CHANGING GAMES IN THE GLOBAL CASINO

By Hazel Henderson Reprint | | Print |

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SAINT AUGUSTINE, FLORIDA, Jun 16 2008 (IPS) - 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, writes Hazel Henderson, 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. In this article Henderson writes that there is growing outrage and demand for reform of the games of traders, speculators, hedge funds, private equity, and even pension funds and charitable foundation and university portfolio managers, which drive up prices of oil and food, and leave the poor unable to afford to eat. The author calls for numerous reforms of the global financial casino, including taxing the 90 percent of speculation in today\’s USD2 trillion of daily currency trading; curbing the USD260 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.

The flaws of laissez-faire economics are again evident in the latest set of financial debacles, with USD100 billion written down from faulty risk models and collapsed hedge funds to speculation in oil and commodities. Little progress has been made to internalise 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 computerised, trading between all market players 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 rigours of public stock ownership, retreat into private equity deals ­buying companies, saddling them with debt, and often stripping their assets and re-sell them.

-Companies try to boost their stock prices with share buy-backs -limiting the supply- as oil companies “banking” huge oil price increases rather than invest in new supplies or facilities.

-Hedge funds (630 speculating in energy) total USD2.9 trillion with their top 10 managers earning USD14 billion in 2007. They still proliferate even after their many risk-analysis 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.

-The newest game is the rise of sovereign wealth funds, swelled with oil revenues and trade surpluses. Here the game is not just money but power and influence, as well as buying real assets instead of holding slumping US dollars. The US, 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 esoteric derivatives also look to sovereign wealth funds to bail them out, joining hedge funds and private equity supplicants. Taxpayers balk at the bailout of Wall Street investment bank Bear Stearns, while central banks are exhausting their reserves, tools, and remedies. Interest rate cuts by the US Federal Reserve 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 ­ which is 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 globalisation of unregulated financial markets led to the rapid “contagion”, accelerated by computerised and algorithm-based automated trading. The “rocket-scientist” academic mathematicians, lured by the hedge funds, turned out faulty models which failed to see the risks inherent in 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 metastasised -just as they had done prior to the Wall Street crash of 1929. In Britain, finance represents 25 percent of GDP and over 20 percent in the USA.

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. The 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.

Necessary reforms of these excesses in the global financial casino include:

-taxing the 90 percent of speculation in today’s USD2 trillion of daily currency trading;

-curbing the USD260 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. Reform of tax policy is urgent: carbon emissions, pollution, waste, planned obsolescence, and resource-depletion should be taxed while income and payroll taxes should be lowered. 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.

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 the money-measured GDP, and correcting its omission 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. (END/COPYRIGHT IPS)