Goldman Sachs rules the world?

The Beeb was the victim of a brain fart from a NY city trader the other day who let slip what traders really think of the world economic crisis. As he blatantly put it traders “don’t really care that much” about the prospect of an economic collapse and that he “goes to bed every night and I dream of another recession, another moment like this” Why? Because he and his trader buddies can make a ton of money out of such a recession, money incidentally that will ultimately come out of the rest of us mere mortals pockets. Can governments do anything to stop the collapse of many economies, no! According to him “Governments don’t rule the world, Goldman Sachs rules the world”
http://www.bbc.co.uk/news/business-15078419
http://uk.news.yahoo.com/goldman-sachs-eyes-major-cuts-report-075618803.html

While I appreciate his candour, and contrary to the rumours online the Beeb has confirmed he’s for real and not a Yes Man, his words confirm what I’ve always felt about the financial markets – they do more harm than good to our economy. Clearly the half assed measures governments are now bringing in after the last economic crisis (4 years too late!) are wholly insufficient. A Tobin tax of some sort, that being a small tax on all trading activity worldwide, would now seem a good idea. This would provide a substantial review stream to fund a variety of projects worldwide (such as climate change prevention and emergency funds to deal with financial crises in the future, p). Also a Tobin tax would reduce the “take” or profit a trader can make from any individual trade while increasing his costs of engaging in speculative trading bets. In short this would greatly reduce the incentive to engage in dangerous and economically damaging speculative betting, possibly to the point of stopping it altogether.

But personally, if this trader is to be believed I’d say that a Tobin tax just doesn’t go far enough anymore. We need to consider a blanket ban on short selling or other mechanisms such as high-frequency trading as well as a crack down on Phantom Share trading (see video on that here). The penalties for violating trading rules needs to be raised higher (mandatory life sentences for certain serious breaches as well as fines equal to the economic damage caused plus punitive damages on top). Indeed I’d even go so far as to question whether it is any longer reasonable to allow financial firms to maintain their “limited liability” clause. This means that currently shareholders or board members can’t be held responsible if the company collapses and leaves behind massive debts beyond its ability to pay back. Even if the shareholders/board members pocketed billions the years leading up to the collapse creditors can’t go after a shareholders personal wealth, even if the companies collapse is clearly his fault (through incompetence or deliberate action). If I go down to the bookies and bet recklessly I loose everything. Is it reasonable for us to allow large financial firms to bet recklessly with our money, loose it all, but make lots of money for themselves and walk away not only scot free but with a massive bonus cheque? And obviously we need to tax these guys more heavily, as I’ve outlined here and here.

And I would remind traders that it is in they’re interest to see things change. There is still huge public anger at the bank bailout and I suspect that if we see another financial crisis where the fat cats profit while main street suffers I don’t think the people will take that lying down. The pressure on governments to do something about it will be fairly intensive. And there are plenty of politicians at the fringes of the main parties, or in populist right wing and socialist parties, who would jump at the chance of doing such things if they were ever elected to power. It will be a little hard for Goldman Sachs to rule the world after the FEC and FBI catch it out breaking various federal trading laws and bang all the traders up in Sing-Sing for a decade or two!

Another disturbing article by the beeb here. It seems the mathematical whiz kids are back using high tech computer programs to plan and implement trading decisions without any human intervention. People who fail to learn the lessons of history are doomed to repeat them! This mirrors the events of the collapse of Long Term Capital Management back in 1998. They had a trading strategy devised by a bunch of Harvard math’s whiz kids and also controlled by computers. However, their model found itself unable to deal with the consequences of good old human irrationality. Consequently when an Alcoholic Yelsin threw his Vodka bottle out of the pram and refused to pay back certain Russian debts, the computers found themselves unable to cope with the turmoil and LTCM wound up insolvent and owing literally Billions of dollars. At the time it was argued (by as many right wingers as well as lefties) that the US federal reserve should sit on its hands and perform no bailout (of either LTCM or the other wall street firms that could also go under if it went down) as well as take the management of LTCM to the cleaners over this debacle. But predictably they did ride to the rescue. This is precisely where the “too big to fail” moral hazard that led to the 2007 financial crisis has its origins, as it showed to companies like Bear Stearns, AIG or Lehman’s that they could screw up royal and the government would ride to the rescue and the bosses who screwed up would get away either scot free or with a slap on the wrist fine and a golden parachute.

Our Gordon-Gecko-is a-Commie-bastard-next-to-me Alessio Rastani also said that if you’re “prepared” for the coming financial crisis they we’ll be okay. Prepared? how? Withdraw that 5 million I don’t have in the bank and put it into US treasury bonds? Sell my soul to Beelzebub? The preparing I’d advise would be nevermind gold (which is now falling anyway) I’d invest you’re savings in canned food, bottled water, firearms (if legal in you’re area!) and maybe a few Molotov cocktails 😉 as we could well be on the verge of a perfect economic storm.

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