European Nations Ban Short Selling as Cities Burn

You have to laugh at the latest nonsense from the fringe-right about the riots now occurring in Europe, which some Washington, D.C., lobbyists and pundits are now citing in defense of the “greed is good” philosophy embraced by their wealthy patrons.

They’re pointing to European nations that treat workers fairly and effectively saying “look, we told you so. Europe is having problems because they’re too generous to workers, instead of exploiting them as we do here in the land of savage capitalism.”

Never mind that our own predatory ways have helped create these problems for Europe, where nations like Norway and Sweden have managed to live within their means for decades while being generous to their citizens.

The bottom line is that the United States is now hurting its allies in the developed world with our pay-to-play government’s flaccid regulation of multinational corporations and Wall Street. A savage strain of predatory capitalism seems to have mutated to life here since the fall of the Soviet Union due to the impact of short-term trading and stock option pay on the fiduciary duty of chief executive officers to maximize shareholder value.

In layman’s terms it simply means that greed is good, more greed is better, and profits justify even the most treasonous and immoral behavior, like denying medical care to a sick person without health insurance, forcing pregnant women to endure cesarean section deliveries so delivery rooms can handle more procedures each day, and replacing cheap generic cancer drugs with expensive new ones that don’t work nearly as well. It’s insane.

And parts of European cities are now in flames in reaction to savage capitalism. That’s a photo of the riots in London to the left; Athens up top.

The continued short-selling of distressed stocks, commodities and securities is just one example of the problems we’re creating on global stock exchanges, because the U.S. still permits the practice, even though it exacerbates market volatility.

France, Italy, Spain and Belgium all banned short-selling for 15 days on Aug. 12 in response to what one Financial Times article described as “sharp share price falls this week.” Spain also prohibits the selling of derivatives. Germany, which has the largest economy in the European Union, banned short-selling last year.

Of course, banning short selling on individual European national exchanges has about as much impact on investors as the state usury laws that still theoretically cap credit card interest rates here in the U.S. It doesn’t do much good for Spain to do the right thing with a temporary ban on short-selling if investors can still short the same investment vehicles on U.S. exchanges, any more than it makes sense for Vermont to do the right thing by capping usury rates at 12 percent when North Dakota banks can barrage citizens of other states with credit cards carrying 29 percent interest rates.

And yet the states-rights champions on the far-right are curiously silent on the subject of our undermined state usury laws

The global economic crisis illustrates one of the real problems with the rise of an interlaced global market in the Internet Age: the absence of a proper system of global business regulation. Without such guidance, capitalism is morphing from a system that champions private ownership of industry into one that places corporate profit growth ahead of national interests.

Short-selling is the predatory investment practice of betting that a stock, commodity or bond will decline in value, often by using borrowed money to magnify the potential gain. Of course, “investing beyond your means” like this, which is never a problem for the same right-wing crowd that rails against the middle class for “living beyond their means,” can also result in losses that exceed an investor’s wealth.

Short-selling and trading in derivatives played a major role in the near-collapse of the U.S. financial services and banking sectors in late 2007, which required their recapitalization by The Federal Reserve. That meant tapping into a federal Treasury disproportionately built from middle-class tax dollars.

Short-selling and trading in derivatives gave us “The Great Recession,” which officially ended in June 2009 after 18-months, but continues to reverberate through a lurching global economy that seems headed for a double-dip recession.

It’s increasingly hard for European nations to treat their people well when the U.S. is treating its people like garbage. Doing so makes their goods and services more costly and therefore less competitive in the global marketplace, just as U.S. goods and services are more costly relative to China.

That’s the rub.

People with no investments in the stock market are rioting in nations that have traditionally treated workers well because they’re being asked to offset the cost of the failed investments of the rich via austerity measures like layoffs, reduced social welfare safety nets, cuts in bonuses and the like.

The driving force behind these cuts are so-called “bond vigilantes,” who run the huge funds that purchase government bonds and called for the austerity measures that sparked these riots. If they don’t like the returns they’re getting from a struggling nation or see signs they may have to share the losses resulting from its economic distress they’ll shift their money to bonds from other nations. That winds up driving up borrowing costs in the abandoned nation, which has to pay more interest on its bonds to get people to buy them.

That’s why government bonding is sometimes called “borrowed money” and “living beyond your means.”

The agenda of bond vigilantes like Bill Gross, co-founder of the Pacific Investment Management Company LLC, isn’t class warfare, but it comes across that way today in a world where so many nations have been selling bonds for so long to live beyond their means. These nations simply cannot make the shift to living within their means overnight. They have to pay off their bonds first and build surpluses as the U.S. did under former president Bill Clinton – a reality lost on the Tea Party fanatics here at home.

