By Jamal Harwood
When the incompetent or corrupt break the law or their most important principles it invariably leads to unexpected consequences.
At the height of the slow motion car crash which is often referred to as the Eurozone crisis, Euro leaders championed the proposed agreement with Greece to slash (haircut) their private sovereign debt by 50%, allied with some ‘chicanery’ (my word not theirs) to deem this debt forgiveness as “Not a default”. The importance of the non default terminology lies in the Credit Default Swap market where bond traders and others protect their sovereign investments via these CDS contracts which are effectively forms of insurance. Fine. If Greece ratifies the deal and pays its debts, gets its economy back on track, quells the riots in the streets and stays within the Eurozone all will go swimmingly for the technocrats. However, by telling the world that they are prepared to cancel debt unilaterally (the haircuts) and effectively cancel the CDS contracts on that debt – the world bond markets have gone into panic. Specifically because the debt cannot be safely hedged by CDS and because recalcitrant payers (like Greece) can get away with non payment or debt forgiveness the price extracted by the bond markets has ballooned. Italy, Spain and even France now are seeing significant increases in the rate of interest they have to pay on their sovereign debt with rates now above 7% on some key maturities. With the very high levels of debt at these rates it is unsustainable.
Higher Interest Rates – The gerrymandering of the markets has led to the market voting with higher interest rates, even though low rates was thought to be a key positive of the whole Euro project. Rather than let Greece default the manipulation will now possibly bring the whole Eurozone down.
Britain is not outside of this law. Gordon Brown and his Chancellor of the Exchequer Alistair Darling were quick to claim praise for “saving the world” as Brown let slip to Parliament for orchestrating the bank bailouts of 2008. The first of the bailouts was for Northern Rock, hopelessly over-leveraged, no short term credit available to try and meet its many long term liabilities, and with customer cues well down the streets of Newcastle trying to withdraw their savings before the bank crashed. Rather than allow failure as capitalism commands for the failed, the politicians took over propping up the bank to the tune of £1.4 billion. Sensing a new doctrine of “too big to fail” other large banks (RBS, Lloyds) were soon knocking at the door of No 11 Downing street requesting £250 billion, and more, to cover their gross gambling debts (at the height of the crisis RBS was the biggest company in the world due to the massive derivatives book it had assumed). Brown triumphantly preached this new doctrine to the finance ministers of the world and the Americans adopted their own TARP (Troubled Assets Relief Programme), initially $700 billion, now considerably larger than that. All to bail out the failed. We were told the bailouts were not handouts to the rich, were not Socialist nationalisations despite taking over majority shares in banks, and were short term emergency measures which would be repaid in full.
The full consequences of these actions continue to play out but it is significant that Northern Rock this past week has been sold back into the private sector. Virgin has bought the bank for £743 million, and a loss of close to £700 million. Virgin has also bought the “good bank” being its branch network and retail operations. The “bad bank” elements including £21 billion of derivatives and troubled assets – shorthand for lost positions – remains firmly as the responsibility of the taxpayer. A damning indictment upon the governments’ patchwork solution to the crisis. Allowing banks to diversify away from core activities to engage in a cornucopia of high risk derivatives and highly leveraged loan positions opened the gates to unacceptable risk positions and predictable losses. But the classic consequence of false protection of the banking industry has led to several unintended crisis.
Moral Hazard – if you defacto tell the industry that regardless of behaviour the government will provide a backstop then we cannot be surprised by the results. Risks have grown as the banks have adopted a “double or quits” stance. If they win they can start repaying debt, if they lose they are guaranteed by the government with public taxpayer money. The gambling culture continues, obscene bonuses are paid with scant regard for public outrage and even the Vickers report rather meekly suggested that the high risk investment banking can be “ring fenced” from retail banking from 2018 (after many further rounds of consultation of course).
The law of unintended consequences is not limited to the economic field. Perhaps the starkest examples have come from the political and reputational harm driven from the failed war campaigns in Iraq and Afghanistan. Abu Ghraib, Guantanamo bay, Bagram Air Base, rendition, torture. All terms now indelibly inked into the consciousness of Muslims globally and not in any way the behaviour of a responsible occupying force seeking to maintain even some semblance of decency.
Where once the British and Americans could count on a perceived history of economic development – painstakenly earned I might add, via keeping others down – respect for the rule of law, family values and human rights. What remains is an empty shell of opportunists, paid politicians, and an industrial/military complex which is out of control and will justify any abuse of human rights to achieve its ends. The British have certainly suffered from hanging onto US coat-tails in the Middle East and Afghanistan/Pakistan. Little surprise that the two most indebted nations of the world US/UK are perceived as the most aggressive in their foreign policy. Support for the unelected brutal dictatorships have not helped perceptions, and if anything have worsened with exposes following the fall of Qaddafi.
Perceptions of the US continue to decline
“A July 2011 Zogby International survey of Egyptians found only 5% have a favorable opinion of America, lower than during the George W. Bush administration. And a Pew Research survey taken this spring found that Egyptians overwhelmingly (82%) disapprove of Obama’s handling of the conflict between Israelis and Palestinians”
The numbers are very consistent across the muslim world with Turks 10% reporting only an approval rating of 10% for the US, and Pakistanis 11%. And we should not be surprised by this. If you cannot show commitment to your principles to your core thoughts how can you expect the respect of other nations.
In consequence the rebellions against the unelected, unIslamic regimes are gaining pace and false starts (Egypt – military junta) are being seen through. The western occupy movements have drawn inspiration from these actions.
Domestically in the UK it has been a sad week. Despite over 140,000 signatories to a petition requested that Babar Ahmed be tried in the UK, and despite guidelines that Parliament will debate any issue for which more than 100,000 signatories are raised, the matter was relegated to a non binding session without a vote at Westminster Hall as part of a wider debate.
MP Andy Slaughter at the Debate stated: “he was first arrested in 2003, and by the time he reached the police station he had sustained at least 73 forensically recorded injuries, including bleeding in his ears and urine. Six days later, he was released without charge. As we know, he was subsequently paid £60,000 compensation by the Metropolitan police for the assaults, although there was no apology and, I think, no admission”
In 2004 Babar was arrested again and has been held in high security prison without charge or trial for more than 7 years pending deportation to the US for a crime he is purported to have done in the UK. The Crown Prosecution Service (7 yrs ago) and Attorney General (5 yrs ago) have already confirmed that there is insufficient evidence to even attempt a prosecution in the UK for any criminal offence.
The 140,000 signatories is the third highest total ever raised in a petition to Parliament and its treatment sends a clear message to the predominantly Muslim signatories that their voice is not important. A sad day for the notion of representative rule. A sad day for habeus corpus, due process and the right to trial in front of ones peers.
Whilst one can accept the law of unintended consequences when one is dealing with an inherently weak economic system – one in which the key participants have handed over sovereignty to their gambling buddies who run the banking system. Many of us have suffered the indignities of an addicted family member that runs roughshod over all etiquettes and honesty to sate that gambling or drug addiction. I’m not so sure re the above political and human rights position. The growing alienation of the Muslim populations east and west, north and south cannot be a bumbling mistake. In such circumstances the law of the un-intended becomes very much the reality of the intended.
As Yeats wrote:
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world
Jamal Harwood is a regular contributor to New Civilisation. He is a lecturer in Finance, and a member of the UK Executive Committee of Hizb ut-Tahrir Britain.