Hedge funds have got one major advantage over bent bookies. In their case, race fixing is entirely above board. Let me expand on this point, by way of an analogy for what has been happening in the Irish, Greek, Portuguese and Italian economies of late.
Let’s say you take a bet on a horse to lose the Grand National, something that those of us who do the gees gees know as a ‘lay bet’. But in this case, you get access to the paddock, and have every opportunity to bribe the jockey or dope the nag. You can even throw ball bearings, or perhaps the odd suffragette, under its hooves once it is on the track.
What’s more, the Jockey Club – a bunch of bleedin’ useless aristos who are never particularly assiduous in these matters, anyway – can’t see any harm in all this, and doesn’t even make a pretence of trying to stop it.
Easy money? Of course. And the City Boys get to do something very like this, through a combination of using Credit Default Swaps and a tactic called short selling.
CDSs are often likened to an insurance policy against debt default, and they can sometimes be just that. They are readily available on state debt. But unlike legit fire insurance, for instance, there is no requirement to own what is being insured. In the overwhelming majority of cases, taking out a CDS amounts to no more than taking a punt.
It is also common to borrow shares and bonds that you do not own, sell them in the expectation that they will fall in value, and then buy them back at the lower price. The process often results in a self-fulfilling prophecy.
The bonus is that if the firm – or in the case of government debt, an entire country – goes pear-shaped, you get to collect on the CDS. As such cover is obtainable at just a few percentage points, the payouts on offer far exceed anything the ordinary punter ever gets to collect on.
Today the Italian authorities have taken decisive action to scupper the speculators. Yes, the market regulator is using “moral suasion” – his words, not mine – to ask people nicely not to do bad things. The request is not binding, of course.
Yet the consequences of this little scam could yet prove to be devastating for millions of people, especially if the hedgies succeed in pushing in pushing an economy over the cliff. The results would range from mass unemployment to reduced pensions and less spending on schools and hospitals. All this, for the enrichment of a handful of money men.
In short – geddit? – there is no reason why these practices should be tolerated, and if the reality was more widely appreciated, they wouldn’t be. The next leftie Labour backbencher who comes up in the private members’ bill ballot could do worse than table legislation to outlaw them.
When they bailed out the banks they guaranteed not just the deposits but also the loans of the banks which were in the form of bonds and CDSs offering fantastical rates of return but which were entirely built on unrepayable mortgages and credit card debts. These bonds are a claim on wealth and are owned by wealthy institutions and individuals but are entirely privately produced i.e. counterfeit. It is as if I was knocking out fivers in my garden shed only I’d go to prison not have them suddenly recognised as legal tender.
So, in order to pay out these bonds governments are borrowing money at eye-watering rates from these same banks and the IMF which is itself causing a sovereign debt crisis. At the same time cuts in spending are going to pay the interest on these new loans or straight into the pockets of bonds holders. This is how the losses of the speculators are being socialised whilst the already wealthy bond holders continue to be paid out on their speculations. The entire European and US economies are being sacrificed to this end. It is a Bankers Versailles imposed not this time on Germany but the entire Western world. It is the largest and swiftest transfer of assets from the poor and middle class to the uber rich ever seen in history.
In Britain and the US of course you can add an additional attack to the cuts faced by Greeks, Spanish and the Irish in the form of money printing and inflation which cheats both creditors and the population.
And why has this speculators credit boom that can be traced back to the mid 80s and Reaganomics suddenly been exposed as bankruptcy? One word: overproduction. Capitalism cannot grow its way out of this one. Beyond globalisation, for it, there is nothing.
The British banks alone sold £6.7 Trillion of CSDs and bonds based on dodgy mortgages and other debts against £300 billion of assets. When they were bailed out the government guranteed these bonds because they are owned in the main by the wealthy. Even if they raised taxes to 100% and cuts government spending to zero they wouldn’t get near that sum but the wealthy are prepared to entirely destroy the economy in order to get their money back on those bonds without taking a haircut. The government has even printed money in the billions to pay them out ramping up inflation wiping out the value of wages and hugely increasing the cost of imports and public services. All this is aside from normal government debt also held in the form of government as opposed to bank bonds by the same wealthy elite) which can no longer be serviced since the collapse of the tax revenues from the City gamblers and the increased borrowings to pay out the bond holders.
I’d say that hedge funds and short-selling are a mere side-show compared to this.