Category Archives: Free Market Capitalism

The economic theory from Adam Smith, through Ricardo, Say, Mises, Hayek and Friedman

The Real Rogue Traders

Kweku Adoboli lost some $2.3bn for his employer, Swiss bank UBS. A couple of years ago Jérôme Kerviel lost over $6.5bn for Société Générale, while a dozen years back, Nick Leeson cost Barings $1.3bn and their independent existence. In all, around $10bn of losses were accrued by these three nice young men who were no doubt the pride of their parents. $10bn may seem a lot, but it’s less than a billion a year – a small price to pay for the continued freedom from regulation which enables investment banks to continue their rogue trading, which is hugely profitable for them, even if it costs the rest of us an arm and a leg.

One of the recent articles on Adoboli’s exploits, suggested that banks had failed to learn lessons and had not controlled individual traders effectively. Another suggested that securities had grown in complexity making it difficult to assess the trading risks involved. The internal risk controls within UBS were said to be obviously inadequate. The same was said about Baring’s in its day. But UBS, Société Générale and Barings, seem pretty typical members of the investment banking community. UBS may have differed slightly in requiring its female employees to wear flesh coloured underwear, but otherwise they seem fairly normal. The lack of risk control in investment banking must be endemic.
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Tea Party Taxation

US presidential candidate, Michele Bachmann, stands up for the ordinary people of America, the factory workers and housewives, who she says are telling her to stand strong against raising taxes and to fight to reduce government spending, as the way to America’s economic salvation. But even in the self-reliant, can-do US culture, taxes are unavoidable. They are needed to pay for national defence and security as well as those provisions of education, healthcare and social security which support the ordinary people. But, it is argued, raising taxes undermines the US economy and would even be immoral, especially taxes which resulted in the redistribution of income and wealth from one category to another.

The Tea Party approach is by no means unique to the US. Vince Cable may refer to them as ‘right wing nutters’, but the free trade, open markets, minimised government, spending and taxes, are part of the UK coalition government’s mantra of which he is part, just as they are of the GOP in the US. Successive US and UK governments have, since Reagan and Thatcher, broadly accepted these positions. But times have changed and what may have worked as recently as a decade ago, is no longer appropriate, causing harm to both ordinary people and the overall economy, quite undermining Ms Bachmann’s contention. For example, the effects of personal taxation have changed radically.
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The Long Term Impact of the Murdochs’ Disgrace

It seems impossible to ignore the Murdoch saga: the seedy old martinet, his chosen heir apparent and the family sycophants and hangers on, shades of the Duvaliers’ era in Haiti, or a dozen or more banana republic tyrants. The Murdochs are clearly prepared to be as ruthless and dishonest as it takes in pursuit of their own self-interest. Their dishonesty, now being revealed daily, was confirmed early on, for example, by Harold Evans, much respected editor of the Times, when the Murdochs took over. Assurances of continued editorial independence were made as a condition of the acquisition, but within a year ‘every guarantee had been broken’. Evans concluded that the Murdochs would ‘promise anything to gain control’. As they are doing now to gain control over BskyB.

The Murdochs’ utter ruthlessness is also being demonstrated daily by the continuing revelations of criminal activity sanctioned in their organisation, and not least by the abrupt closure of the News Of The World with the destruction of around 200 jobs, in some vain attempt to rescue vestiges of public respect for the family.
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The Untruths Which Rule the World

There is quite a catalogue of actual and potential man-made disasters. They include the risk of Greece defaulting on its debts, followed by Portugal, Ireland and the collapse of the Eurozone, the hollowing out of real economy firms particularly in the UK and to a slightly lesser extent the US, the explosion in inequality of wealth and income symbolised by the obscenity of financial trader’s and bankers’ bonuses, the credit crunch, hedging and short selling, the size and power of financial sectors, the failure to distinguish between investment in real economic activity and purely speculative investment, growth of structural unemployment, the explosion of ‘hatred and contempt’ among ordinary people initially in Greece and Spain, poverty in sub-Saharan Africa, ideologically based policies of the IMF, WTO and the World Bank and the whole unsustainable enterprise destroying earth’s resources and climate, and even threatening human existence.
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How To Spend It

The bonuses earned by the bankers, hedgers and various fund managers arise as a result of making fast, smart decisions about price movements in currencies, commodity prices, food, energy and key resource shortages, mergers and acquisitions and the like. The quick returns from such deals ensure that mini speculative bubbles keep getting inflated, and the smarter fund managers make money when the bubbles burst as well as when they inflate. And the smartest and biggest fund managers are able to create bubbles and control their inflation and bursting, that is except the really big, conglomerate bubbles that gather once in a while. So speculative trading continues to grow and the problem of how to spend the resulting bonuses keeps on growing too. It really is quite a problem.

