Financial dilemmas

Published February 6, 2021
The writer is an adviser on international travel, migration, and ethical investing.
The writer is an adviser on international travel, migration, and ethical investing.

THE brawl between retail investors (Main Street) and institutional investors (Wall Street) has extended into February. Silver prices have already hit an eight-year high. In August 2020, the gold price also hit a record high.

The increase in the gold price was primarily because of fears of inflation over increased stimulus packages — money printing, in other words — by some of the world’s biggest central banks. The recent increase in the silver price, on the other hand, could in part be attributed to retail investors’ resentment over alleged price manipulation by institutional investors. The fact of the matter is that stock market manipulation has been going on for years.

In September 2020, for example, the largest bank in the United States agreed to pay a record $920 million fine to settle a case that involved manipulation — spanning at least eight years — of futures contracts of precious metals and US treasuries. Previously in 2017, BNP Paribas, a large French bank agreed to pay $350m to New York’s banking watchdog to resolve a probe of misconduct occurring between 2007 and 2013 in its foreign exchange business. The same bank was also among the three banks barred from lira trading, for some time, by the banking watchdog in Turkey in May 2020 due to what the regulator called manipulative attacks on the lira.

Ethics must be kept in sight while making money.

Qatar has also sued a trio of banks in recent years, alleging their involvement in efforts to devalue the Qatari riyal, something that, according to the Qatari government, made it liquidate nearly $3 billion in US treasury investments and draw down over $40bn in foreign reserves to support its currency. These are a few examples of efforts of stock market and currency manipulation.

The system we are living under encourages debt and relies on credit and consumption. Fractional reserve banking — a practice prevalent in almost all countries, that allows banks to keep only a fraction of the customers’ deposits, while allowing them to lend the rest — increases money supply in the economy. Ceteris paribus, this is inflationary, in the words of Dr Ahamed Kameel, a professor of economics and finance, resulting in the loss of purchasing power of the money.

“According to an estimate, since the creation of the Federal Reserve Bank in 1913, the US dollar has lost over 90pc of its value against gold with other major currencies also experiencing a similar fate.”

Inflation, the decline in ethical investing, and the growing gap between the financial markets and the real economy are the dilemmas of modern-day societies. In May 2020, during the first wave of the pandemic, when smaller businesses were struggling with unemployment hitting record levels, the view on Wall Street was bright and shiny. Fed continued to buy corporate debt at an unprecedented rate. While this was good news for the shareholders of America’s giant publicly traded firms, from Amazon to Facebook, the common man in the US was finding it difficult to pay the bills. Such events not only create wealth inequality but also have the potential for a backlash. The roars of the Reddit crowd somewhat speak of this.

In some developing countries, like Pakistan, where investing in capital markets is not very common, the real estate market worth hundreds of billions is a playground where big boys tend to dictate the rules, at least for now, and the weaker crowd has to play by those rules. Pump-and-dump, short-selling, spoofing and other types of market manipulation can all be seen, in one way or another, in the real-estate business in Pak­istan. If in the words of US Sen­a­tor Elizabeth Warren, “the hedge funds, private equity firms, and wealthy investors … have treated the stock market like their own personal casino”, how different is the situation in Pakistan’s real estate market? In the name of pre-sales, adjustment, or application forms, millions of rupees are gathered by some mega developers even before the full acquisition of land by the developers.

There is nothing wrong with making money; however, ethics must not be forgotten. Whether we look at the South Sea Bubble — a financial crash that rattled London and England in 1720 — the 1929 crash, Black Monday in 1987, or the financial crisis of 2007-08, history will tell us one thing: forgetting ethics and fundamentals makes us pay.

While some large financial institutions may be too big to fail, resulting in their rescue at the expense of the taxpayers’ money at times, a small-scale investor is never too big and, hence, has to bear the burden himself. This is where the policymakers need to play their part.

The writer is an adviser on international travel, migration, and ethical investing.

Twitter: @DrHussainFarooq

Published in Dawn, February 6th, 2021

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