcker tells FORBES. “Now I can’t tell you how much that’s penetrated into the field staff … or the people who make the loans.”

Last year a little-known internal bank review was done on the effectiveness of the bank’s corruption-fighting efforts. At first, according to the report’s lead author, Navin Giri-shankar, Zoellick’s team asked the evaluator based inside a semi-independent bank unit-not to review the Volcker restructuring until they had more time themselves to see how it was working. The investigators agreed, focusing instead on the end results that ultimately matter, anyway the “quality of the bank’s operations,” particularly in countries that suffer heavily from corruption and poor governance.

The bank’s corruption fighters are too focused on specific development projects and not enough on the budgets of poor countries, where bank funds more than $50 billion since 2008 are commingled with a country’s income and may not be used for its intended purpose. These funds go down a rabbit hole and are almost impossible to track.

It was a bold report that shook the bank, and Zoellick’s team worked hard to discredit it. “In the beginning they wanted to push us toward examining countries where they felt there would be successes,” says Girishankar, considered one of the best analysts inside the agency. “Then the sampling was questioned, as were the findings that the bank is not consistent in fighting corruption and improving governments across countries.”

A similar report that the bank buried, attacked and then ignored was done by another respected internal investigator, Anis Dani. This report found a “dramatic dip” in the quality- meaning effectiveness, impact and results-of bank projects over the past five years, says Dani. He also found a seemingly premeditated effort to remove the only whistle blower function within the bank that dealt with all its projects, called the “Quality Assurance Group.” Zoellick’s team dissolved it in 2010, and while the bank maintains that it is working on replacing it with something else, Dani calls that claim “hogwash.”

The study, presented to the board in February of this year, was objected to by the bank’s senior managers, who preemptively produced their own Power Point presentation that found a lot of the same problems that Dani did. (That report has never been released.)

None of these apparent attempts to blunt unwelcome news comes as a surprise to Carman L. Lapointe, who has worked as the UN’s chief internal watch- dog since 2010. Before that Lapointe was the auditor general of the World Bank, where her team issued 60 internal reports per year on what was really going on inside the agency. “Carman’s reports were-how can I put it-a bit can-did,” laughs a bank vice president who supported her. But it led to Lapointe being gently walked out the bank’s door in late 2009. “We were pretty blunt with what had to be said, and that’s not what those at the top of the bank want to read,” Lapointe tells FORBES. “The bank’s management  didn’t want to hear the tough messages. They are very reluctant to be held to account.” The bank wouldn’t comment on that, although Lapointe says she confronted Zoellick before leaving, and he told her he’d been blindsided by his own top  managers.

At the most fundamental level the World Bank has a mandate problem. Economist Adam Lerrick, a longtime critic of the organization, argues that it lost its bearings lending to middle- income countries “that don’t need the money,” like the BRIC countries Brazil, Russia, India and China-rather than sticking with development projects in the world’s poorest and most fragile states.

The bank argues that it makes money from lending to the BRICs, which allows it to lend still more money to the poorest nations. In a 2006 study, however, Lerrick drilled down into the bank’s books and found real annual losses of $100 million to $500 million per year on its loans although accounting maneuvers painted a rosier picture of the financials. It’s hard to believe the situation has improved in the wake of the financial crisis.

“The World Bank should be in the development business, not the lending business,” says Lerrick. “Its scarce donor-backed funds should be channeled to countries that do not have access to private-sector capital.” Volcker has previously likened the bank’s we-must-lend attitude, ominously, to Fannie Mae.

Nowhere is the problem clearer than with China, the world’s second largest economy and the World Bank’s second largest customer behind Mexico, having borrowed more than $30 billion over the past few decades. When China in 2007 threatened to stop borrowing from the bank unless the agency toned down its new corruption fighting plan according to a secret internal bank memo, obtained by FORBES the bank’s top managers went into a panic and quietly caved. “The bank is desperate to keep its best clients,” explains Lerrick. A decision was made inside the bank announced on its website but wrapped in diplomatic jargon that they would benchmark each country individually on corruption, rather than against one global standard. The practical result was an easing of the rules for the biggest violators, such as China.

Zoellick, who prides himself on his relations with China’s leaders, did nothing to alter it. Indeed, in the report issued last year by Girishankar, he con- firmed that this was happening. “There are several countries, including those with very big geopolitical influence and a strong voice on the bank board, where the bank had to find a way to deal with it,” he says.

It gets worse:Hardly a month now passes without an announcement that the World Bank is lending China a ton of low interest money say $300 million to clean up a polluted lake-only to watch China turn around a few days later and announce a similar sized zero-interest loan, or grant, to a poor sub Saharan nation, winning extra global clout. Meanwhile, inside the bank’s Washington headquarters, China is increasingly assertive on the board level, while bank managers kowtow to China. Case in point: In the China office at the bank in Washington, one staffer’s job, according to a recently retired senior bank official, is to closely examine every World Bank document the bank creates that mentions Taiwan to make sure that it uses language China approves of. If it doesn’t, the language is altered.

