STWR - Share The World's Resources

The flaws of laissez-faire economics are again evident in the latest set of financial debacles - requiring fundamental reforms in global finance, writes Hazel Henderson.

14th July 08 - Hazel Henderson, Ethical Markets

Ever since the 1980s when Britain’s Margaret Thatcher and US President Ronald Reagan spurred de-regulation of global finance and privatization, market fundamentalism became the main game.

At last, the world is seeing the difference between money and real wealth, between “demand” in markets and the real needs of people without money.  We cringe at the tragic pictures of poor people eyeing abundant, tempting supplies of food in the local markets around the world but who are forced to go away hungry or make their children patties made of mud, spices and whatever scraps of vegetation they can find.

The games of traders, speculators, hedge funds, private equity and even pension funds and charitable foundation and university portfolio managers, driving up prices of oil and food, invoke increasing outrage and demands for reform.  The recent FAO Summit in Rome called for $10 billion more to pay these higher food prices. Yet, without financial reforms, this money will fatten players in the global casino.

The flaws of laissez-faire economics are again evident in the latest set of financial debacles, with $100 billion written down from faulty risk models and collapsed hedge funds to speculation in oil and commodities.  Despite the efforts of socially-responsible investors and asset managers to impose transparency, better corporate governance and true-cost pricing, little progress has been made to internalize social and environmental costs into risk-analyses, company balance sheets and national GDP accounting.  These huge, mounting costs: from pollution to global climate change, ignored for decades by financiers, accountants and most official statistics, now feed the suspicions of millions that global finance is indeed a  casino with rules rigged by the insiders.

In the ceaseless, now computerized, trading between all market players (recently measured in London’s exchanges by the elevated testosterone levels of the mostly-male traders), the games of money, power and ego are changing again – for the worse.

• Market players unwilling to submit to enhanced scrutiny of shareholders, analysts and the rigors of public stock ownership retreat into private equity deals – buy companies, saddle them with debt and often strip their assets and re-sell them.

• Companies try to boost their stock prices with share buy-backs – limiting the supply, e.g., oil companies “banking” huge oil price increases rather than investing in new supplies or facilities.

• Hedge funds (630 speculating in energy) total $2.9 trillion with their top 10 managers earning $14 billion in 2007.  They still proliferate even after their many risk-analyses failures, as greedier investors seek ever-higher returns.  The game, as with private equity, is also to buy companies with borrowed money.  Speculating in commodities ($8 trillion of futures contracts in oil in 2007) drives up the prices of other necessities.

• The game of “enhancing shareholder value” (versus other stakeholders’ interests), played by private equity and hedge fund players, has led many asset managers of employee pension funds, foundations and university endowments to join these new greed sweepstakes.  Many employees are shocked to find their pension fund managers investing their retirement funds in all these efforts to try to beat each others’ market performance – contributing to the problems of plant closures, rising gas and food prices and carbon emissions.

• The newest game is the rise of sovereign wealth funds, swelled with oil revenues and trade surpluses.  Norway has the oldest and most responsibly managed of these funds.  Others are in Singapore, China, Kuwait and the United Arab Emirates.  Here the game is not just money but power and influence as well as buying real assets instead of holding slumping US dollars.  The USA, the world’s largest debtor, must court these funds, sending Treasure Secretary Henry Paulson, hat in hand, while President Bush pleads with Saudi Arabia’s King Abdullah for more oil.

• Banks, hurt by reckless investments in the alphabet soup of esoteric derivatives: CDOs, SIVs, CDSs (at $62 trillion), also look to sovereign wealth funds to bail them out, joining hedge funds and private equity supplicants.  Taxpayers baulk at the bail out of Wall Street investment bank Bear Stearns, while central banks are exhausting their reserves, tools and remedies.  US Fed interest rate cuts have weakened the dollar, feeding inflation and speculative bubbles in oil and commodities.

What are the likely outcomes of all these new games in the global casino – still unregulated since the Asian meltdowns of the late 1990s?  Firstly, we are seeing the effects of the massive credit creation by central banks which fed the dot.com bubble, the housing bubble, the oil, food and commodities bubbles – a worldwide expansion of fiat currencies.  The globalization of unregulated financial markets led to the rapid “contagion” – accelerated by computerized and algorithm-based automated trading.  The “rocket-scientist” academic mathematicians, lured by the hedge funds, turned out faulty models which failed to see risks from these new conditions and how their own trading strategies were creating new systemic risks to their own financial markets.

Financial sectors of the US, UK and other market economies metastasized – just as they had done prior to the Wall Street Crash of 1929.  In Britain, finance represents 25% of GDP and over 20% in the USA.  Too many people are employed in trading, borrowing and financial engineering – rather than in producing real goods and services.

Money was an important invention in human societies, but it only retains its value if it is a good tracking and scoring system of the products and exchanges of the real economy.  Pyramiding of paper and now electronic “assets” inevitably leads to write-downs, dislocating both the speculating players and the rest of the economy.  We see now how the changing theories of central bankers distort real economies, from Alan Greenspan’s belief that the dot.coms had created a “New Economy” to his urging US borrowers to try adjustable rate mortgages and hailing all the new derivatives as “financial innovations” that spread risk to those able to bear it.

Reforms of these excesses in the global financial casino include:

• taxing the 90% of speculation in today’s $2 trillion of daily currency trading;
• Curbing the $260 billion in index funds tied to oil and other commodities;
• reducing the 16 to 1 leverage allowed in oil and commodity trading by raising margin requirements;
• repealing the “ENRON loophole” passed in 2001 that de-regulated energy trading;
• repealing of US and EU subsidies and mandates for ethanol;
• greater transparency and oversight of hedge funds, private equity and sovereign wealth funds.

Many more fundamental reforms are necessary: requiring central banks to use their more targeted tools beyond manipulating interest rates, e.g., increasing the capital reserves banks must hold and raising margin requirements on stock purchases.  Reforming tax policies is urgent: taxing carbon emissions, pollution, waste, planned obsolescence and resource-depletion while reducing income and payroll taxes.  Shifting the still-massive subsidies showered on the oil, coal, gas and nuclear industries to production tax credits can accelerate the growth of renewable energy.  Solar, wind, geothermal, tidal, fuel cells, hydrogen, mass transit, smart DC electric grids as well as capturing the 40% of energy currently wasted in the US fossil fuel economy can shift human societies to the Solar Age.

And as we change the financial games and fix accounting errors in the global casino, we can also change the obsolete scorecards.  There is widespread public recognition in global surveys of the errors of money-measured GDP growth, and correcting its omissions of social and environmental costs has begun (www.beyond-gdp.eu).  Including all these factors and indicators of health, education, poverty gaps, environment and quality of life can help shrink the global casino and restore finance to its proper function.

Hazel Henderson is author of  Ethical Markets: Growing The Green Economy, president of the independent Ethical Markets Media, LLC, and co-creator of the Calvert-Henderson Quality of Life Indicators (updated regularly at www.calvert-henderson.com).

Link to original source

Subscribe to this comment's feed

Write comment