Wednesday, 17 December 2008

Bolting stable doors

The news that some of our most respectable banks have been completely taken in by what appears to be the most gigantic pyramid selling scam in history is pretty alarming, but is just another indication of the way that corporate and personal greed can blind people to reality.

Not everyone was taken in, of course. As the Sunday Times pointed out, a number of investors were savvy enough to ask how on earth someone could manage a return of 1% to 1.2%, month in month out, and never have a down month. One even said "We could never quite work out what it was that he did". But some major banks ploughed their - our - money in regardless, seeing only an incredibly high level of return and wanting a piece of the action. The net losses from this latest example of greed could be as high as £33billion.

I have to say that I have little confidence that this is the last bubble which will emerge from the wreckage of the world's financial systems. The way that people were taken in over the securitisation of dodgy sub-prime debts was bad enough; but if they have also fallen for a pyramid selling scheme on this scale, it seems highly probable that other problems will emerge as accountants (and hopefully the police) pore over the debris.

That gives me an issue with the government's latest scheme to pump more into the banking system by purchasing 'assets' from the banks. I don't know – and nor am I convinced that anyone else does – whether these 'assets' are actually worth anything, let alone the large sums which we as taxpayers will be paying for them. The only thing of which I am certain is that the amount of 'assets' being traded on the markets is significantly higher than the amount of real, tangible value underpinning them – according to some estimates, possibly by a factor of as much as 10:1.

At the bottom of all this mess are two main factors, it seems to me. The first of those is greed – the pursuit of unrealistic returns which out-perform the market, and which are believable only by suspending critical judgement. And the second is that the financial instruments being traded on the world's financial markets have become too complex for most of the people trading in them – never mind the layman – to understand. Derivatives of derivatives; betting on the outcome of other people's bets – this type of market making serves the interests of only the few, and for them to gain, the rest of us have to lose.

We need to take the time to clean out the stable, not just bail out the banks, and do it thoroughly if we are to have a basis for rebuilding confidence. That means a great deal more regulation over what banks and other institutions can or cannot do, and a determined effort to purge the markets of the gamblers and speculators who think only of themselves. And it means an end to some of the overly-complex financial instruments which are at the root of recent problems.

In that context, the call by David Cameron for an inquiry into the causes of the financial crisis sounded praiseworthy at first – until I read the small print. In fact, for all the brave rhetoric, his call for those who have brought about the downfall of the banking system to face the music seems to be limited to those who can be proven guilty of actual illegal actions, which means that the vast majority of those who have behaved in an utterly irresponsible fashion would completely escape his clampdown. Not really surprising, given that his party removed the regulations which would have prevented some of the daftest decisions being taken. (Gordon Brown, of course, even lectured the rest of the world on why they should do the same. For either to criticise the other over the causes of the crisis is less than honest.)

I am absolutely certain that Cameron's call for those who have behaved irresponsibly to be punished will not extend to the gamblers and speculators who fund his party, for instance. And even after all that has happened recently, his friends and backers, the short-sellers, are still at it – undermining the UK economy by short-selling sterling in order to make large sums of money for themselves.

Properly run financial markets are an essential element of the world's financial systems; but markets should be there, first and foremost, to serve our collective needs. A market which operates primarily to allow the greedy to make profits at the expense of others is not serving the interests of the majority. Given that we all depend on the markets to keep the economy moving, we have every right to insist that they be run in a way which is transparent and honest and which serves our needs.

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