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The Global Financial Chicanery: Biggest threat to Markets and Democracy - 1

Press reports across the globe in the last week of July 2010 suggest that billionaire financier George Soros is in advanced talks to buy a 4 per cent stake in the Bombay Stock Exchange (BSE). Valued at approximately US$ 35-40 million, this deal involving Soros and the country’s largest bourse has set the cat among the pigeons in several countries. Strangely, despite the strategic issues involved in the deal, Indian media, experts and analysts, and more importantly, the financial sector including other shareholders of the BSE, are inexplicably silent.

Soros Fund Management, according to these press reports, is in advanced stages of negotiations to buy a stake in Asia’s oldest stock exchange from Dubai Financial, a part of the sovereign fund Dubai Holding. The Financial Times quoted a source as stating "Dubai Financial has been looking to sell its about four percent stake for quite some time now. The talks with Soros are now in almost final stages and a formal transaction is expected shortly."

But first the question – who is George Soros and what is intriguing about the deal?

Wikipedia says Soros is a "Hungarian-American currency speculator, stock investor, businessman, philanthropist, and political activist. He became known as the Man Who Broke the Bank of England after he made a killing, reportedly of US$ 1 billion (we will dwell on this in Part II) during the 1992 Black Wednesday UK currency crisis.

But Soros is no ordinary financial speculator who made his billions by making or marring markets. Soros is the chairman of Soros Fund Management, Open Society Institute, and a former member of the Board of Directors of the vastly influential Council on Foreign Relations (CFR). Crucially, he is believed to have played a significant role in the transition from Communism to Capitalism in Hungary (1984–89).

In short, his ability to influence geo-political developments, his advocacy of open markets (with absolutely no or miniscule regulation) and his innate ability to seamlessly link the two and profit from it makes him one of the most influential persons of our times, not only in shaping and de-shaping currency or other markets, but even in shaping or de-shaping geopolitical developments. That makes the deal intriguing.

No one has been more forceful in expressing these views than the Malaysian Prime Minister Dr. Mahathir Mohammed a virulent critic of market speculators, especially George Soros. It may be recalled that as the East Asian Crisis unfolded in 1997, Dr. Mohammad went on to blame "international speculators for villainous acts of sabotage" and "height of international criminality." In fact, he was directly hinting at Soros and his complicity in dynamiting the Asian economies.

According to Dr. Mohammad, the East Asian crisis was in fact a western conspiracy to undermine Southeast Asia’s economic growth, to "punish" these countries for their growth, for their new assertiveness in the world economy, and for their growing resistance and opposition to US policies. This view has credence among some sections of expert opinion in the region as well as in distant places.

Those who buy Mahathir’s arguments repeatedly point to the fact that the East Asian Financial Crisis followed one important political development in the region. July 1, 1997 marked not only the 30th anniversary of ASEAN, but also the admission of Myanmar to this group. The EU and the US opposed Myanmar’s admission to ASEAN only because they did not like Myanmar’s ruling military junta.

George Soros, an important player in the entire crisis, is known to fund anti-Myanmar activist groups; he was one of the most vocal opponents of the country’s admission into ASEAN. Perhaps unsurprisingly, people who support Dr. Mohammad’s theory claim to this date that Soros’ actions in the currency market led to the collapse of the Thai Baht on July 2 and the subsequent (and almost reactive) fall of other currencies of ASEAN countries. The nominal US dollar GDP of ASEAN fell by US$ 9.2 billion in 1997 and a further US$ 218.2 billion (31.7%) in 1998.

If the speculative attack on Asian currencies that began on July 2 was merely a coincidence to political happenings the day before, it must be a remarkable coincidence. Soros, it is generally believed to this day, had a role in triggering the depreciation of Southeast Asia’s currencies because of these or other reasons. According to Dr. Mahathir Mohammad, in the three years leading to the crash, Soros invested in short-term speculative investment in East Asian stock markets and real estate, then divested with "indecent haste" at the first sign of trouble. Naturally when Soros invested prior to 1997 the markets reacted positively, but as he withdrew, markets collapsed dramatically. And in 2010, the fallout of the East Asian Crisis still continues to haunt several of these countries in the region.

But all this, especially in the context of a reported purchase of four per cent stake in BSE by George Soros, provides a larger text to the power of financial speculators; their impact on the Indian economy, as well as their ability to fashion our approach to contentious issues, needs to be factored in any critique of Soros’ intended buy into the BSE. It is quite possible that the next round of Indo-Pak talks on the vexed Kashmir issue or altering the stated Indian policy of entire Kashmir being an integral part of India could well be sponsored by Soros! (He has already been invited to India twice to address the so-called elite).

