As the Global Financial Crisis (GFC) drags on, the inability or unwillingness of the ruling global elite to recognise or address its true causes appears ever more surreal, not to say terrifying. The sense of impotence and ideological bankruptcy among political leaders is manifested almost daily – as in President Hollande’s attempt on 9 June to convince his Japanese hosts that the Eurozone crisis is “over” (http://www.bbc.co.uk/news/business-22832471) and in Britain’s opposition Labour party simultaneously embracing the governing Coalition’s policy of austerity and welfare cuts even as the independent Institute for Fiscal Studies projects that this strategy will preclude any relief from public spending cuts and tax rises until at least 2020.
This flight from reality is a sign of the utter helplessness felt by world leaders in face of their failure to find a solution to the global economic paralysis stemming from the GFC. From their perspective, of course, any such solution must be compatible with preserving the present “neo-liberal” world economic order, which since the 1980s has concentrated untold wealth in the hands of the tiny minority that they represent, while the vast majority of the world’s population sinks deeper into impoverished hopelessness.
A conspicuous recent symptom of their frustration is the attempt by the new government of Japan, whose economy has experienced no significant growth in over 20 years, to break free from chronic stagnation by engaging in a renewed massive bout of Quantitative Easing (QE) – or money printing by any other name. The main idea behind this move is ostensibly to promote domestic inflation – instead of the chronic deflation the country has experienced since around 1990 – by encouraging a devaluation of the Yen and thereby, it is hoped, a rise in consumption and growth. The immediate impact of this initiative was dramatic, prompting a 25 per cent fall in the value of the Yen against the US dollar in the 6 months to mid-May 2013 and a corresponding rise in the Nikkei stock market index (over 80 per cent) in anticipation of the higher inflation and economic growth investors apparently believed would result from this stimulus.
The scale of this intervention – involving the purchase by the Bank of Japan of government bonds (JGBs) with Yen newly created by itself – has been even larger (proportionate to the size of the national economy) than the parallel initiative in the United States, where the Federal Reserve’s QE programme is currently monetising debt at the rate of over $1 trillion annually. Not surprisingly, it may seem, such massive injections of funds, channelled through major banks and investing institutions, have served to underpin the broad-based market euphoria building round the world since late 2012, which has seen most stock market indices rise by upwards of 20 per cent. Yet for all the efforts of politicians and mainstream commentators and media to spin this market surge as an indicator of rising economic optimism and the long-awaited revival of economic growth (GDP) – even though it has failed to lift most market indices as high as the all-time peaks attained before the bursting of the dot.com bubble in 2000 – manifestly it has been an entirely synthetic, liquidity-driven bonanza.
Moreover, mainstream propaganda is at pains to downplay the vital role of QE in allowing both public and private debt to continue to be financed. Yet without such massive official purchase of government bonds (and also private-sector “toxic waste” such as US mortgage backed securities) there is no doubt that their market value would have fallen – and interest rates correspondingly risen – to unsustainable levels, thereby forcing public and private institutions into open insolvency and mass default.
Corruption of the market place
The artificial nature of the recent stock market “boom” is still more obvious once we discover that a large proportion of the stock purchases fuelling it has been made by companies buying back their own shares, (http://usatoday30.usatoday.com/money/perfi/stocks/story/2012-03-20/stock-buybacks/53674154/1) often financed by increased debt rather than retained earnings. In other words, company executives and directors are using the opportunity provided by the abundant cheap finance conjured out of thin air by QE both to manipulate their share price higher – facilitated by the prospective reduction in the number of shares outstanding – and to enrich themselves by selling their own shares in the company at a higher price, as well as through increases in their remuneration where (as is often the case) this is linked to rises in the share price. At the same time the whole process reflects dwindling rather than growing confidence among corporate insiders in the prospects of their businesses and an irresponsible tendency to cash in while they can, even if that means further weakening balance sheets (now loaded with more debt which will be even more of a handicap once interest rates rise again).
These corrupt, market-distorting practices in the stock market may be seen as just another manifestation of a broader climate of manipulation now pervading all asset markets. The best publicised case of such market rigging has been the LIBOR interest rate fixing scandal exposed in 2012. On top of this now come allegations – which have thus far received little media coverage – that the vast foreign exchange market (with daily turnover of more than $4.5 trillion), whose epicentre is once again London, is also subject to widespread distortion of exchange rate benchmarks by market traders. Even more hidden from view is the abundant evidence that the US authorities are colluding with private sector financial institutions to suppress gold and silver prices (http://www.gata.org/node/12708) (in the interests of maintaining the value of the US dollar, otherwise severely threatened by the Federal Reserve’s ever more profligate monetary policy) – a process which is illegal under anti-trust law.
All this reinforces the growing sense that virtually all international financial markets are by now effectively rigged – and that the often criminal practices involved are tacitly sanctioned, indeed orchestrated, by the governments of the industrialized world under US leadership. Indeed, while evidence of this has been building for many years – as witness the establishment of the shadowy US presidential Working Group on Financial Markets following the stock market plunge of 1987 and a number of well documented instances of official share buying in Japan and other Far Eastern markets since then, it may be said that the widespread adoption of QE since the onset of the GFC has served to underpin and sanctify the whole principle of generalised market manipulation.
