As is well known to generations of economists, the application of double standards and officially approved market distortions in what is supposed to be a “free market” economic system has attained widespread acceptance over many decades. But, as those whose memories extend to the 1970s may recall, once upon a time such interventions could be seen as rather exceptional – and needing to be officially justified as temporary measures required to sustain or restore growth or employment in countries or regions adversely affected by short-term market weakness. Even in such cases, however, free market ideological purists warned of the “moral hazard” involved in allowing state subsidies or guarantees (underwriting) of projects or loans which might give rise to conflicts of interest and are in any case intrinsically distorting and thus potentially damaging to the health of markets.
By now such interventions have become so commonplace that this stance can be said to have been institutionalised – to the point where even the most blatant manipulations of the market are allowed to occur without legal consequences or any apparent expressions of public concern. The shift in attitudes can be illustrated by events surrounding the Guinness trial of 1990 and the more lenient treatment of more recent comparable cases. In the former case three leading City figures and the former CEO of Guinness himself were convicted of “making a false market” in the company’s shares and sentenced to prison accordingly – although several years later they were able to establish that their convictions were flawed. By contrast recent comparable instances of market manipulation have either been officially ignored or, where this had become impossible, treated with maximum indulgence. Most notably the Libor scandal, which was uncovered in 2012 and involved the systematic distortion of market interest rates by major banks (of which Barclays was identified as the lead perpetrator – in which role it was even seemingly encouraged by the Bank of England), has led to no criminal convictions other than of a few relatively low-level traders, with no penalty at all for the complicit top executives, although the CEO of Barclays was forced to resign. Fines levied on the bank by the UK authorities – totalling £285 mn – were of course charged to shareholders. In such a climate it is hard to imagine that today the Guinness Four would even have been questioned, let alone prosecuted.
More generally, it is evidently now understood by all insiders that the authorities in the industrialised West have assumed responsibility for rigging markets – to “do whatever it takes” to insure against any global financial meltdown, although for obvious reasons this strategy must not be publicly spelt out and the related actions must remain covert as far as possible. Despite the secrecy it is possible to date this tendency from the 1987 stock market crash, when the US government established the “President’s Working Group on Financial Markets” , whose activities are not on public record but which is known to be charged with coordinating government actions to prevent too severe falls in the stock or bond markets. It is easy to see that the creation of this informal committee (known colloquially as the Plunge Protection Team or PPT) amounts to the official sanctification of moral hazard, not to say of criminal conspiracy to commit fraud where this is in the interests of the powerful.
The success of the US authorities in keeping the existence of the PPT under wraps may perhaps be judged by the fact that the present writer was unaware of its existence some 10 years after its creation. Hence when he wrote his book The Trouble with Capitalism: he felt able to write “The crudest approach to using state resources in support of the market value of assets is that of officially inspired buying of securities in the market. This technique is known to have been used from time to time by the Japanese government, through the agency of major banks, to prop up values on the Tokyo Stock Exchange. However, it is not an expedient likely to find much favour with most governments or financial markets – unless at least it could be applied covertly – since it would obviously tend to foster a perception that the market was rigged and that prices of securities were essentially artificial.” In the light of what we now know this obviously shows the author to have been, not for the first time, somewhat behind the curve in recognising the capacity of the ruling élite for committing ethical atrocities. By now, however, in 2017 such naivete is scarcely possible as highly successful movies such as The Big Short (based on a true story) have exposed how deception and fraud have almost attained the level of public virtues on Wall Street.
Although such signs of moral degeneracy within the Western financial hierarchy have been discernible for many years, history will probably record that the watershed moment in this systemic decline was the failure of the giant Lehman Brothers bank in September 2008 and the decision of the US administration – led by Treasury Secretary Paulson – to make available hundreds of billions of dollars to other major banks to shore up their balance sheets against the reality of impending insolvency matching that of Lehman. The same policy response was adopted by the UK and other major financial powers, involving the loan of vast sums of public money to otherwise bankrupt institutions. Given that most of the sponsoring governments were themselves already heavily indebted, such emergency liquidity could only be procured by de facto large increases in public borrowing. But the natural response of the market to such massive increases in debt issuance by already bankrupt financial institutions and governments would have been to demand higher interest rates. Since such higher interest costs would only have rendered them even more insolvent it was immediately apparent that there was no way of avoiding mass bankruptcy via conventional market mechanisms.
