Why the global financial industry needs to be regulated and chained

I frankly admit right from the beginning, that I am not a fan of the global financial industry with its inherent excrescences and perversions. The major reason for my skepticism is, that we have seen in course of the last 45 years far too many asocial, immoral or even illegal incidents caused by this industry with strong negative impact on the real economy. In many cases the taxpayers had to pay the bill. Examples are:

The burst of the US Subprime bubble in 2007/2008 resulting from intransparent transactions with „Credit Default Swaps (CDS)“ (these derivatives were called by Warren Buffet already in 2003 „financial weapons of mass destruction“) as well as with „Mortgage Based Securities (MBS)“, „Asset Backed Securities (ABS)“ and „Collateralized Debt Obligations (CDO)“ classified with false credit ratings provided by Rating Agencies as starting point for the last global financial crisis (Europe still suffers under the aftermath)
The crash of the dot-com bubble in 1999/2000, which sustainably damaged e.g. the equity culture in Germany (after the crash the number of Stockholders in Germany dropped from 6.2 million in 2000 to 3.6 million in 2008)
The Asian crisis in 1997/98 caused by hedge funds (e.g. of the self-appointed „philanthropist“ George Soros), which speculated against the Thai currency „Bath“ and brought the global finance system close to meltdown
Provision and management of illegal or at least immoral tax shelter schemes with or without utilization of Offshore Centers (e.g. Virgin Islands, Seychelles, Cayman Islands, St. Kitts and Nevis, Liechtenstein, Panama, Bahamas, Delaware), which contribute to tax evasion in a magnitude of 100 Billion Euro per annum only in Germany (note: in 2012 the global private banking industry had Assets under Management of 19.3 trillion USD, Offshore Centers accounted for 42% or 8.3 trillion USD on this total).
Deliberate bypassing of laws e.g. by cum-ex and cum-cum trades („dividend arbitrage“) to achieve an unrightful multiple reimbursement of capital gains, which cost just the German taxpayers according to most recent calculations provided by Christoph Spengler (financial scientist at the university of Mannheim) between 2001 and 2016 a loss of 31.8 Billion Euro.
Criminal manipulations of the LIBOR (London Interbank Offered Rate) by Barclays Bank and up to 20 other Banks discovered in 2011
Huge manipulations of commodity prices (e.g. for oil, corn, coffee, cocoa, wheat) utilizing speculative bets with futures, e.g. by Goldman Sachs
Manipulation of stock prices e.g. by high-frequency trading or short-selling starting around 1985 and massively expanded around 2000 depending on the availability of high-performance computer trading systems and complex trading algorithms
Bypassing of existing financial regulations – the traditional Banking Sector has to comply with – by the Shadow Banking Sector comprising e.g. Asset Management companies (such as BlackRock, Vanguard or Fidelity), Private Credit Funds (such as Goldman Sachs Mezzanine, TCS Direct Lending Fund or KKR Lending Partners) or Crowdfunding platforms (such as Kickstarter, GoFundMe or Indiegogo) – the Shadow Banking Sector had according to the „Financial Stability Board (FSB)“ in 2014 already a magnitude of 80 Trillion USD (vs. 136 Trillion USD covered by the traditional Banking Sector) and awards in the USA nowadays every second loan
Currency swaps designed by Goldman Sachs to disguise the real economic situation of Greece, which allowed the country to join the Euro Zone effective January 1, 2001 even though it was not at all prepared for the Euro
Transfer of debt risks in a magnitude of several hundred billion Euro resulting from Greek national debt from private „investors“ to tax payers of the Euro Zone between 2010 und 2012
Unprecedented manipulations of the Euro currency rate performed by the European Central Bank (ECB) in a magnitude of 2.3 Trillion Euro (i.e. more than the GDP of France, Italy or Spain) in form of the „Quantitative Easing“ Program causing fatal negative side effects for small savers and old-age pensioners and taxpayers (important: since these manipulations have partially experimental character it is unpredictable what their results will be – besides higher and higher bubbles in the stock and real estate market which are already in place)

The aforementioned list is by far not complete. Worth reading to gather more comprehensive and detailed information are for example Matt Taibbi’s articles „The Great American Bubble Machine“ (http://www.rollingstone.com/politics/news/the-great-american-bubble-machine-20100405) and „Secrets and Lies of the Bailout“ (http://www.rollingstone.com/politics/news/secret-and-lies-of-the-bailout-20130104).

The negative consequences of these asocial, immoral or illegal behaviors of the global financial industry on our societies, economies and democracies are huge and disastrous. They cause unhealthy huge imbalances in the distribution of income and wealth, bubbles in the stock, real estate and commodity markets and are the worst role model for the man on the street, you can think of.

