Death and taxes are said to be the two great inescapabilities of life, and sometimes the implication is assumed to be that they are the only two worth mentioning when one is marshalling one’s reserves of stoicism to counter life’s vicissitudes. But there are others, some positive: I think kindness or fellow-feeling is a far more common trait among human beings than cruelty, as proved by the normal daily functioning of society, and I think – quite consistently – that selfishness and its even less appealing manifestation as greed is more common than sentiments of social responsibility when it comes to attitudes towards anonymous others. That sometimes seems to be all too true of people whose lives are dedicated to the imperatives of Wall Street and the City of London.
These latter borrow shares, currencies or contracts, sell them to push down their value, buy them back at the lower price they reach, and return them to their original owners with a profit in their pockets. Suppose they do this with bank shares. The bank’s share value drops, depositors become anxious and withdraw their money, credit rating agencies lower the bank’s standing which means that it has to borrow money at higher interest to cover its obligations. As a result it begins to teeter. Depositors might lose some of their money, most forms of rescue entail job losses from the bank’s staff, people seeking mortgages to buy a home or loans to start up a small business find life harder … but those who have profited are not among them.
Such forms of capitalist activity as short-selling and other techniques to make money out of money – conducted by people operating in the financial sector to graze upon, exploit, finesse, manipulate, and ultimately profit from the money transactions going on at the level of the ‘real’ economy – are said to be vital to the ‘real’ economy, and in many ways this is true. For one thing City profits are a major component of the UK’s standing as one of the world’s wealthiest countries (and therefore the City’s activities are very much part of the ‘real’ economy). For another, the money generated does not all go on imported luxury goods, thus benefiting other economies, but serves the rest of our own economy through investment and credit facilities.
At the same time, though, some of this activity really does have a big downside, and it was obvious in the financial crisis of 2008 and the following years. Financiers resist government attempts at regulation and oversight, they are endlessly inventive in the ways they can make money out of money and the movement of money, creating tradeable ‘assets’ – even out of dodgy debts, as we saw with the cancer at the heart of the 2008 crisis: sub-prime mortgages in the US – and artificially manipulating the financial marketplace for short-term gain, as in short-selling. The good that the market can do in being an open arena of trade and opportunity is thus threatened by the vices of its virtues.
There is no surprise in the fact that the 2008 crisis started on Wall Street, because American capitalism is much less regulated than European capitalism. The lesson learned from the Great Depression of the early 1930s is that governments and central banks cannot stand by and let everything fall to pieces. So we see central banks pump billions of dollars into the financial system to maintain availability of credit for its institutions, we see nationalisations (even by the US government: a whole New Deal) and abrogation of competitiveness legislation – in short we see action that should theoretically be the very opposite of capitalism, the very opposite of reliance on ‘the wisdom of the markets’, to save our skins.
A nice reckoning was afoot there. The paladins who resisted the state’s interference in the money markets proved unable to manage them well without the state’s help. But the state cannot go too far in sitting on the goose that, in good times, lays golden eggs. It had to find a way of limiting the goose’s more noisome efflations while keeping the eggs coming – a finger in the right dyke, so to say – and that is a delicate matter. Over-correction in the regulatory direction might do opposite harms; yet the robber-baron mentality of speculators cannot be allowed to destabilise the entire economy on the grounds that nothing but the profit motive counts.
One place to start is with short-selling. The Financial Services Authority banned short-selling for four months at the height of the crisis. This was an admission that part of the reason for the crisis is a sharp practice. For consider: these activities amount to gambling on a certainty. With central banks and governments loth to let a bank go under, the cowboys can manipulate matters knowing that they are in no danger of losing out, though lots of other people will do so – and, in the end, mainly the taxpayer. They know, in effect, that at the limit they can put their hands in the public’s pocket: their own pockets are safe. The then Chancellor of the Exchequer, Alistair Darling, said that the short-selling ban was temporary because in normal times the technique is acceptable and indeed useful for providing liquidity and funds for investment. But then it was damaging and irresponsible; and that moment is always waiting to repeat if the reckless push to maximise profits overrides all other considerations, not least among them stability.
The only thing that prevents greed is a guaranteed danger of burning your fingers to the knuckle if you go too far. One simple idea: for every x percentage drop in a publicly quoted bank’s value directly attributable to short-selling of that bank’s shares, the tax on the profits thus made by short-sellers jumps in increments of 20 per cent to the maximum 100 per cent. Such a provision might do the trick.