November 28, 2008.

The new US government of Barack Obama should push to reform the world financial system. Clearly the old order was not just unsatisfactory, but it outright collapsed. It has also collapsed in a highly unfair way, with some of the richest even profiting from the crash. If the old system is not reformed now, it never will be, because the need to do so will never be as strong (see P/S).

What should the reform of the world financial system be made of? I suggest:

1) Regulate the market of any derivative so that it can act as a damper, not an amplifier of the fluctuations of the market function it is a derivative of (favor commercial operators, limit leverage, etc.). In other words, make sure that the tails do not wag the dogs, as they do now (see P/S).

2) Create MARKET EFFICIENCY and MARKET DEMOCRACY. As long as some operators have full information, and their computers are acting on it in the next microsecond, while most non professional market participants are doing other things, like working, sleeping or day dreaming, not all operators can take action in a fully informed way. In other words, one cannot have an efficient market as long as only a few are informed in a timely manner. We need time to allow most market participants to have equal access to information. In the age of individuals having a lot of their retirement in market equity, we need to make sure that MOST PEOPLE ARE INFORMED BEFORE PRICES MOVE SIGNIFICANTLY.
To do this: get inspiration from the foundations of physics, or from traffic safety. In both cases, there is a SPEED LIMIT (in physics the speed of light). So put a speed limit on any traded security (bond, stocks, currencies, commodities, etc.) by regulating a limit of say 3% a DAY on any security, up or down.

Another way to slow down the frenzy of transactions (which favors manipulators and speculators, and other similar parasites) is to put a not so tiny tax on each transaction. (It would be most positive on government deficit too.) Or one could try a combination of both speed limit and significant transaction cost.

Rich financial types will scream that this would kill “liquidity” (probably thinking about filling the moats around their castles). They will scream that trading could not occur, etc. But they can be answered, point by point. And the first answer is this: finance as the exclusive wealth making haven of the plutocrats would be over. Finance would now be first in the service of the real economy, and everybody, not the province of plutocracy. Limiting moves per day will limit excessive speculation.

3) The dangerous and abusive non sense of having people in non democratic regimes (China, Middle East, etc.) forcefully save so that their government and plutocrats can lend money to the USA, because Americans do not save enough, should be discouraged. Americans should be incited to save, like everybody else, so they can invest in their own country with their own money. So put high energy taxes in the USA and an Added Value Tax. The AVT recenters the economic activity towards saving, and away from frantic consumption. (In the European Union, the AVT is a minimum of 15%. By law. The British government just momentarily lowered its AVT from 17.5% to 15%, in the hope it will help with the UK recession… But other European countries did not touch theirs.)

4) In the USA, a CEO CLASS has appeared. These people sit on each other’s boards and give each others’ riches and perks. They have helped to transform the USA into a plutocracy: not only do they control Wall Street, but also industry. That allows them in turn to rig the work of politicians, by buying them off with the prospect of future riches. Then they tweak(ed) the tax code to their advantage. Look at the spectacle of ex president Clinton, now an immensely rich man, but not thanks to his past salaries or personal investments from said salaries. Clinton is now reaping the fruits of years of friendliness towards the hyper rich when he was president. The rise of a worldwide plutocracy is an extension of this. Ultimately, just as happened previously in the Imperium Francorum, the empire of the Franks, a feudal regime with lords will replace all democratic pretense. Fighting the plutocracy starts with breaking the CEO class. Putting representatives of unions on the boards (as done in Germany) could be a first step. Of course, for nationalized companies, civil servants should be disseminated in management and boards.

5) Raise taxes on the hyper rich, worldwide, and regulate fiscal paradises. (The largest fiscal paradise, many argue, is the USA itself! If the USA cooperates with the EU, there will be no more fiscal paradises.) Reestablish the financial reforms made to prevent a return of the Great Bubble and Great Depression that followed it (i.e. re-regulate banks stringently, reestablish the up tick rule, etc…).

Patrice Ayme


P/S 1: The list of proposed changes is not exhaustive: there will be other bits to tidy up. Bretton-Woods anchored currencies on gold. Nixon yanked the dollar out of its gold connection, anchoring currencies on the dollar thereafter. This needs to be looked at.