In these circumstances the method adopted for thus rescuing the entire financial system was effectively without precedent. Known as quantitative easing (QE) it entailed the creation of new money – “out of thin air” – by the official monetary authorities (central banks) which they then used to buy up financial securities (mainly bonds) from other banks at a substantial premium to the market price – or what that price would have been without official intervention in the market. The high prices paid, which took no account of the inherent market worth of the securities or the solvency of the issuing institution or corporation, were designed to drive down market interest rates generally, with a view to reducing the pressure on the balance sheets of hard-pressed borrowers – or “zombie” companies, most of which would have otherwise been forced out of business.
Although it has never been officially spelt out, it is clear that the theoretical aim of QE was to provide relief to debtor organisations until they could generate sufficient revenues from their core activities to run down their debts (or “deleverage”) to sustainable levels while avoiding bankruptcy, a process which was supposed to be aided by keeping interest rates low enough to stimulate demand and new investment. Yet in the 9 years since the strategy of bank bailouts, QE and record low interest rates was initiated globally there has been no sign of meaningful recovery from the depressed levels of economic activity that marked the onset of the crisis in 2008. This harsh reality is confirmed by the fact that there has not only been no rundown of the huge global debt mountain; it has actually risen by over 40 per cent, or $60 trillion, since 2008, indicating that insufficient growth in value added has occurred to permit a reduction in total debt. Moreover, no central bank has given any indication of how they plan to exit their positions in the securities they have purchased from the private sector at such vast expense – no doubt for the very good reason that they know the counterparties (debtors) will never be able to repay them (i.e. repurchase the bonds bought from them by the central bank). The cluelessness and dishonesty of the authorities is exemplified by the confident announcement in mid-2015 by Mark Carney – highly paid Governor of the Bank of England – that the Bank would probably be raising interest rates from the record low of 0.5 per cent (held since 2009) by early 2016, only to lower them still further (to 0.25 per cent) by mid-2016 (following the surprise Brexit vote), where they have since remained with little indication that they could be raised any time soon.
An untenable position
It is thus apparent that the common strategy for global economic recovery adopted by the leading powers is a) based on a gigantic fraud and b) inherently doomed to fail. History may well conclude that the success of the establishment propaganda machine in largely concealing this reality from the public as a whole for so long amounts to the greatest confidence trick of all time.
However, the grim reality of systemic failure, which has gradually become clearer to all, including the ruling élite themselves, over the past 9 years, means that we have surely now passed the point where the position has become untenable. On the other hand, given the evident impossibility of any collective decision on the part of the different authorities to change course – and their awareness that catastrophe will ensue in any case – it remains difficult to determine how or when a “tipping point” will be reached, as it is now clear that they will resort to any manipulative trick at their disposal to “keep the show on the road” as long as they can.
While many market players are aware of such tendencies there is an understandable desire among them not to publicise what is going on. Clearly this is because the ruling élite are anxious a) not to draw attention to the fact that market competition has become a complete sham, rigged in favour of a privileged few, and b) to delay the inevitable deluge for as long as possible.
Rotting from the head
The epidemic of official irresponsibility and malfeasance described above has, it seems, all too readily given rise to the gradual spread of a culture of permissiveness in most areas of economic activity. It must be stressed that, as noted in another recent posting – Dethroning the Profit Motive – this tendency is of long standing in the (relatively brief) history of market capitalism, particularly since the British Companies Acts of the 1850s gave companies the right to claim limited liability and thereby ensured the primacy of maximising shareholder value in corporate strategy. Hence the inevitable tendency for enterprises of all kinds (financial and non-financial) to prioritise the pursuit of higher profits above all other goals, particularly among publicly quoted companies competing for investor funds.