When Zoellick took office five years ago, he instituted, he says, a flat budget on the agency-which, to outside eyes, remains at roughly $2 billion annually for administrative overhead. He did it because he felt it would instill discipline on the global staff and honestly felt they could do more with less. Unfortunately, FORBES has learned, the staff simply did an end-run around the president.

“No one believed we had a flat budget except him,” laughs a senior vice president. “We’re spending trust funds like there’s no tomorrow. So where is the flat budget? Everyone just got money from bank owners in a different capacity.”

“Trust funds” are the World Bank’s dirty little secret, their version of Congressional earmarks. There are hundreds of them, funded by dozens of countries and dedicated to virtually every poverty type project you can think of. And they have been growing so phenomenally that they now provide $600 million annually, or 30% of the bank’s total administrative budget.

Many donor countries do this because they don’t want their money sitting in a general bank fund that the bank can use for anything it wants. But since they have various arms of the bank administering these funds, there’s even less oversight than there would have been otherwise. And while those trust funds are generally not supposed to go toward administrative overhead, they often do anyway, say bank insiders, which many countries are unaware of. FORBES has turned up examples- such as with Italy-in which arms of the bank have been charging headquarters and individual countries for the same salaries and expenses, helping to enrich bureaucratic fiefdoms.

FORBES has also discovered a whole layer of bank officials who have learned how to game the system or expand their influence through its constantly revolving doors. It’s not unlike the way that U.S. officials retire and then go to work for the contractors they associated with while in government service. As just one example, “Lead Education Specialist” Luis Crouch helps manage the billion-dollar Global Partnership for Education, run out of the bank’s headquarters. Crouch is a revolving door within a revolving door- over the past ten years he has shuttled back and forth between the bank and Research Triangle Institute, a nonprofit that sells education tests to the bank and USAID, according to a USAID consultant familiar with the deals who says Crouch consistently favors RTI. Asked about his apparent conflicts of interest, Crouch declines to comment, while bank spokesmen also decline.

With such off-book shenanigans going on, perhaps it’s not shocking that last December more than $2 billion suddenly started appearing, disappearing and reappearing across the online budget accounts (and computer screens) of bank units around the world, according to staffers responsible for those budgets. In some accounts they showed huge deficits where none had been, while in others there were sudden surpluses. This was popping up in unrelated units across the bank’s computer networks-and driving every- one crazy trying to figure out what was happening. One insider likened it to the game whack-a-mole-only with hundreds of millions of dollars shooting up in different spots and vanishing from others. One possibility could be that it was massive hacking-an incessant problem at the bank. Another explanation is that it was simply “Computers Gone Wild”- perhaps the IT network on its own playing a game. Others suspect the explanation may be more nefarious. One thing for sure: It eroded confidence in the World Bank’s controls.

Zoellick’s hands-off management style didn’t help, either. He delegated most day-to-day functions to a deputy, Caroline Anstey, as well as delegating to her and two others the chairing of most board meetings-which is normally the function of bank presidents. The board meets twice a week, and yet Zoellick shows up maybe once a month. At the beginning they groveled for his attention, until he started going behind their backs to get information directly from their bosses (the finance ministers of their countries).

Indeed, Zoellick fashioned himself more in the role of a statesman than a bank CEO. He is rumored to be eyeing a senior job in a Romney Administration. Given this, bank insiders say that Zoellick’s goal with bigger career perch- es in mind-has been to simply manage the agency in a way that there is no noise or blame that could be affixed to him.

That meant not taking big risks. In late 2008 Zoellick tapped former Mexican president Ernesto Zedillo to chair an independent commission to study the issue of giving smaller and poorer countries a bigger seat at the World Bank governance table. That report was sent to Zoellick when it was completed last year, who promptly gave it to the board-but not before adding a cover letter saying it doesn’t necessarily represent his views. “Why did he have to do that?” Zedillo asks FORBES. “It was very obvious it was an independent report. He didn’t have to say that. He was not the author of the report at all. I think he’s afraid some country members will jump to his neck, blaming him for the report. They can blame me if they don’t like it.”

One of the Zedillo commission’s biggest conclusions is that “the board should be a real board and not an executive board,” says Zedillo. “The board should handle strategic matters and oversee seriously the activities of the bank. Right now it has a conflict of -interest.

“You cannot be the overseer and also the approves of the operations,” he adds with a laugh. “But that’s been a practice since the bank was established. … Do they really think the World Bank will be relevant in 10 to 15 to 20 years if you keep it the way it is now? The answer is no.”

– Bob Prouty, Forbes