Corporations Are Not Humans : Not Even Close---Episode 41

                        PROFITING FROM MARKET VOLATILITY

   The financial resources that private speculators bring into play in the world's money markets mock governmental efforts to manage interest and exchange rates to maintain economic stability and growth. Allen Metzler, one of the world's leading authorities on central banks and monetary policy, estimated that if the world's central bankers agreed among themselves on a coordinated commitment to protect a currency from a speculative attack, they might at best be able to muster $14 billion a day, a mere drop in the bucket compared with the more than $800 billion that currency speculators trade daily. 
   The U.S. dollar fell by approximately 10 percent against both the Japanese yen and the German mark during the first half of 1994. On June 24, 1994, the U.S. Federal Reserve and sixteen other central banks mobilized a coordinated intervention and bought an estimated 3 to 5 billion U.S. dollars to slow the fall. The market scarcely noticed. 
   We have reached a point at which such interventions do little to decrease volatility. They simply transfer taxpayer dollars into the hands of speculators.
   The onset of the Mexican peso crisis in December 1994 gave new insight into how costly the financial dysfunctions have become. Although little discussed by the financial press, the backdrop of Mexico's financial crisis was very different from the picture of an economic miracle that had been presented to the public by big business and the Clinton administration during their campaign to sell the North AmericanFree Trade Agreement (NAFTA). 
   For years, Mexico increased its foreign borrowing --- and thereby its foreign debt --- to cover consumer imports, capital flight, and debt-service payments. This borrowing took many forms, including selling high risk,  high-interest bonds to foreigners ; selling public corporations to private foreign interests ; and attracting foreign money with the speculative binge that sent Mexico's stock market skyrocketing. As little as 10 percent of the $70 billion in foreign "investment" funds that flowed into Mexico over the previous five years actually went to the creation of capital goods to expand productive capacity and thereby create a capacity for repayment. Prices of many of the assets transferred to foreign ownership were based on fictitiously inflated balance sheets. Projected debt service payments alone came to exceed the country's projected export revenues. Mexico's "economic miracle" was little more than a giant Ponzi scheme. 
   Who benefited from these inflows ? A few Mexicans built huge fortunes during this period. Forbes identified fourteen Mexican billionaires in its 1993 survey of the world's billionaires. It identified twenty-four in its 1994 survey. 
   The bubble burst in December 1994. The Mexican stock market lost more than 30 percent of its money value in peso terms as speculators rushed to pull their money out. Downward pressure on the overvalued peso due to the flight of money out of Mexico pushed the Mexican government into a deep financial crisis and forced it to devalue a highly overvalued peso. This resulted in a dramatic shift in the terms of trade between the United States and Mexico and priced most U.S. imports out of reach of the Mexican market. When it appeared that the Mexican government might be forced to default on its foreign obligations, the Wall Street investors who held Mexican bonds ran to the U.S. government with cries that the sky would fall unless U.S. taxpayers financed a bailout. President Bill Clinton responded by circumventing a reluctant Congress to put together a bailout plan totaling more than $50 billion in taxpayer money to ensure that the Wall Street banks and investment houses would recover their money. Critics of the bailout noted that not a penny of this money would go to the millions of poor and middle-class Mexicans who are bearing the major burden of the crisis. 
   Neither the bailout nor the interest rates as high as 92 percent on Mexican government securities had stemmed the peso's continuing decline by mid-March 1995. Austerity measures imposed by the Mexican government were expected to put 750,000Mexicans out of work during the first four months of 1995, and interest rates of 90 percent or more on mortgages, credit cards, and car loans would push many families into insolvency. Estimates of the number of U.S. jobs that would be lost due to the related drop in exports to Mexico ran as high as 500,000. 
   Shock waves from the Mexican crisis reverberated throughout the world's interlinked financial markets as speculators scurried to move their money to safer havens. When the Mexican stock market bubble burst, speculators with holdings in other Latin American countries got nervous and quickly pulled out their money, resulting in a fall of more than 30 percent in one month in the per-share value of the leading Latin American stock funds. When the U.S. bailout linked the dollar to the falling peso, wary currency speculators sold dollars to buy German marks and Japanese yen, further weakening the dollar in international currency markets.

   How did this look to the Stratos dwellers from high above the clouds ? The March 1995 issue of the United Airlines magazine Hemispheres,  placed in every seat pocket of United Airlines passenger planes, featured an article praising the success of the NAFTA and calling for its extension to the rest of the Western hemisphere.

   The ability to move massive amounts of money instantly between markets has given speculators a weapon by which to hold public money hostage to their interests, and they are increasingly open about calling attention to this fact. Economist Paul Craig Roberts of the Cato Institute, a Washington, D.C. thinking tank devoted to the propagation of corporate libertarianism, lectured President Clinton in a Business Week op-ed piece : 

     The dollar is also under pressure because investors have realized that Clinton favors big government "solutions," while other parts of the world, especially Asia and Latin America, are curtailing the scope of government and growing rapidly as a result. Equity investors have developed a global perspective, and they prefer markets where government is downsizing and the prospects for economic growth are good . . .  It would also help if Congress were to repeal hundreds of ill-considered laws that benefit special interests at the expense of the overall performance of the economy, and if thousands of counterproductive rules in the Code of Federal Regulations were removed.

   The process is simple. If the speculators who are shuffling hundreds of billions of dollars around the world decide that the policies of a government give preference to "special interests"--- by which they mean groups such as environmentalists, working people, or the poor --- over the interests of financial speculators, they take their money elsewhere, creating havoc in the process. In their minds, the resulting economic disruption only confirms their thesis that the policies of the offending government were unsound. The view expressed to the Washington Post by a foreign exchange analyst is typical : "A lot of central banks love to blame it on the speculators. I think it's more a question of their gross incompetence in managing their monetary policy than a speculative attack." 

The financial press continues to describe what is happening in terms of global investors and international capital flows, as though we were still living in a world in which those who have savings commit them to productive uses beneficial to society with the expectation of steady, long-term returns. The reality that the Stratos dwellers are loath to acknowledge is that financial institutions once dedicated to mobilizing funds for productive investment have transmogrified into a predatory, risk-creating, speculation-driven, global financial system engaged in the unproductive extraction of wealth from taxpayers and the productive economy. This system is inherently unstable and is spiraling out of control, spreading economic, social, and environmental devastation and endangering the well-being of every person on the planet. Among its more specific sins, the transmogrified financial system is cannibalizing the corporations that once functioned as good local citizens, making socially responsible management virtually impossible and forcing the productive economy to discard people as costly impediments to economic efficiency.