P/S 2: In parallel to the financial reform, there should be a reform of the world economy, a reform of globalization, taking into account strategic goods (i.e., the world location of all high tech products, starting with… cars), agricultural subsidies (bad, except in starving areas), carbon emissions, and carefully maintaining strategic imbalances insuring the military domination of the powers that have imposed a rough approximation of peace in the last 63 years. And, of course, and first of all, making sure that the creation of new jobs somewhere does not mean the sheer disappearance of the corresponding, preexisting jobs somewhere else, but, instead the mutation of the later to comparable socioeconomic situations (that conservation law was not formally imposed so far, and would necessitate some new governmental machinery).

P/S 3: If the world financial system is not changed now, people will get used to being abused by it. Their indignation will fade, they would adapt, and be profusely thankful for the first slightest improvement. We would move towards a return of greater plutocracy, or, in other words, the feudal system.

P/S 4: In our interpretation of what caused the decline and fall of Rome, the original cause is the unsustainable rise of the Roman plutocracy.

Globalization the wrong way, plus various financial tactics, the most prominent being world wide tax evasion and huge leverage, have allowed the recent apparition of a plutocracy manipulating countries and populations against each other for its own benefit. This is a bit, but on a grander scale, what is going on presently in Russia, where tremendously rich oligarchs float above a miserable population distracted by fun and games like invading Georgia. Thus world financial reform should try to diminish the influence of world plutocracy (Russian plutocrats have a foot, or more, safely in the West, thus escaping the full might of the Russian government, a general tactic of plutocrats everywhere). The Gracchi brothers tried to pass wealth reform in Rome, to break the unbearable ascent of the plutocracy. They were assassinated, with thousands of their supporters. Rome marched firmly into plutocracy, dictatorship and civil war, for the next six centuries.

P/S 5: To buy and sell with little liquidity would be child’s play in the computer age (it would have been very difficult before it, that is why it did not occur in history). A complex set of rules could allow trades, depending on who wants to do what. When a security is limit down (say) for the day, up-tick trades could be allowed (so investors could buy at limit down; for selling they would have to wait until next day in their place in the queue, considering their trading history; that would severely handicap extremely frequent traders (like “quant” hedge funds), but not the most sedate ones (like the most thoughtful mutual funds)). If the volume of trading is too huge, automatic lotteries could determine who gets in or out.

P/S 6: Some people (Nobel Laureate Krugman, for example) have clung to the belief that speculation of the futures’ market cannot influence the price of the underlying commodity. That is completely wrong. They tried to hold to that argument as the price of oil futures shot up. Now they have fallen silent. Why? Because something even more grotesque happened. The price of oil in dollars collapsed from $147.5 to $50 in three months without any change in demand or supply (staying stuck around 86 million barrels/day). Two-third down: it was all a question of the futures collapsing, as hedge funds had to de-leverage (under the polite pretext that they anticipated a severe worldwide recession). The oily tail waged the oil dog.

P/S 7: The housing bubble collapse and its associated foreclosures should not have been a big deal for the banks (by themselves they would have just dented profits). Problems, such as the disappearance of some banks’ entire capital, came from the banks’ massive investments in derivatives, some of them unknown not only to regulators, but to the banks themselves. Pluto hides below the ground, in the Dark, indeed.

P/S 8: One of the master ideas of world financial reform is to make finance a slave to the People, and cut off the evil pathways plutocrats have been using to make themselves ever richer, on the back of the People.

Still another possible example of such an evil pathway is the “Carry Trade” where financial operators borrow in a country with low interest rates, just to transfer the capital to a high interest rate country. This has made some plutocrats very rich. It should be looked at very carefully to see if there is enough good in it, or if it should be mitigated, or outright outlawed. At first sight, it defeats the purpose of providing “liquidity” (i.e., money) to the low interest country (the fundamental reason why the interest rates are low there). Such an inquest would not be a wild attack against riches and capital a la Marx: legitimate pathways to get richer who profit the People by motivating exceptional individuals should be encouraged (and would be encouraged even more, since the evil pathways would have been closed, thus funneling more activity and creativity towards what profits to all, and not just a few parasites).