Global finance lost in cyberspace

High-speed trading and cloud computing have far outrun government oversight and control. For years, I have documented how often science and technology leap ahead of politicians and bureaucrats. Usually, citizens and their groups sound the alarm because they feel the impacts first: job losses, pollution, identity theft, ponzi schemes, and worthless investment advice.

The latest runaway technologies are those now driving the cyberspace communications revolution: the Internet, high-frequency trading, money-laundering, offshore finance in the global casino, loss of privacy, corporate-controlled personal data on Facebook or on servers now in the clouds.

Some examples:
*The New York Stock Exchange handles one third of the world's stock trading (22 billion messages a day), while over 60 percent of all transactions are computerised as high-frequency trading allows for thousands of trades per second. This led to the “flash crash” of May 2010 when stocks of listed companies plummeted. Accenture, for example, fell from $40 a share to pennies in a few minutes, though it did recover later. The US regulator — the Security and Exchange Commission — complained they were out-gunned, out-spent, and out-smarted in this new computerised technological arms race.

* In 2011, the cable company Hibernia Atlantic spent $300 million on a new transatlantic cable to shave 6 milliseconds off the current 65 millisecond transmission time between New York and London. G20 “sherpas” and UK bank regulators Adair Turner and Andrew Haldane question the social value of such trading activity. Needless to say, retail investors are fleeing these financial casinos.

*The 500-plus institutional investors at the UN Environmental Programme Finance Initiative (UNEP-FI) Tipping Point Roundtable in Washington voiced many of the same worries. Co-chair Paul Clements-Hunt warned that “the disconnect between grassroots economic realities and financial markets erodes the trust that binds us together.”

Co-chair Barbara Krumsiek, CEO of Calvert Investments, added, “Economic policies must move in a direction that balances the needs of all stakeholders.” The UN-backed Principles for Responsible Investing (to which Ethical Markets is a signatory member) set a higher ethical bar, but many see a lack of sanctions, vetting and enforcement.

* While government regulators fall further behind, new evidence of the concentration of corporate and financial power was finally mapped by complexity systems analysts at the Zurich-based Swiss Federal Institute of Technology, leaders in the field of technology assessment.

They revealed a core of 43,000 transnational corporations, all tightly interlinked, with 147 (ie, less than 1 per cent) controlling 40 per cent of the global wealth network. This study closely tracks with the 2011 Global Wealth published by Credit Suisse. These findings are echoed by Nicholas Shaxson in “Treasure Islands”, which explores offshore finance in tax havens, and the 2011 World Bank report "The Puppet Masters" on how corporate structures hid financial manipulation and stolen assets.

Once again, citizens and their civil society organisations (CSOs) are ahead of governments and academia in forcing reforms: Occupy Wall Street, which is worldwide and the most visible, as well as Global Witness, Tax Justice, Global Financial Integrity, and New Rules for Global Finance, to name a few.  Business guru Don Tapscott, author of Macrowikinomics and endorser of Ethical Markets’ Green Transition Scoreboard, quotes an Occupy Wall Street sign: “This is not a recession.  It's a robbery!”  He calls for Three Principles for a New Wall Street, viewing the irresponsible behaviour of bankers and financiers as unacceptable.

Will we humans be able to regain control over our technological inventions or will they dominate us as in science fiction dystopias? Daniel Kahneman brings us up to date in his “Thinking Fast and Slow”. Kahneman and the late Adam Tversky, co-founders of behavioural and decision-making research, demolished the core assumption in economics that we humans are rational decision-makers. An embarrassed Nobel committee acknowledged psychologist  Kahneman with the Bank of Sweden Prize in Economics.

Macroeconomics methods are now threadbare and daily sinking further into disrepute. Mainstream economics orthodoxy still disempowers us by claiming that markets come from God's “invisible hand” rather than human ingenuity. Mathematicians John Geanakoplos of Yale and Doyne Farmer of the Santa Fe Institute confirm the economists’ blindness.

They call for lowering discount rates used by short-term-focused economists which ignore future events. I and many other ecologists and systems analysts have pointed out for decades how discount rates short-change future generations (Real Economies and the Illusions of Abstraction).

Can we learn to master our tools? The jury is still out!

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