Posted November 4, 2009
“Other News” is a personal initiative seeking to provide information that should be in the media but is not, because of commercial criteria. It welcomes contributions from everybody. Work areas include information on global issues, north-south relations, governance of globalization. The “Other News” motto is a phrase which appeared on the wall of Barcelona’s old Customs Office, at the beginning of 2003: “What walls utter, media keeps silent”. Roberto Savio
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Trading is arguably the core activity in all market economies. Free trade is the mantra of all economists – left, right and center. Trading is considered indispensible and more trade is always seen as better. The financial crisis caused a closer look at trade and financial traders to see if these conventional beliefs are still valid and whether stock markets have spun out of control.
E. F. Schumacher, author of Small is Beautiful (1973), drew our attention to issues of size and scale ignored by most economists, pointing out how huge organizations lost sight of reality in abstract statistics and models. The conventional view was that more was better: more GDP-measured economic growth, more goods, more money, more investments, more dividends, more jobs, all seen as driven by more trade.
Trading with money enjoys an exalted status in economic textbooks, government policies and corporate management. The much larger volume of daily transactions and exchanging between people in the unpaid Love Economy is ignored in GDP. Yet, more money-based GDP-growth is not always better. It may also be jobless growth or damage our environment and quality of life. More world trade often harms local communities, cultures and causes social disruption and job losses.
Trading for profit and for trading’s sake became excessive on Wall Street and drove speculation in oil prices and volatility in currencies. Some $3 trillion of currencies are traded every day on exchanges around the world – over 90% of this is speculation. When traders attack a currency in a “bear raid” to drive its price down so as to buy it back cheaper, they harm the citizens of that currency’s country. When trade rules and prices do not take into account of social and environmental costs “externalized” to others, as in the case of World Trade Organization rules, then weaker countries and smaller players suffer from such trade.
Today, over 60% of all trading on Wall Street exchanges is done by computers – all programmed to compete to get the fastest execution of their trades at the best price. Each trade generates a commission so the most trades make the most money. The latest “innovation” is “high-frequency” or “flash” trading, where the computer programs run so fast that they can trade stocks, bonds or commodities thousands of times per minute. These computers are so fast that they can “see” other orders in line before they are actually traded. This allows bonanza profits from the proprietary trading of Wall Street banks and hedge funds such as D E Shaw, advised by Larry Summers, now US President Obama’s chief economic advisor. Testimony at the Congress Financial Services Committee questioned the benefit of proprietary trading to the real economy and its conflicts of interest, calling for a ban.
All this abstract “rocket science” and clever mathematical models taught at elite business schools isolated financial traders from awareness of the harm they were causing to others. Many students dream of careers in “financial innovation” with huge salaries and bonuses. Questioning executive pay still overlooks trading: how much is enough or too much or over-rewarded? Today, financial trading ballooned into major economic sectors of the USA, Britain and other countries, making traders far wealthier than workers in the production of goods and services. Trading, like finance, produces nothing. Financial “services” simply take money saved by producers in the real economy and using their networks of connections, serve as “intermediaries” facilitating bringing savers and investors together with new business ventures and other borrowers and households.
Since the financial crises of 2008-2009, many experts have called for the downsizing of these bloated financial sectors and curbing their trading activities and ever-more mysterious financial “products” such as credit default swaps (CDSs), collateralized debt obligations (CDOs) whose totals soared to $658 trillion of these bets between traders in the few biggest banks in the world. We now know that CDSs, CDOs and all the alphabet soup of such “financial products” were really bets that should be relegated to betting parlors and regulated by gaming commissions.
Why did real production take second place to trading which became such an exalted and highly-paid activity? Financial trading became conflated with normal transacting and exchanging information, a key activity in human relationships and evolution. Humans have always bartered, traded and shared information with each other, since early tribal societies. But trading is a means to an end: to increase the utility or wellbeing of the trading parties, and only a part of the much larger free exchange of information and mutual aid in societies.
Recently, trading itself expanded as a means to enrich traders and financial players. Recent financial bubbles: the dot.coms, housing and oil followed earlier bubbles: the tulip mania in Holland and Britain’s South Sea Bubble. The newest bubble Wall Street is salivating over is carbon trading, which they see as a new “asset class” to trade and a new profit center. Like earlier bubbles, carbon trading has not removed any real carbon from the Earth’s atmosphere and is unlikely to do more than make another group of traders wealthy.
Trading, like money and finance inflated, metastasized and de-coupled from the real world of production and physical assets. Psychologists who study traders see excessive trading as an obsessive compulsive addiction, like gambling or over-eating. Recent researchers took cheek swabs of traders on the stock exchanges in London and found elevated testosterone levels. Addiction to risky trading is now a consumer pastime as millions of “day traders” sit at home trading stocks on their computers – hoping to make their fortunes.
Curbing excessive trading in our global financial casinos, which brought such pain to Main Streets across the world, has now become essential. Small taxes on all financial transactions can slow down and reduce the staggering volumes of trading today. Economist James Tobin promoted this idea in the late 1970s and many experts assessed this tax, found it beneficial and reviewed various ways of collecting it (The Tobin Tax: Coping with Financial Volatility, Oxford Univ. Press, 1996). Obama’s economist Larry Summers recommended such a tax in his “When Financial Markets Work Too Well: A Cautious Case for a Financial Transactions Tax” (1989). This tax can be collected by governments using the computer program FXTRS.
In 2009, Lord Adair Turner, head of Britain’s Financial Services Authority, asserted that financial sectors had become overgrown and questioned their social utility. His remedies included imposing a financial transactions tax on all trades. All such proposals, including my own (The United Nations: Policy and Financing Alternatives, Elsevier UK, 1995), have been howled down by financial sector players, as well as their World Bank and IMF handmaidens. Now is the time to bring trading back down to Earth. Necessary reform includes the Tobin Tax to stabilize financial markets and to reap many public benefits, including billions in funding to ameliorate the damages inflicted by rogue finance.
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* Hazel Henderson, president of Ethical Markets Media (USA and Brazil), authored The Politics of the Solar Age (1981), Ethical Markets: Growing the Green Economy (2006) and the Calvert-Henderson Quality of Life Indicators, updated regularly at www.calvert-henderson.com. She can be reached at www.ethicalmarkets.com and www.hazelhenderson.com.