It’s just like paying off household credit card debt. It takes time for a family to make the switch to living within their means, especially when daddy is out of work. You just can’t do it overnight when you’re talking about nations that used bonds to bankroll multi-decade infrastructure programs that are still underway.

Furthermore, most economists agree that the worst time to introduce the multi-year austerity measures needed to
 kick the bond habit is in the middle of an economic downturn, when such cuts further inhibit economic growth.

The funny thing in all this is that it’s the rich who overwhelmingly invest in stock markets and they’ve been getting richer the past few years because they can afford to retain talented accountants, lawyers and money managers to protect their wealth and navigate beneficial regulatory loopholes.

Meanwhile, workers with a lot less in the stock market are being asked to help pay off the bad debts run up by wealthy short-sellers, irresponsible banks, crooked politicians and the like. Those workers already routinely pay a higher precentage of their incomes into the government kitty than the rich precisely because they cannot afford the experts who helped make our tax code and investment rules so complicated.

That’s why “austerity measures” are eco-speak for gutting social programs that serve workers to blunt the impact of stock market downturns on the government bond market. And that’s why workers are rioting in Greece, England, Spain (left) and Israel (right).

They’re not rioting for nothing. They’re getting screwed and our pay-for-play government here in the U.S. is helping them get screwed.

Here’s the other rub:

Many of today’s short-sellers are the same investors that helped precipitate the worldwide economic collapse we faced in late 2007 via risky speculative moves that held both the potential for huge gains and huge losses. They followed their “greed is good” mantra right into The Great Recession, and then handed the check for their failed market bets to working taxpayers through their elected leaders and central banks.

The big winners so far are China, which doesn’t pay its workers diddly, and multinational corporations, which are always willing to boost their profits by cutting labor costs. The logical outcome of their ability to charge high prices in developed nations for goods made in low-wage nations is a world where all workers eventually will be paid a pittance like the Chinese, at which point the multinationals will bring manufacturing back home to the retail markets for their finished goods to continue to feed their profit growth addiction by shaving transportation costs.

In the absence of effective U.S. regulation of multinationals, the rest of the world has been hard-pressed to establish minimum standards for corporate behavior. Likewise, in the absence of effective U.S. regulation of short-selling, the rest of the developed world is hard-pressed to stop the short-sellers that get richer by making things worse.

All that’s standing between complete anarchy and revolution in Greece right now, and in other nations, is a thin blue line of exhausted riot police. The problem for the investor class is that the police are workers too and the day they lay down their shields is the day the wealthy lose everything, just as they did in France in 1789 and in Russia in 1917.
 
Leaders of the European Union seem to understand what’s at stake, that the present situation can’t go on forever, and that the riots in Greece already are spreading to other developed nations. Ollie Rehn, the EU’s Commissioner for Economic and Monetary Affairs, says the EU is putting together a rescue package for Greece that will give the beleagured government in Athens some “breathing space.”

In other words, they’re going to pony up some money so Athens doesn’t have to keep stealing from bitter workers to reassure bond vigilantes. The problem is that once a law-abiding worker concludes their govenrment works for someone else and crosses the line into kicking ass it’s hard to put that genie back in the bottle.

German politicians have suggested the bailout package could be worth more than $163 billion and last three years, according to this article in the London-based Daily Mail. Nouriel Roubini, the the New York University professor who predicted The Great Recession, has warned that a number of other countries could be swept up in the crisis. He told the Daily Mail that “the bond vigilantes are walking out on Greece, Spain, Portugal, the U.K. and Iceland.”

That means higher borrowing costs for those already beleagured nations. It also rais
es the question of why they should even bother to pay off their existing debts once the bond vigilantes have done their worst. And the global market linkages mean their problems, which our government helped create, are our problems too.

Oh boy, are we screwed.

We’re just lucky we’ve got principled institutions like the Tea Party and the U.S. Chamber of Commerce looking out for the greater good, in combination with fine elected leaders like 40-year House veteran Charlie Rangel looking out for us. Cause no one else in New York State could possibly pocket legal bribes – I mean political donations – with the speed and efficiency of  Charlie Rangel. And no can hand them out like the Chamber.

Not.

The $69 question is how long working-class riot cops are going to keep fighting with working-class demonstrators in European cities to defend the wealth of the rich. It can’t go on forever, and history has shown that increased force militarizes protesters.

The moral of this story is that unrestrained greed is never good and neither is savage capitalism, especially in developed societies where people have been raised to believe in the Golden Rule.

This can’t go on. It’s madness.