Why should Joe Sixpack comply with laws or stick to his contractual obligations (e.g. pay his taxes, payback his loans or cover negative effects of his economic transactions as entrepreneur or private person) if the financial industry doesn’t do it? The bailout of banks with taxpayer’s money in course of the last global financial crises justified with the ridiculous argument that these banks were „too big to fail“ was a fatal negative signal for the engagement, commitment and sense of duty of each and every citizen serving the public good.

This applies even more, since almost all protagonists of the financial industry showing asocial, immoral or illegal behaviors in course of the last 45 years were obviously as well „too big to jail“ from the jurisdiction’s point of view – which is an even worse signal for Joe Sixpack, since every little worker and employee get’s meticulously persecuted and punished by the government and the jurisdiction if he/she tries to cheat in his/her tax return or just violates road traffic acts.

I am convinced that the rise of extreme left and right wing parties or politicians in many European countries, as well as in the USA, has decisively been influenced by the ruthless misconduct of the financial industry at the expense of the small people and taxpayers in course of the last decades.

In order to prevent these significant asocial, immoral or illegal incidents and the resulting negative effects on our societies, economies and democracies in the future the governments and regulatory bodies need to fundamentally change the rules of the game and enchain the global financial industry so that it has no other choice than to focussing on long-term sustainable investments with direct impact on the „real economy“, to comply with laws and regulations and to show respect and responsibility for our societies. So far the regulatory bodies primarily focussed on the increase of the equity ratio of the banks belonging to the traditional banking sector and the improvement of their risk management effectiveness – which is by far not enough. It is much more important, to take the instruments out of the hands of the global Financial Industry (including the Shadow Banking Sector), which they can utilize to cause damage.

Please understand me correctly: I have absolutely no problem with successful economic entrepreneurship, I grant every successful person the results of his/her own hard work and I am not arguing at all that everybody, who works in the financial industry is criminal or has by default immoral intentions. However it should be a matter of course that everybody, who participates from the benefits of our societies and democracies, complies (without any exception) with laws and regulations and runs his/her business in a way which respects the moral basics of our societies and democracies.

Furthermore I strongly believe that banks and comparable financial institutions must be restricted to their original tasks, which are the management of monetary transactions and the temporary provision of liquidity for companies and private persons. Short-term speculations on companies, currencies or commodities should be hindered or even better prohibited, whereas long-term investments with sustainable aims should be fostered.

In this context it is important to know, that almost all of the major instruments for short-term speculations or other financial manipulations with negative impact on our societies have been invented, introduced or at least misused and perverted in course of the last 45 years as consequence of fateful deregulations approved by the US-Presidents Carter, Reagan, George Bush, Clinton and George W. Bush and various political leaders in Europe (e.g. Margret Thatcher, John Major, Tony Blair, Helmut Kohl, Gerhard Schröder).

The financial industry utilized the massively expanded leeway provided by this deregulations by introducing, upgrading or broadening various instruments for short-term speculations or other financial manipulations such as high-frequency trading, short-selling, hedging, speculations with commodities or against currencies based on long and short equity models, Credit Default Swaps (CDS), Asset Backed Securities (ABS) including Collateralized Debt Obligations (CDO), tax-avoiding transactions with Offshore Centers and so on …

All the listed instruments are neither God-given, nor will the global financial system collapse if these instruments become strictly regulated or even prohibited. In contradiction: A significant simplification of the global financial system and its instruments in combination with a harmonization and simplification of our tax systems will have a healthy and positive effect on our global economy. Our global economy should by no means be a playground for unscrupulous gamblers and bettors. People, who want to gamble and bet, should satisfy their lucid drive in a gambling house with their own money and at their own risk and not at the account of taxpayers.

The experience of the last 45 years (with Richard Nixon’s colossal error to severing the final link between the dollar and gold in 1971 as starting point) shows that the financial industry is neither willing, nor able to fulfill these requirements on a voluntary basis. Instead the financial industry needs to be effectively enchained by governments and regulatory bodies, which are not infiltrated or corrupted by lobbyists – and the chains need to be as strong as possible.

The British journalist and novelist John Lanchester („The Capital“) said in 2012: „The financial system in its current condition poses an existential threat to Western democracy far exceeding any terrorist threat. No democracy has ever been destabilized by terrorism, but if the cashpoints stopped giving out money, it would be an event on a scale that would put the currently constituted democratic states at risk of collapse.“

It’s high time for a change …

P.S.: Finally, I would like to recommend you the following two complementary blogs: