Imagine an amoral world, where parents encourage children to steal. On the way to school each morning, the richer kids would pilfer sandwiches or sweets from their poorer classmates. At playtime, the loot would be sold, the proceeds pocketed by the thieves.
Sounds crazy, doesn’t it? Well, it is no crazier than the financial system that Michel Barnier, the EU’s single market commissioner, is in charge of regulating. This Wednesday (September 15) the Frenchman will propose a new law on short-selling, that abstruse practice where a blackberry-hooked whizz-kid borrows shares and sells them based on the prediction that their value will drop, then buys them back once that fall has materialised, making a tidy profit.
The harmful effects of short-selling have long been apparent. Many Asian governments blamed the crisis that beset them in the 1990s on speculators who used the tactic to drive down the rates of local currencies far below their real economic values. A decade later, it was singled out as the major cause of the rapid fall in the prices of shares in Lehman Brothers and other massive banks. And more recently, it has been a contributory factor to Greece’s woes and the wider tremors in the euro-zone. Originally working in cahoots with the Athens government (before last year’s election), Goldman Sachs helped present a misleading picture of public accounts to make Greece attractive to lenders, then bet on the risk of the country defaulting. As Wall Street rogues reaped their winnings, Greece was forced to borrow at higher rates.
Earlier this year, Germany introduced a temporary ban on that even more extreme – and absurd – activity called naked short-selling, where a speculator gambles with shares he or she neither owns nor has borrowed. Barnier intimated that he was upset by the unilateral ban, yet expressed understanding for Berlin’s stance. His new proposal will offer national regulators greater leeway in restricting the practice but there is no prospect that it will be forbidden outright. And so a golden opportunity to heed the lessons of the financial crisis is being wasted.
Open Europe - the right-wing think tank that is a principal source on EU affairs for several British newspapers – regularly issues warnings about Barnier wanting to ruin the City of London. These warnings have now proven fanciful; the truth is that Barnier lacks sufficient guts to introduce stringent rules for the casino of European capitalism.
His cowardice is easily explained. While he may appear to be the antithesis of Charlie McCreevy, his predecessor as single market chief, both are essentially cut from the same ideological cloth. Barnier has not tested positive to the same allergy to regulation as McCreevy, yet is similarly willing to serve the interests of an unaccountable elite.
Gillian Tett, normally one of the most incisive commentators with The Financial Times, was wrong last month to say that the main lobby group for short-sellers, the International Swaps and Derivatives Association (ISDA), had become “distinctly toxic” in Brussels’ political circles. The truth is that it and other bands of speculators dominated the working group assembled by the European Commission to lay the groundwork for Barnier’s new proposals.
Evidently, the speculators held greater sway, too, during a sham “public consultation” that Barnier called on short-selling than the few more radical contributors to that exercise. John Chapman, a British diplomat-turned-journalist, has neatly summarised the flaws in Barnier’s thinking. By refusing to contemplate a ban on short-selling, Chapman’s submission to the exercise noted, the Commission is failing to land “a significant blow on the hedge fund industry, whose activities are the single most pernicious development of the past 30 years”.
Chapman traces the flourishing of hedge funds back to an initiative taken by Ronald Reagan in 1982. By modifying a US law then almost five decades old, Reagan ensured that funds for the use of millionaires did not have to be regulated. The greatest advantage of hedge funds may be their ability to short sell, says Chapman, who argues that the privileges granted to them by American and subsequently by Europe are largely unparalleled. “Millionaires are not allowed to be driven in super-charged limousines along public highways without limits or any constraints on knocking other cars out of the way,” he says.
In a related dossier, Barnier will also this week recommend new rules for the derivatives market. Estimated to be worth €427 trillion globally, the derivatives market is one that thrives on human misery. Derivatives were the main instruments of speculation on basic foodstuffs that caused prices of wheat and maize to jump by up to 90% in developing countries between 2007 and 2008, forcing the poor to eat less.
In January this year, Barnier described speculation on essential food in a world where one billion people suffer from hunger as “a scandal”. Yet his proposals on derivatives will not go far enough. The idea of insisting that as many derivatives as possible are traded through a regulated exchange has, for example, been ruled out. This omission is despite widespread recognition of how over-the-counter derivatives – those traded off-exchange – played “a key role in transforming a financial downturn into a global economic calamity,” according to Nobel laureate Joseph Stiglitz.
Loopholes of this nature are readily exploited by the market fundamentalists determined to maintain a free-for-all approach to global finance. For millions of others, they can mean the difference between sustenance and starvation.
•First published by New Europe, 12-18 September 2010 (www.neurope.eu)