But, as noted in another recent posting – The Phasing Out of Capitalism – the demand for capital investment is steadily dwindling over time in response to technological change (on top of the usual cyclical downturns associated with the capitalist system), so that outlets for such profit-seeking funds are increasingly hard to find. Hence there are powerful pressures in all sectors of the economy to find new outlets for excess investible funds and at the same time minimise the chance of losing money on both new and existing investments.
In a situation of generalised bankruptcy, where asset values have been inflated to unrealistic levels, it becomes ever more impossible to make genuinely profitable investments or sales without engaging in some form of market distortion or dishonesty. This explains why there is unrelenting pressure on a) governments both to approve large-scale “white elephant” projects such as the London Olympic Park, the Hinkley Point C nuclear reactor or the HS2 railway (on which there is no chance whatever of a genuine positive return on investment) and to underwrite them with public subsidies, and b) on economic agents to lie, cheat and steal on an ever greater scale.
Unsurprisingly the collapse in ethical standards resulting from these tendencies has not been confined to the banks and traditional big business (Libor, Rolls Royce, Volkswagen). It is easy to see why the failure of those at the top to lead by example – while enjoying de facto impunity from legal sanction – should lead those lower down the scale to believe they can help themselves to illicit gains in whatever field of activity they may be engaged, especially where the financial temptations may be hard to resist. A particularly pernicious example of this is the business of professional sport, which has attracted large amounts of investment – notably in payment for TV rights – in recent decades. The result has been not only growing ruthlessness among competitors in pursuit of the millions on offer for the winners but distortion of results related to gambling activities where large sums are wagered. Thus major sports such as cycling, football, athletics and cricket have been significantly affected by such practices as doping (now known to have occurred on an epic scale at the London Olympics in 2012) and match fixing – to the point where there is a risk that public confidence in their integrity may be undermined.
Thus does the moral hazard stemming from elevation of the profit motive to the level of a supreme public good threaten to poison every part of our commercial life. It should therefore be seen as a matter of the highest priority to reverse this tendency. Unfortunately, however, there is little sign that those in authority or with the power to enforce the law are willing to challenge the prevailing culture of impunity. This may be partly because any serious action to punish the guilty would ensnare most members of the global élite – as suggested by the revelations in the Panama Papers. But more likely the powers that be are only too aware that a serious attempt to restore morality to public life by eliminating such practices would not only entail a wipe-out of virtually all their own wealth but would signal the end of the capitalist profits system in any recognisable form – given that in the aftermath of the crash it would have to be recognised that a) in the modern-day economy there is far less need for capital for fixed investment and b) speculative investment is just as useless and dangerous from a public-interest perspective as it was when it was last subjected to severe restriction in the 1930s after the Great Crash.
The evident decay of the moral climate in the economic and financial sphere has manifestly been extended to the wider political field. Whereas once the West were the champions of human rights and the rule of law, we have now allowed our rulers to drag us into a “war on terror” in which we have become a party to crimes such as Guantanamo and the Iraq invasion, while proclaiming that our supposed enemies are showing their hatred for our values. The reality, of course, is that the West has effectively trashed its own values – supposedly including democracy, respect for human rights and the rule of law, as enshrined in the Universal Declaration of Human Rights. The most conspicuous examples of this betrayal of these values lies in the conduct of Western governments and corporations towards
a) China. At the time of the Tienanmen Square massacre of Chinese dissidents seeking greater democratic freedom in 1989 Western governments led by the US imposed limited economic and political sanctions on China. Subsequently, however, any attempt to censure it or impose restrictions on Western dealing with China in face of its continued repression and abuse of human rights has been progressively abandoned, most notably in respect of the dissident campaigner for democracy Liu Xiao Bo.
