The not so invisible hand of the market

The illusionists are back. Or more precisely the trick performed is that they have never been away. Rather, they have been devising new ways to deceive the public of the economic realities of our time. The repercussions of their illusion was reinforced in a conference in Rome involving twenty unions from various countries in Europe coordinated by FISAC the finance sector workers union in Italy.

Since the global financial crash in 2008, it is these workers who have been the sacrificial lambs in their hundreds of thousands in the finance sector for the mistakes of CEOs and the investment marketeers. In a report by the global union for finance workers, UNI, it’s estimated that during a two year period 2011-2013 over 193,000 banking jobs alone were axed in the 26 countries it covers. It is critical to separate the honest workers in the tainted financial institutions who work long hours under enormous pressure and who acted with complete integrity from those further up the food chain who have been left unscathed financially as the bonus culture returns more aggressively than before. The Office for National Statistics figures shows that in the five years since the crash the finance sector, which includes insurance, paid out £67bn in bonuses.

The illusionists, of course, perform tricks on each other by deliberately marking-up their asset portfolios to artificially inflate the price of the company in order to secure loans, through various accounting tricks, insider-trading, lack of due diligence and exerting influence on the infamous credit rating agencies. Anyone who has read Andrew Sorkin’s Too Big To Fail will be stunned by the complete incompetency, ignorance and wilful blindness of the CEOs of Lehman Brothers, Bear Stearns, AIG and the rest of the motley crew who have thrown the world into a Depression. Despite the reality confronting us the public, media and politicians have utterly failed to identify the disease (as opposed to the symptoms) of capitalism. This should not be a surprise to us because economics in our higher education institutions propagate the apparent sacrosanct principles of the market’s ‘invisible hand’ and the rationality that free competition will lead to the most efficient allocation of resources. These concepts with the aid of mass media have penetrated the public consciousness in untold ways. These principles are now taken to be universal truths or natural laws.

The work of Nobel Prize Winner Daniel Kahneman in Thinking, Fast and Slow has proven that many people do not act rationally and the fundamental principles of free market capitalism are not scientific truths. To the contrary, faced with huge losses people often tend to gamble more further putting themselves in financial jeopardy: cue the financial marketeers. In the aftermath of the Depression, the world has witnessed the subtle and powerful reconstruction of free market capitalism. In ‘recognition’ of the risks facing economies a new edifice built to apparently save capitalism from itself – or so the illusionists would have you believe. The illusion has been to set in train a new series of pillars that will govern our global economy. The pillars are based on transparent accounting; sufficient capital to insulate banks from further shocks and responsible lending.

The new edifice has included the reform of credit agencies and implementation of ‘stress tests’ in Europe whereby banks are required to have a mandatory minimum amount of money set aside for the next crisis in order to not go under. After the crisis due to the triple-A credit ratings of firms who held subprime mortgage there was a public scramble to reform the credit agencies hired to evaluate the toxic securities. One of the measures designed to do this was to encourage the credit rating agencies to provide unsolicited opinions on their competitors by creating a website for issuers to share deal data. Yes – that’s the extent of reform creating a website and encouraging firms to criticise the opinions of other firms in the same field. The lack of success of the reform has led to ‘rumblings’ of a return the pre-Depression practice of ratings shopping (see Financial Times 11 June 2012).

EU banks will be required to hold 8% of capital to their risk-weighted assets under transitional Basel III rules. These are the same stress-tests in 2010 which gave Irish banks a clean bill of health just months before the country’s finance sector imploded along with Spain’s Bankia, the Franco-Belgian Dexia and the Dutch SNS Reaal. The public is informed that the tests are more stringent and trustworthiness has been restored. This is a fallacy which has been exposed by the Economist (29 April 2014) describing stress tests in our financial institutions as having a ‘chequered history’. We are led to believe this time it’s different.

The real point of such ‘reform’ and ‘tests’ is to create in the public consciousness a climate supported by mainstream media which affirms that the powers that be have recognised their mistakes and active measures are being progressed to avoid a repeat of 2008. The illusionists, however, are deliberately propagating this new edifice as being the panacea when in fact it is sowing the seeds of our next downfall. The trick being performed is to recreate the illusion of growth and, in doing so, more dangerous moments for the system. It is an imperative the illusion is exposed, namely, that the visible hand of the market is dictated by one rule only: the maximisation of profit by any means necessary. It is time to construct pillars on solid ground on which our economies can be built, being governed by principles of justice, equality and fairness. We cannot let the moment pass to truly reform and regulate the system..

Andrew Brady is Director of Union Solidarity International – see