Guest Report

Filfthy Luca's Nightmare On Wall Street

He might be recalcitrant; but maybe he's right.

When the Asian crisis erupted last year, Malaysian Prime Minister, Mahathir Mohommad identifies Hedge Funds - huge pools of capital - as one of the causes of the turmoil. He argued that hedge funds had invested billions of dollars in Asia, and then, at the first sign of trouble, ripped the money back out - devestating local economies.

Mahathir was roundly condemned by the west and it's economic mouthpiece, the IMF... after all, hedge funds were seen as the ultimate vehicles of capitalism: big bucks, big risk, big rewards. To criticise them was to criticise the very embodiment of the global financial system.

Long Term Problems

That all changed when the Long Term Capital Management hedge fund proved to be anything but long term. LTCM was run by one of Wall Street's best and brightest, John Meriwether, and had two Nobel Laureates on Staff.

But that counted for little.

In September, LTCM stunned Wall Street by announcing that it's bets on the the global finanical turmoil gone bad - the hedge fund had lost $4 billion. The collapse had massive ramifications: America's biggest banks had invested huge sums with LTCM. If it went under, so could they.

Suddenly, Wall Street realised that it wasn't just millions of faceless Asians who stood to lose from the economic crisis: the West was vulnerable too.

There's nothing like self-interest to change people's minds, and that's exactly what happened here. Wall Street bailed LTCM out and disaster was averted - but at a greater cost than anyone anticipated. The reputation of hedge funds was dealt a serious blow. There's now a recognition that the funds were operating in an irresponsible, reckless and ultimately destructive way. Mahathir was right.

That recognition brought with it an even greater realisation: the global financial system that nurtured and encouraged hedge funds was itself flawed. Even George Soros - who has made billions from hedge funds - now believes that, "instead of acting like a pendulum, financial markets have acted like a wrecking ball, knocking over one economy after another."

There's no doubt a great many factors contributed to the Asian crisis, but now the IMF, the US Treasury and even the Australian government seem to realise that hedge funds played a part: naked capitalism can be ugly capitalism.

Sand in the Wheels

Behind closed doors, the architects of the global financial system are now trying to decide how to prevent a repeat of the Asian crisis. One proposal that's received almost universal support is that hedge funds be regulated.

Some people want to go further: they argue the global financial system itself should be regulated. One suggestion that's now receiving serious attention is that global capital flows be slowed down. As respected international economist, David Hale, points out, the cost of a long distance 'phone call between New York and London in 1930 cost around $800 in today's money. These days, the cost of moving money is less than one cent.

As Hale argues, "even Alan Greenspan, the Chairman of the US Federal Reserve, is asking whether we have a global financial system now that has a propensity to instability simply because the cost of moving money has fallen so dramatically on the back of new developments in computer and communications technology."

A few years ago, Nobel prize winning economist, James Tobin, suggested that all the money sloshing around the financial system is inherently destabilizing. He argued that a tax should be imposed on foreign exchange transactions. "The lession of the Asian crisis is that we've gone too far, we need to slow things down, put some sand in the wheels so that capital flows don't go so fast", he told me recently.

"It could be a very small tax but it would make people think twice before moving funds very rapidly between countries because every time they moved them they'd have to pay tax."

When Professor Tobin first proposed his tax, he was roundly ridiculed. Now, like the critics of hedge funds, his ideas are gaining wider acceptance. They're being considered at the highest levels.

For the West, the legacy of the Asian crisis is a realisation that the global financial system is badly flawed and needs to be changed. Any changes will come too late for Asia. For millions of people there, the legacy of the crisis will be unemployment, poverty and social dislocation.

Filfthy Luca is a prominent Sydney finance journalist. He will write an irregular column on economic matters for Workers Online

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  Issue 14 contents

»	Call For IR Crisis Talks as Country Conference Looms
»	Workers Sacked for Body Hire
»	British Union Secures Free Net Access
»	Cab Charge Wars: SBS Workers Fight for Their Lives
»	State Wage Case Smooth - Except for Brack
»	FOI Loopholes Could Leave Public Servants Exposed
»	Drug Summit Misses Tokin� Gesture
»	Public Will Lose Again From Rail Sackings
»	Robin Hood Strikes Again
»	CPSU shows it cares�
»	Unions Take Action on Timor, Stolen Generation

»	Guest Report
»	Sport
»	Trades Hall
»	Piers Watch

»	Faction Calls Miss Point
»	Don't Ignore the Class Divide
»	Timor: Look at the Map!
»	Songs of the Revolution Feedback

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