Global financial system – dangerous risks

As Greece advised the International Monetary Fund (IMF) that it would not be able to meet its due payment and the bolivar went into free fall in Venezuela, four of the world's biggest banks were fined more than US$5 billion after pleading guilty to rigging the currency markets. The world's financial system faces breathlessly dangerous risks. A fine of US$5 billion is lighter than a slap on the wrist for these super banks for manipulating currency trading, adding further jeopardy to a very shaky system built on sand.

This newspaper buried the little Associated Press story about one of the major global current events at the back of nowhere on Page B6 on May 21: "Four of the world's biggest banks," the story reported, "agreed to pay more than $5 billion in penalties and plead guilty to rigging the currency markets - a rare instance in which federal prosecutors have wrung an admission of criminal wrongdoing from a major financial institution."

Listen to the language. There is no question of who is wagging whom. US federal prosecutors, who should be policing and regulating the system, have only managed to wring an admission of criminal wrongdoing from a major financial institution in this rare instance. And the banks have 'agreed' to pay a feather duster fine. The banking-conspiracy theorists seem well supported here!

 

ACCUSED OFWRONGDOING

 

Traders at JPMorgan Chase, Citicorp, Barclays and the Royal Bank of Scotland were accused of working together to manipulate rates on the foreign exchange market, where hundreds of billions of dollars and euros change hands. And we are often led to believe it is rogue speculators who threaten the system.

More ethical currency traders try to predict the movement of exchange rates and try to make a profit from rate changes without producing a grain of corn, a drop of oil, or a byte of data. Less ethical traders, and the biggest banks are here indicted, manipulate rates to their own advantage and are not above colluding to do so.

With the gold standard long gone, although British currency notes still comically promise to pay the bearer of money bills the face amount on the paper bill should they demand it, there is nothing real behind today's paper, plastic and increasingly digital money. And as soon as enough people realise this and lose faith in the facade, the system is due for a crisis of confidence and a crash on a scale never before seen. Speculative trading made worse by criminal manipulation by big players in the system who ought to be keepers and protectors of the inherently shaky system can only hasten the day.

The story continues: The penalties imposed on the banks, light though, they are a victory for the US government and reflect a broader effort by the Justice Department, long criticised as reluctant to prosecute big banks (too big to fail?) to tackle financial misconduct. But financial misconduct may be just what pushes the system to collapse. Although playing fast and loose even within the law could trigger the impending tipping point.

Over the last 18 months, the story says, prosecutors have brought criminal cases against banks accused of tax evasion and sanction violations and have reached multibillion-dollar settlements with several others for their role in the 2008 financial meltdown.

But the sting is in the tail. The story concludes, "still the punishment announced may have limited practical consequences." The banking system and specifically big banks are bigger than governments, even the US government whose currency is the currency of the world in which people and governments store their wealth. Think of Jamaica's Net International Reserves, US dollars stashed in the vaults of the Bank of Jamaica.

 

BOLIVAR FREEFALL

 

The Venezuelan bolivar is in free fall, losing more than 50 per cent of its value since January 1 as citizens and businesses rush to convert their money to the US dollar, in the face of mounting economic chaos and who knows how much currency speculation in the uncertainties of Chavez-Maduro socialism. Currency speculation, whether manipulated by unscrupulous and cartelised banks or otherwise, flourishes best in the kind of economic environment like Venezuela's where government controls the economy in capricious fashion counter to economic reality. Decades-old price controls, for example, leave staple items priced below rational market value. A bottle of cooking oil costs only US 20 cents even at the black market rate, with rice and sugar even cheaper. An army of black market entrepreneurs were making a killing buying subsidised gasolene in Venezuela and selling it at market price across the border in Colombia before the army was mobilised to stop it. And you can be sure the soldiers will take over the cross-border gas trade to their own benefit!

Venezuela is the world's sixth-largest exporter of oil and its economic and financial shocks can very easily spread into the world economic and financial systems. But a player doesn't have to be big to be the trigger of collapse. As they famously say in Chaos Theory, the flap of a butterfly's wing in the Amazon may set off a tornado in Texas.

Greece has become a dangerous butterfly, although it is not exactly a small player as the 44th largest economy in the world in a ranking I have seen of 188 countries. The deeply indebted country had signalled that it wouldn't have the money to meet its due May 12 payment to the IMF unless additional bailout funds were made available. Like Jamaica, borrowing more simply to pay down earlier loans. Greece pulled through at the twelfth hour and paid up through its nose. A Greek default would have serious consequences for the Eurozone.

 

GAME OF PRETENCE

 

Jamaica, the IMF poster child for calmly and quietly bearing austerity and paying up, will not default. But even such a small defaulter could pitch the world financial system off kilter from the ripple effect of uncertainty and loss of confidence. But every pettifogging banker knows that the world's debt cannot ultimately be repaid. The pretence of paying keeps some stability in a shaky system. Hence the IMF's inflexible insistence that Greece must meet its obligations and right on time, even if they kill Greeks.

But as the burdens mount, the defaults will come. What is desperately needed is a global debt jubilee to reset the system. But dogma and greed and the dominance of the banks pushing to maximise profits at all costs and by all means, fair and foul, block jubilee and hasten collapse.

Big China with its communist politics and capitalist economics has been trying to protect the yuan from the global speculators through exchange rate controls. Venezuela has tried it for the bolivar, ending up with three official exchange rates and the real rate, the black market rate, and an accelerating drift towards dollarisation.

Last week the IMF, acting as key agent for the world financial system,said it no longer believes that China's tightly controlled currency is undervalued, giving unfair advantage to Chinese exports in the world economy.

Champagne popped in many quarters late last year when China was supposed to have overtaken the United States as the world's largest economy, But China, like almost everybody else, holds its reserves in US dollars. If it isn't yet, it will soon be perfectly clear that the country in whose purely symbolic currency the wealth of the world is stored will run the world through a global financial system to which everyone will be forced to subscribe by one means or another. The banks, bigger than borders, will be quite useful in this global hegemony, now completely unavoidable. But banks and country will have to figure out how to permanently keep a step or two ahead of the threat of collapse that is built into the very core of an inherently unstable global financial system.

- Martin Henry is a university administrator. Email feedback to columns@gleanerjm.com and medhen@gmail.com.