It’s not as though it’s a one off. And it comes on top of a basic salary which very much more than pays for living expenses at quite a generous level. You can do the Veblen thing and go for some conspicuous consumption – conspicuous waste is really not regarded as attractive today even if one was so inadequate as to find it intrinsically appealing. But conspicuous consumption is still seen as admirable. The Financial Times ‘How to Spend it’ Saturday supplement provides some ideas. For example, £81,000 for the Philip Treacy hat as worn by Princess Beatrice (??) at the royal wedding, except it looks so silly. Or £78,000 for the ex-Kate Middleton St Andrews dress. Or a wrist watch, amount spent depending mainly on the weight of gold and diamonds. But really such spends, even if one felt desperate to bolster one’s identity that way, could only provide relatively minor contributions to solving the problem.
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Why Don’t We Make the Bankers Pay?

In the United States, Goldman Sachs, hugely profitable out of the financial crisis, still rules the roost. According to Senator Carl Levin, chair of the senate permanent sub-committee on investigations, in the report on Wall Street and the Financial Crisis, it’s a “sordid story” of a “financial snake-pit, rife with greed, conflicts of interest and wrongdoing.” Levin said he would be recommending Goldman executives be referred for criminal prosecution. But that’s barely news. Goldman have paid for their criminality before. In the UK this startling story is hidden away in a few short paragraphs on page 26 of today’s Guardian (15th April). It hardly qualifies as news. Because everybody knows.

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Economy Life Cycles

In 1914 UK owned 45% of the world’s foreign direct investment. America’s peaked at 50% in 1967, but is now less than half that, with the UK nowhere. Today China has just 6% but growing fast. America’s manufacturing productivity gains were in decline since 1970s (2.8% pa), well behind Germany (5.4%) and Japan (8.2%). American R&D expenditures in absolute decline. In relative terms the America’s real economy is following UK into absolute decline.

In a forthcoming book – ‘The Road to Co-operation: Escaping the Bottom Line’ – these various economies are identified as on different positions of the economy life cycle: UK and US being post-industrial, Japan and Germany, industrial, and China and India, industrialising. But what does post-industrial mean?

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Capitalism without bankruptcy: too big to fail

Industrialisation is what fired capitalism. Prior to that most capital was held in the form of land and buildings with not a lot of spare cash lying around waiting to be invested. Nor any pressing need for it. But when industrialisation began in the eighteenth century, it required major infrastructural investment in things such as canals, turnpike roads and subsequently railways. These huge projects took years before producing any return and the sums required were way beyond the capacity of wealthy individuals. Dispersed shareholding and large scale credit finance were brought into existence to enable the massive capital investments of industrialisation.

Contributory sums from large numbers of relatively small investors were multiplied by the bankers new found capacity for lending a proportion of deposits lodged with them for safe keeping. Even Marx acknowledged the ‘capitalistic system’ worked, having ‘created more massive and more colossal productive forces than have all preceding generations together.’ That was years before joint stock companies were allowed to provide the luxury of limited liability to their shareholders. When Marx was working on the Communist Manifesto, shareholders responsibility for their companies was total. If the company went bankrupt, they were liable for its debts and would in all probability go bankrupt with it. The possibility of bankruptcy was what gave the ‘capitalistic system’ its edge. As widely asserted, capitalism without bankruptcy is like religion without hell.
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Osborne’s Wasted Opportunity

In the context of UK’s indebtedness, it might seem that any morsels in the new budget to benefit the real economy, for start-ups, small businesses, for technology and innovation, should be thankfully received. But the real opportunity, the one the now toothless Vince Cable made so much noise about, has been totally ignored. For the financial sector, it really is business as usual. Its rape of the real economy can continue for another year at least without fear of interference.
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Is Japan’s Misfortune the Real Tipping Point?

From time to time the real world where people eat, drink, sleep and have their being, is impacted by the very unreal financial world of speculative markets, and invariably to its huge disadvantage. The bursting bubble of 2007-8 was one such example, which some hoped might be a tipping point, leading to a more civilised future. But not just yet. Now, the speculating elements are picking over the humanitarian disaster unfolding in Japan, to seize the chance of a quick profit. And there is still no sign the ‘madmen in authority’ have the stomach for making any fundamental change. The real world will continue its devastation.

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