By Hazel Henderson and - -
ST AUGUSTINE, FLORIDA, Jan 1 2008 (IPS)

The multi-trillion dollar \”losses\” on Wall Street are simply cancelling out their illusory \”gains\”. No amount of federal bailing and money printing can fill the black hole of unrealistic expectations created by faulty economics, writes Hazel Henderson, author of Ethical Markets: Growing the Green Economy (2007), president of Ethical Markets Media LLC, USA, and co-creator of the Calvert Henderson Quality of Life Indicators regularly updated at www.calvert-henderson.com. In this analysis, Henderson writes that Wall Street became a parasite on the real economy of Main Street and has spread its contagion around the world. The lesson is that financial markets must shrink; the non-bank investment firms\’ business model is broken. The task now is to manage the downsizing of Wall Street and the global financial casino and redesign regulatory systems and markets to restore their useful but limited role in facilitating the production of useful, ecologically-benign goods and services in the growing green economies of the Solar Age. The truth is now in plain sight: there was no invisible hand! Markets and money are both shaped by legislation, central bankers, tax policies, subsidies, lobbying special interests and cronyism. Economics has always been politics in disguise. Money was confused with real wealth: educated healthy citizens and the basic productive eco-systems of our planet.

The Chicago Boys and their clones stormed through Latin America in the 1950s, led the triumphant forces of capitalism to victory in the Cold War, and sparked the Reagan and Thatcher era and the Washington Consensus of deregulation, with privatization driving today’s form of economic globalisation. The roots of market fundamentalism, which stem from Adam Smith’s Wealth of Nations (1776) while ignoring his Theory of Moral Sentiments (1759, 1790) and from the Austrian School of Ludwig Von Mises, Friedrich Hayek, and others, became the ideological basis of US libertarianism and the neoconservatives’ revival in the George W. Bush administration.

This lure of “rugged individualism”, making money in markets free of regulation, also drove the narrow calculus of Milton Friedman’s famous single bottom line: the only purpose of private enterprise and corporations is to make as much money as possible for shareholders.

The computer revolution which automated trading on Wall Street and linked financial markets worldwide played a key role in the excesses of short-termism, now measured not only quarterly but in nano-seconds. In September 8, split-second trading and short-selling of United Airlines stock on a false rumour lost the company USD 1 billion in value in under an hour. Now the short-sellers are turning on each other, shorting the financial firms at Wall Street’s core. The “free market” ideology prevented regulation of today’s global casino even as finance ministers fretted about the need for a global financial architecture after each crisis. The Asian meltdown of 1997-8 was followed by the Russian default and the blow-up of the Long Term Capital Management hedge fund in 1998, the Argentine default of 2002, the 2008 bailouts of Bear Stearns, Fannie Mae and Freddie Mac, the demise of Lehman Brothers, and the rescues of Merrill Lynch and AIG, costing the Fed USD 900 billion so far.

Apparently the clean-up in the USA will be left to the next president. Both Obama and McCain expressed outrage at Fannie and Freddie’s reckless risk-taking and influence peddling even though both took contributions and were deeply involved with favouring these two housing giants, which hold over USD 5 trillion of US mortgages. Both candidates blame Wall Street’s recklessness and greed while faulting regulators for being asleep at the switch.

Automated programme trading is now 50 percent of all market activity. “Value-at-risk” and other mathematical models created by all those academic “quants” are still proving inaccurate while all the financial “innovations” from sub-prime mortgages hailed by former Federal Reserve Chairman Alan Greenspan, to the securitisation of debt in collateralised debt obligations (CDOs) and other financial instruments are revealed as little more than fraudulent investment. Shockingly, pension funds, charitable foundations, and university endowments played the same games, competing for higher returns. They piled into hedge funds and oil and commodity speculation, risking their beneficiaries’ retirement incomes in real estate and private equity deals in spite of their special status as universal owners.

We now know that capital markets built on individual and corporate self-aggrandizement, unrealistic profit targets, competition in seeking these “alpha” returns, lack of transparency, dishonesty and greed are bound to fail.

Chicago School economists have been de-frocked in prime time as market players, including AIG with its USD 85 billion in Fed loans, and now General Motors and Ford line up to be bailed out by taxpayers.

Are we seeing the end of the US neocons’ efforts to repeal the New Deal and the demise of the Chicago Boys’ free market capitalism? Where do we go from here? Regulation in the public interest is now acknowledged as urgent by Bush Treasury Secretary Henry Paulson. Paulson now blames Wall Street’s excesses, i.e., shifting of social risks, costs, and environmental destruction onto taxpayers and future generations, even though he was CEO of Goldman Sachs prior to joining the Bush administration.

Wall Street must be about investing, seeking fundamentally valuable, well-run companies offering useful goods and services, even paying dividends. Trust, ignored in Chicago’s School of Economics, must be restored because it is the bedrock of all markets. Financial markets metastasized in the US and Britain, swelling to almost 25 percent of their GDPs with too many people trading exotic paper and too few people actually producing goods and services.

As the public caught on to all this, the Chicago Boys and Bush neocons’ effort to privatize Social Security and turn over future retirees’ benefits to private accounts managed by Wall Streeters was revealed as a bad joke. More revelations each day point to billions more of “toxic waste” (i.e., almost-worthless bonds packaged with dicey mortgages) still not “marked to market” (i.e., properly accounting for the falling house prices and foreclosures). Sixty-two trillion dollars of outstanding credit default swaps (other form of fraudulent insurance on assets owned by third parties) must be written down on the balance sheets of Wall Street titans JP Morgan Chase, AIG, and others. Yet federal bailouts can only hasten the further decline of the US dollar.

As documented in Chain of Blame (2008) by mortgage experts Paul Muolo and Matthew Padilla, the US housing bubble was driven by Wall Street’s gigantic money bubble created by cheap credit and leverage. The multi-trillion dollar “losses” on Wall Street are simply cancelling out their illusory “gains”. No amount of federal bailing and money printing can fill the black hole of unrealistic expectations created by faulty economics. Wall Street became a parasite on the real economy of Main Street and has spread its contagion around the world. The lesson is that financial markets must shrink; the non-bank investment firms’ business model is broken.

The task now is to manage the downsizing of Wall Street and the global financial casino and redesign regulatory systems and markets to restore their useful but limited role in facilitating the production of useful, ecologically-benign goods and services in the growing green economies of the Solar Age. The truth is now in plain sight: there was no invisible hand! Markets and money are both shaped by legislation, central bankers, tax policies, subsidies, lobbying special interests and cronyism. Economics has always been politics in disguise. Money was confused with real wealth: educated healthy citizens and the basic productive eco-systems of our planet. (END/COPYRIGHT IPS)

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