Else the Indian Rupee (with or without its new symbol) could well face a significant bout of volatility. This may not be as far-fetched as it sounds considering Soros’ connections not only to the powerful Council on Foreign Relations but also to the interventionist Human Rights Watch, both of which bodies have intense interest in India’s internal affairs.

Power of financial speculators
Market movements, as students of Economics tell us, are a function of sentiments. Sentiments in turn are fashioned by the collective mood swings of market participants. Naturally that makes Media an important tool in shaping and de-shaping the sentiments of market participants.

Let me elaborate through certain real life developments of the past couple of years. Of late, there is a new class of investors – investment by the financial sector into the commodities futures market. In doing so, the link between the prices of a commodity and the relationship between supply and demand seems to have been completely bypassed. What is worrying analysts is the growing influence of these players, who tend to take positions that exert extraordinary pressure on prices. This in turn fuels speculative bubbles. Moreover, their activities are obviously coordinated across currency, stock and commodity markets. Consequently, the rise and fall in commodity prices has nothing to do with demand and supply of that particular commodity. In the process the fundamentals of economics have been short-circuited.

This issue is of particular importance for food commodities in a country like India with constant supply side constraints. Nothing illustrates this paradigm better than a report by Johann Hari: How Goldman gambled on starvation in the Independent, UK, on 2 July 2010, portions of which are reproduced hereunder:

"You want to know how some of the richest people in the world - Goldman, Deutsche Bank, the traders at Merrill Lynch, and more - have caused the starvation of some of the poorest people in the world?

At the end of 2006, food prices across the world started to rise, suddenly and stratospherically. Within a year, the price of wheat had shot up by 80 per cent, maize by 90 per cent, rice by 320 per cent. In a global jolt of hunger, 200 million people - mostly children - couldn’t afford to get food any more, and sank into malnutrition or starvation. There were riots in more than 30 countries, and at least one government was violently overthrown. Then, in spring 2008, prices just as mysteriously fell back to their previous level. Jean Ziegler, the UN Special Rapporteur on the Right to Food, calls it "a silent mass murder", entirely due to "man-made actions."

Most of the explanations we were given at the time have turned out to be false. It didn’t happen because supply fell: the International Grain Council says global production of wheat actually increased during that period, for example. It isn’t because demand grew either: as Professor Jayati Ghosh of the Centre for Economic Studies in New Delhi has shown, demand actually fell by 3 per cent. Other factors - like the rise of biofuels, and the spike in the oil price - made a contribution, but they aren’t enough on their own to explain such a violent shift.

For over a century, farmers in wealthy countries have been able to engage in a process where they protect themselves against risk... When this process was tightly regulated and only companies with a direct interest in the field could get involved, it worked. Then, through the 1990s, Goldman Sachs and others lobbied hard and the regulations were abolished. Suddenly, these contracts were turned into "derivatives" that could be bought and sold among traders who had nothing to do with agriculture. A market in "food speculation" was born. Until deregulation, the price for food was set by the forces of supply and demand for food itself. (This was already deeply imperfect: it left a billion people hungry.) But after deregulation, it was no longer just a market in food. It became, at the same time, a market in food contracts based on theoretical future crops - and the speculators drove the price through the roof.

In 2006, financial speculators like Goldman pulled out of the collapsing US real estate market. They reckoned food prices would stay steady or rise while the rest of the economy tanked, so they switched their funds there. Suddenly, the world’s frightened investors stampeded on to this ground. So while the supply and demand of food stayed pretty much the same, the supply and demand for derivatives based on food massively rose - which meant the all-rolled-into-one price shot up, and the starvation began.

So it has come to this. The world’s wealthiest speculators set up a casino where the chips were the stomachs of hundreds of millions of innocent people. They gambled on increasing starvation, and won.

Recall all this was happening in full public glare of the intelligentsia, media and analysts. Thanks to the machinations of these financial speculators, grain prices especially wheat, rose across continents. The then American President George W. Bush blamed it on the increasing consumption of the Chinese and Indians. The Indian response was even more bizarre – some of our experts actually floated the theory that South Indians were turning away from rice and were consuming more wheat, which was fuelling global wheat prices!