b) Russia. Although sanctions have been imposed on it following its annexation of Crimea and other violations of Ukrainian sovereignty, the Putin regime has otherwise been allowed to continue a murderous campaign of repression at home – and abroad with its support for the monstrous Assad regime that has brought terminal ruin to Syria – with scant objection from the US (notably under the Trump administration) or EU members which look on Russia as an important trading partner. The ludicrously contradictory position of the Western nations is demonstrated by the fact that Russia was ejected from the G8 group of countries (now G7) after its occupation of Crimea in 2014 but remains a member of the larger G20 (established in 1999), as does China.
c) Saudi Arabia (also a G20 member). This country has long been a by-word for extreme denial of human rights and as an exponent of medieval tyranny. Yet it has remained largely protected from any pressure to reform by its position as the world’s major exporter of petroleum and the dominant force within OPEC (now under threat from domestic political pressure – notably since 9/11– and market forces gradually heralding the end of the petroleum era). It is also a major market for the Western armaments industry.
What these examples illustrate is the age-old problem of financial interests conflicting with moral values – a phenomenon obviously exacerbated by “globalisation” under a capitalist market economy where, as demonstrated in previous postings of this blog, an extreme incentive is provided to the maximisation of private profit. Arguably an important lesson to be drawn is that adherence to a code of moral values – such as the Universal Declaration of Human Rights – in any given society is made easier if trade with societies adhering to different values is minimised. Therefore in the absence of such a genuinely universal code we should consider overturning the conventional wisdom that maximising international trade is a good thing in favour of maximising self-sufficiency within a given jurisdiction (a perception that may also fit with the changing pattern of production under emerging advanced technology – a possibility that we shall explore in a forthcoming post).
So far from trying to move international relations towards a common vision of equity or the rule of law we now find that the world order has sunk to the level of the law of the jungle. What is truly astonishing is the failure of the global establishment to recognise the blatant application of double standards as between the more and less powerful players in the world. Thus for example the EU has lately been making great play of its insistence that Poland should apply what the Union declares to be the rule of law in relation to abuse by the Polish government of its national constitution, while at the same time ignoring the shameless refusal of the German authorities to bring to justice the management of Volkswagen and other car manufacturers for their criminal flouting of safety standards. Equally striking is the failure of the developed world as a whole to recognise the huge resentment among the more marginalised nations at the West’s monumental hypocrisy in applying the “rule of law” – including through the International Criminal Court – in ways that manifestly discriminate against the black and poor while white Western criminals such as Bush and Blair get off scot-free over their war crimes – or that such hypocrisy inevitably breeds violence and terrorism.
It can thus be said that the world has descended into a state of generalised anomie – or total absence of ethical standards in public life – after some 40 years in which the dominant ideology has been typified by such phrases as “greed is good” and “there is no such thing as society”. Such moral degeneracy is far from universal, however, as demonstrated by the remarkable display of community solidarity and humanity shown by the people of North Kensington following the horrendous Grenfell Tower fire in June 2017 – in stark contrast to the response of the right-wing political leadership.
As the world order now collapses into total chaos, there is huge irony in Western leaders’ desperate insistence that the escalating terrorist atrocities perpetrated in response to successive disasters, social and economic, are attributable to “extremism”, particularly of the Islamist variety. For this propaganda is seemingly uttered without any thought that each new intervention by Western governments against poor or marginalised peoples – such as for example recent initiatives by Britain and France against insurgents in West Africa – serve as a provocation to potential terrorists. Yet it is hard to believe that it has not occurred to some Western leaders that, instead of devising futile programmes of “deradicalisation” and ever harsher laws and prison sentences aimed at those plotting or carrying out terrorist acts, it would be more constructive to end Western aggression against “the wretched of the earth” and enter a dialogue with them on how to alleviate their plight and give them hope for the future in place of the endless misery which now seems their only prospect. What this might entail – in terms of a new dispensation for the “developing” countries that still comprise the vast majority of the world’s population – will require another posting to consider in detail. Yet one thing is certain: it must mean an end to their subjection to the anarchic forces of neo-liberalism and their unrestrained exploitation by international capital. This will in turn inevitably have fatal implications for the entire ideology of profit-maximising capitalism.