It should go without saying that allowing such an essentially fraudulent market climate to develop is extremely hazardous for those who would preserve the illusion that the world economy is governed by more or less free markets and a “level playing field” for all. For once market players perceive that markets have become institutionally perverted and corrupt arenas where a privileged few with inside information can make vast profits at the expense of the mass of ordinary investors the latter are bound to start leaving the casino in droves – if not burning it down. At the same time it will become harder and harder to convince the public at large that they should make huge sacrifices to keep the system afloat.
Against this background the continuing resort to QE – an unprecedented experiment that turns the basic principles of market economics on their head – represents an enormous gamble. It has been justified largely on the basis that it can stimulate revived growth by pumping more money into the economy. However, its failure to do so thus far – notwithstanding attempts to pretend that the US economy at least is now recovering – has led in recent months to growing worries in the markets that it will soon prove unsustainable. For without the prospect of a boost to growth leading to a reduction, let alone a reversal, of budget deficits holders of US Treasury Bonds and JGBs are losing confidence that they will hold their market value. This concern is already being reflected in a slight rise in market interest rates. Yet for reasons noted above any significant rise in interest rates – of 1 percentage point or more – would likely precipitate mass global insolvency, which would be compounded by a generalised collapse in asset values. Even more chilling is the prospect that, even if the longed for revival of growth were to occur, it would inevitably lead to a sharp rise in interest rates as both demand for capital and inflationary pressures pick up. The only way this might be averted would be by engaging in further monetary expansion (via QE) so as to continue bearing down on interest rates, although this would bring the obvious danger, indeed certainty, of hyperinflationary collapse. Either way, therefore, there is now evidently no way of avoiding the catastrophic market meltdown that policy makers have been struggling to avert since 2007.
This harsh reality is finally starting to be reflected in the mainstream media, as it continues to pay lip-service to neoliberal orthodoxy while at the same time being forced to recognise its inevitable failure. Thus a leading commentator in the right-wing Daily Telegraph (http://www.telegraph.co.uk/news/politics/labour/10103347/If-the-Labour-Party-wont-spend-whats-the-point-of-it.html) on the one hand chides both the Tories and Labour for their failure to make serious cuts in the welfare budget, but none the less concludes that the British national debt burden is after all too large be paid down and can only be eliminated through inflation or default. This thought is echoed by a former senior economic policy official in the George W. Bush administration, Dr Pippa Malmgren, who in a recent interview states that “at the end of the day, the magnitude of the debt that is held by the United States, and indeed by all of the industrialized economies that have a debt problem, is so great it cannot be paid down. The human suffering involved would be so far beyond our capacity to withstand, so it has to be defaulted on.” (http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Archive.html – 8 June).
Thus the global elite – or criminal syndicate – which attempts to manage the world economy in its own interests now finds itself in the position of a chess player who has run out of moves. Yet such is the irresponsibility of those in charge that, so far from conceding defeat, we can only expect them to try ever more desperate ploys – such as precipitating yet more wars – in trying to escape the inevitable. One thing that seems most unlikely to deter them is the scale of human suffering they might unleash.
20 June 2013
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In the wake of the rate-rigging fines, it is alarming that prosecutions have not been brought in response to what is obviously criminal and utterly contemptible behaviour. And it is also worrying that the entire debate about how best to criminalise this misconduct has fallen on death ears – despite the SFO director sensibly suggesting earlier this year that we should introduce a crime of “failing to prevent a fraud”. Such an offence exists in Australia, and unlike fraud, can be more easily and less expensively proved. I imagine that all of the giants who were fined for rigging would fall foul of the Australian offence of failing to prevent a fraud (as enshrined in part 2.5 of the Criminal Code 2002, s51). If we are to continue to grant corporations the privileges of separate personality, we should demand greater corporate criminal responsibility. Civil law, regulatory fines, and the current criminal regime (chiefly fraud) is not adequate, or adequately enforced, and a corporate offence of failing to prevent a fraud would provide at least some disincentives for mis-conduct.
Your alarm at the lack of prosecutions is fully justified and widely shared. However, could it be that this is due more to the sheer number of those who could stand to be indicted – including those at the very top of the establishment – than the lack of adequate legislation? Recall the famous Guinness trial of the 1980s, when City luminaries were convicted of, essentially, share market manipulation, but some of those found guilty pleaded – with good reason – that they were unjustly singled out as many others were doing the same thing with impunity. About the same time the Reagan administration set up the President’s Working Group on Financial Markets (aka the Plunge Protection Team) whose unspoken purpose is well known to be to intervene in and support markets via official manipulation.
I can’t speak for the SFO, but I would have thought that regulatory capture is less of an obstacle for the over-worked and under-budgeted CPS than the general problems of cost and risk. As you rightly point out, if multiple prosecutions are brought against a large number of individuals across multiple teams, divisions, and organisations, the proceedings will be extremely costly. The scale of such cost is made more problematic by the difficulty in securing a conviction. Because fraud involves some degree of subjective intent, it is generally harder to prove than lesser mis-conduct offences such as “failing to take adequate steps to prevent a fraud”. Such an offence would also be aimed at the organisation, giving rise to corporate criminal responsibility rather than (or as well as) individual criminal responsibility. This would be a good additional tool for the SFO and CPS and provide them with more options for prosecutions. It is just one idea, but a shame it has fallen on deaf ears (despite the director of the SFO suggesting it).
You may be right. In any event it comes down to political will. If, as I have suggested, market rigging and other fraudulent acts are now officially tolerated – or even encouraged / orchestrated – by the authorities in the interests of maintaining short-run market stability then they are unlikely to take meaningful steps to facilitate conviction of the perpetrators.