GAME OF DECEIVED DECEIVERS
Roller coasters. Today's financial crisis offers an ideal field for professional frauds
By Michael R. Kratke
[This article originally published in: Freitag 06, 2/8/2008 is translated from the German on the World Wide Web, http://www.freitag.de/2008/06/08060501.php. Michael R. Kratke is a professor of economics at the University of Amsterdam.]
The US credit crisis remains the danger for the world economy. At the World Economic Forum in Davos, Secretary of State Rice assured her hearers that the US economy is sound and healthy. However the second lowering of the key interest of the US Federal Reserve was an act of averting recession. Massive losses have long been a reality in Europe.
The roller coaster ride, always at the edge of the great stock market crash, is merry. Once again in early February millions of fictional stock assets arose as quickly as they dissolve in thin air. Millions are redistributed again - among the owners of capital- and financial assets and among the big financial businesses. The worldwide game with fictional assets has a few winners and many losers in the financial world. The stock market enterprises are among the main winners. Powerful and frequent price fluctuations mean high returns in which the stock markets and professional speculators earn enormous sums. Nearly everyone profits today. Professionals make money with both rising and falling prices. Therefore today's financial crisis offers an ideal field for professional swindlers. The banks that posted billions in losses join in the fraud and hope to compensate their losses.
OLD KEYNESIAN PRESCRIPTIONS ARE SUDDENLY INVOKED
In Davos, at the 2008 World Economic Forum (WEF), the assembled elites offered joint economic prognoses. Suddenly there was no talk of upswing, only of the speculative bubbles that will burst in the near future and the waves of bankruptcies soon to come over us. The fear of the great crash, of the worldwide economic crisis that could eclipse all past crises was so clear to the ladies and gentlemen of the "elite" that old Keynesian prescriptions were suddenly invoked and haggled over. To escape panic, people are ready for a drastic change - cheap money and radically lower interests according to the American and Japanese model or economic program. Everything is possible to escape the threatening economic collapse. The triumphant self-assurance of advocates of the very new global capitalism does not seem possible any more. The specter of the worldwide economic crisis was always an undertone in the illustrious talk rounds in Davos.
Before anything like capitalism criticism could be heard, the crash of the Societe Generale, the second largest French bank, occurred. In that speculation scandal, one individual trader absconded with nearly four billion euro. This was an unparalleled event with un-heard of losses although the same bank wrote off 2.05 billion euro in the fourth quarter of 2007 on account of the credit crisis. The rumor kitchen started immediately and birthed the redeeming fairy-tale: a single unscrupulous operator with his wicked intrigues triggered the stock market crash of Black Monday. The banks and their lobbyists could hardly contain their joy. One young man named Jerome Kerviel was responsible for the crisis, not them or an irrational economic system.
Kerviel did nothing unusual. He made a bet several weeks before with around 140,000 futures contracts. He bet on the rising European stock indexes (including the German DAX) with almost 50 billion euro, many times more than he could bet on his own initiative according to the bank's rules of the game. This went wrong although it was professional enough to speculate (on falling stock prices). Relying only on himself, he could not sail around the internal controls of the bank. He was neither a lone operator nor an isolated case. Traders constantly isolated the quantitative limits of the businesses as specified in their regulations. These violations are silently hidden by management as long as they are successful. The giant losses were probably caused by insider deals and panic-oriented rejection of futures contracts. In November 2007, the management of the bank was warned by the EUREX that its dealings for years went beyond all internal bank limits. Who deceived who in the game of deceived deceivers is by no means clear.
The billions in recent losses of the Societe Generale have consequences. Its stock fell and the bank needed fresh capital. In similar cases, this capital came from foreign investors, state funds from Arab states, China, India and Singapore. The Societe Generale is a take-over candidate since it has lost half of its stock value since May 2007. The Societe Generale is on the verge of being swallowed. Shareholders in the SG will not long resist the temptation of false promises in the imminent take-over battle of French and other banking corporations. In early February 2008, the mere rumor of a possible offer of BNP Panbos forced up the shares of SG over ten percent. Now the very big players are in the picture. The next mega-fusion in European banking is lined up that will cost the jobs of thousands of bank employees - a phenomenon that is part of every regular financial crisis.
IGNORANT AND UNSUSPECTED AND SIMULTANEOUSLY RATIONAL AND SOPHISTICATED
The conventional ritual in such emergencies is played once again. In the true ring of conviction, the bearers of responsibility insist this is completely conceivable in Germany. Pseudo-entries, an inevitable part of the deals now collapsing, are possible everywhere as part of business. Because of their talent for "creative accounting," trickery and deception, young traders are hired because they are unscrupulous accountants Jerome Kerviel, Neil Leeson and the young professional speculators represent the type of player obsessed with frenzied "achievement."
Today's finance capitalism needs this type who is ignorant and unsuspecting and at the same time rational and sophisticated. These traders know all the tricks. The stock markets of the world, the centers of international high finance, are dominated by many foolish young (and not less foolish and old) men (and sometimes women) so the world economy is confused with a casino. There is something fishy or misguided in the system.
The world economy is too important to be left to gamblers. A few additional rules and controls are not enough. We need far more than a few new surveillance cameras and watchmen in the casino. We need another worldwide economic order. Insight in this new order is still alien to our elites.