13 November 2014

Forex fiddlers have done yet more harm to the reputation of capitalism


The most jaw-dropping aspect of the foreign exchange scandal, for which some of the world’s largest banks were ordered yesterday to pay enormous fines, is that the miscreant traders continued their activities after their jobs had been saved by the taxpayer.

Put to one side the wisdom or otherwise of the bank bailouts themselves. Here were traders who had watched other banks go under and then had the institutions in which they worked rescued with hundreds of billions of aid paid for by their fellow citizens via the government. In Britain it was a high-spending government whose model of regulation had failed and whose deranged conviction that the boom would go on for ever turned out to be hubristic nonsense.

Yet the traders do not seem to have clocked the implications of any of this during the crisis or if they did they concluded that it was safe to carry on ripping off their customers by colluding to out-fox clients. This is quite bizarre. Even if the morality of what they were doing did not trouble those involved (who can know?) one might at least have expected a sense of self-preservation to kick in. Best start doing things properly. Best go easy on all this racy stuff. But no, they carried on for years, merrily messaging each other as though it was all the most jolly of japes. Perhaps the bailouts convinced them that they had nothing to fear.

The affair does raise fresh questions for those of us who are capitalists, who believe in the power of markets to deliver mass prosperity and improvements in living standards and life chances. Six years on from the crisis, news that is reputationally damaging to the capitalist cause continues to flow.

But the forex scandal underlines the case for true competition and open markets. The antics of the traders involved were classic cartel behaviour. They formed a tight-knit group to protect their interests and exploit their access to privileged information, just as Adam Smith explained merchants would given half the chance and without open competition. The foreign exchange traders involved did so from inside the safety of enormous and over mighty financial institutions (once fawned over before the crash by politicians who now rush to television studios to condemn bankers.) This was crony capitalism compounded by cartelisation.

The answer to these problems in finance is not statist micro-management. No, the answer – alongside simpler regulation – is much more competition and transparency, smashing open cartels and encouraging the creation of many new players. Only in this way will it be demonstrated to customers, and voters, that markets that work properly deliver not just for a tiny elite but for the many.

Iain Martin is Editor of CapX