No one, definitely not one trained economist from the establishment, blamed it on financial speculators and their impact on grain prices. Either they were all on the payroll of these financial speculators or were inexcusably ignorant about the derivatives market. Either way, it does not speak very highly of these economists. A friend captured the credibility crisis of economists quite brilliantly at the height of the 2008 global financial crisis when he said – "It is not merely economies that are in crisis; globally, economists are in crisis." How true.

What is adding fuel to the fire is the role played by the media in the entire affair. Increasingly it is being seen that the dividing line between the media and financial players is getting blurred. The media seeks to be a player in the markets while simultaneously being a commentator on the markets. This makes it easy for anyone to make or mar market sentiments. Naturally with their power and reach, the media has enormous influence over the collective psyche of the people, especially in a country like India. This enormous influence ensures that the sentiments are always controlled – mostly favourably, but if need be negatively – by the media. With rumours of anchors (in case of electronic media) taking enormous positions by the day, the media’s role as an independent commentator of the markets is suspect.

Consequently, a "report" published in some remote corner of the world on the El-Nino flows or its impact on the Indian monsoon pattern could well trigger a spurt in food grain prices in India merely on anticipation of a failure of the monsoon. This speculative report when repeated by vested interests in the media at prime time or in the front pages of national dailies instantly becomes an "impending food disaster waiting to explode."

Naturally, all this adds to the panic-spasms in the economy. The artificially triggered panic in turn leads to hoarding by the "common man." People hoard in anticipation of shortages and not when there is an actual shortage. It is this hoarding by the common man which generates demand at the aggregate level, leading to increase in the prices of a commodity. Once the necessary threshold level of panic is created, the rest is easy. Rumours, black marketers and hoarders at the retail level then take over and ensure a cataclysmic price rise.

In India, with underdeveloped spot markets and poor infrastructure, it is easy to create demand supply gaps easily through this process of triggering panic. Financial investors and their partners in investment, the media, act in tandem to create this panic. After all, they have taken positions in the futures market quite early, knowing pretty well that it is they who have the ability to hype the failure of monsoon, leverage it and profit from it.

Commenting on this issue of over-hyping the failure of the monsoon in 2009, the Economic Survey for 2009-10 was particularly critical of the government’s failure in not being able to check the "hype" over Kharif crop failure, caused by an erratic monsoon, which did not take into account the comfortable levels of food stock and prospects of Rabi production. The Survey further notes that this "may have exacerbated inflationary expectations, encouraging hoarding and resulting in a higher inflation in food items." What is lost in this debate of the absurd is that the government allowed such speculation in the first place and then kept quiet when the players hyped up the speculative and still-in-the-future monsoon failure.

Some analysts argue that whatever be the impact of such "intervention" by the speculators, the consequences would be purely temporary and prices would return to normal so as to reflect the fundamentals. That is, provided the fundamentals themselves are not subject to such intervention. But the more important question is - what prevents the Government from preventing such hyping in the first place?

This is what makes the study of economics and markets simply fascinating in India. The Economic Survey 2009-10 points to the fact that the minimum buffer stock of rice and wheat required to be maintained in the month of January 2010 was 20 million tonnes. Against the same, the Survey points out that the actual buffer stock of rice and wheat was approximately 47 million tonnes. In contrast the buffer stock in January 2009 was 35 million tonnes. In short, in a "drought year" the Government actually procured 12 million tonnes from the markets. Conventional economics suggests otherwise – that the Government should release buffer stocks to ensure more supply to meet the possible surge in prices.

The reference to the commodity markets mentioned above provides a contextual reference to a larger discussion on the relationship between the media and the financial sector. It is vital that we understand the role and power of Goldman Sachs or for that matter George Soros in making or destroying market sentiments through their linkages with the media. It is this financial sector – comprising largely of speculators – who not only fashion editorials, headlines and breaking-news in our media, but also wield dangerous and disproportionately large influence on our policy framers.

The intended purchase of a stake in the BSE by Soros is part of a larger process by which even the faint murmur of opposition by some vested interests in certain quarters is quelled from within. From now on, given his track record of influencing media, polity and intellectuals, BSE will behave more as a subsidiary of Soros than as a premier stock exchange of the country, reflecting and expressing our national interests.

But is this speculative game limited only to India and is it limited only to speculation of food grains? Are we becoming needlessly paranoid about the global financial architecture? We shall look into these issues in the next part of this article tomorrow.

(To be continued …)

Last modified on Sunday, 07 July 2013 07:36