Friday 19 September 2008

Why the FSA hasn't done nearly enough

I suppose the people most to blame for the financial meltdown, apart from those who invented collateralised debt obligations – funny how we don’t know their names – are the credit ratings agencies which were conned into giving them a nod of approval. But what makes me most hot under the collar at the moment is the sheer hypocrisy from the cheerleaders of the financial world.

All those columnists, from the FT to the Evening Standard, now complaining about the rampant greed and risk-taking, were notably silent about while it was going on.

At least the Conservatives are sticking by their convictions, or at least their funders, and defending the hedge funds. Long may they continue to do so – it could be the main differentiator with their opponents.

They also imply that the financial system is fine, were it not for a handful of sharks. In fact it is semi-corrupt, has drawn such power to itself that it can swallow up the resources of all the central banks in the world in about eight hours of normal trading, and bears little relation to useful productive finance. It is corroding the conditions for open markets not enabling them.

Only about five per cent of the $3 trillion a day that roars through the wires has anything to do with real exchange of goods and services; all the rest is speculation. It is speculation that we all collude with, in a sense, in our pensions and investments. But otherwise it lays waste, and where it builds, it serves only to create incredible fortunes for a very few.

This isn’t the way forward for the world, and it is time we worked out what to do about it. We need a new system, and the system will be better if it isn’t created overnight in the eye of the next storm.

Because a four month ban on shorting bank stocks is not nearly enough. The hedge funds will short the next most vulnerable entities out there – the currencies of the nations that are pouring unsustainable billions into propping up the financial markets. They will drive down the pound.

That is why the Asian currency crisis of a decade ago was a dress rehearsal for this moment. An anonymous hedge fund manager called the Australian Treasury minister at the height of the storm and told him he was outnumbered and must submit. The Thai treasury minister phoned the IMF in a panic, and found it was the middle of the night in Washington and he had to talk to the security man. Patients were turfed out of hospital beds at bayonet point when currencies crashed, and their hospitals were made suddenly bankrupt.

Did Gordon Brown act, let alone the Federal Reserve? No, it wasn’t our currencies under attack. But it could be, and one day it will be.

Fast forward a decade. Can you imagine Chinese hedge funds driving down the US dollar? Or the Chinese sovereign fund doing so? I can – and that thought alone guarantees an end to this corrupt system. Let’s make sure it’s sooner rather than later.


Tristan said...

If people thought they were worth more they'd buy them for a higher price. That's simple, yet nobody realises it.

Selling short only works if most people believe that the stocks are currently over valued.

A ban on selling short will do nothing, because its not the problem.

But we must have scapegoats and more government intervention (because government is never to blame).

David Boyle said...

You miss the point. I don't deny the banks that were targeted deserved punishment. The point is that the way the financial system now works, free and open markets have become impossible, and if we want them back we have to deal with the problem - that the tail is wagging the dog.

juliandobson said...

It isn't just that the tail's wagging the dog - it's that we're all happy for it to do so (with some honourable exceptions, before you protest!). Look at the government's plans for regenerating regional economies and it's financial, legal and business services that are seen as the drivers of growth. Sheffield's economic masterplan aims to bring thousands of financial jobs to the city - to do what exactly? Mind you, I'm sure the Provvy isn't doing too badly.