All Quiet on the Eastern Front?

A North Korean ballistic missile was fired yesterday, whose trajectory went over the centre of Japan before it was ditched in the Pacific Ocean to the east of Japan. This was a hugely provocative act: yet the Japanese stock market was unaffected by the news: the main index fell by less than 100 points,and that can be attributed to a number of minor technical adjustments within the market. There is no reason to think that the news story had an impact on the market.

Japanese ministers again mentioned the possibility of reviewing defence policy, which has been constrained since 1945 by the terms of the treaties that followed the Japanese surrender at the end of the Second World War; but no immediate action was taken.

Commentators on the world's stock markets have felt the need to comment on this lack of any response in the level of stock and share prices to a significant demonstration of the rogue state's rapidly developing power to attack its neighbours, which is regarded as, a side-issue to its plan to develop the capability to attack the continental USA. The general view is that the main markets [in the the Americas, in Europe including the UK, and in Asia] are all in a euphoric condition, carried ever-forward by the massive creation of 'money' by the central banks over the past decade. The cautious withdrawal of the policies by which the capitalist system was 'saved' in 2008-9, by the US Federal Reserve over recent months has not affected that highly positive set of conditions for dealers and players in the global market.

Two other factors are in play. The first is, that if there were to be any direct action by the USA or by any other threatened power against North Korea the consequences would be calamitous and totally unpredictable. The possibilities of a thermonuclear response by North Korea to an attack by the US Air Force, using high explosives in an attempt to destroy buried facilities are so enormous that nobody can assess the effects that would ensue: so the possibility cannot be factored in to stock market price adjustments. The second factor is that governments in the region appear to assume that the Chinese have the power forcibly to 'discipline' North Korea, and would use it, if they judged that the situation really needed it.

Inevitably, it has already been announced that the United Nations Security Council will meet this afternoon, for another session of tut-tutting and to allow the main players to make their positions even clearer and for the North Koreans to say - as ever - that they do not care what the UN says or does.

North Korea has land borders with South Korea, China and Russia. North Korea was created by Stalin's USSR, before the Peoples' Republic of China was established. The position of Russia in relation to North Korea is no less important now than it was in 1950 at the time of the Korean War. Though Chinese troops rather than Soviet forces actually entered the land war, the supplies for the Communist side came from the USSR. It is inconceivable that Mr Putin is not hugely influential in Pyongyang, though the connection is downplayed in the public discussion of the matter; and lazy commentators have taken the view that the North Korean dictator pays little attention to Russia. It will be very important to take note of exactly what the Russian delegate says in the Security Council today: the nuance will matter. The state of US-Russian relations is important in what happens in North Korea, and pretty well the whole of the US political system is in a dangerously anti-Russian frame of mind at present. This does not play out in the calculations of the world's stock markets, but it is a factor not to be forgotten

Mastering Markets

Media commentators, and the tame Economists who provide them with sound-bites, continue to talk of 'the markets' as independent entities that have the power to undermine national economies and even multinational agencies in their endeavours to stabilise the prices of currencies [against each other] and national debt [quoted in an external currency: e.g. US bonds priced in the Yen or the Euro]. A market is merely a social structure. The dealers in markets are companies that are registered [and taxed] under the laws of specific countries, so the implicit assumption that they somehow exist as agents over which states have no control is a silly outcome from economic theory. Market participants are susceptible to government control at work, no less than they are subject to regulation when they drive home in their cars. If governments opt not to control the behaviour of marketeers, or use arcane and ineffectual methodologies that are concordant with Economists' theorising, any resulting detriment is their responsibility.

Back in the simple world that existed before the Big Bang of 1986, banks [which were then recognisable as a specific group of trading businesses] were subject to the corset. Just as a material corset pinches in the waistline of a person who is embarrassed by obesity, so the banking corset limited the extent to which each bank could expand its business. Banks were told the limits, and they obeyed: sort of, for a time. But then the Bank of England, as the regulator, allowed the rule to be 'bent': the Bank turned a blind eye to window dressing. The banks were required to demonstrate that they were keeping to the rules on one date each month; which allowed them to manage the timing of loans and repayments so that they went significantly about the permitted level for most of the month. It was by making and all-but-breaking such rules as the corset that old-style regulation became discredited. But if the rules and the methodologies had been imposed effectively they need never have become discredited. The supposedly gentlemanly banks of the pre-big-bang era slid around the rules: and their successors have continued to do so.

The present situation in both global finance and in domestic stock markets requires control. History shows that market players ignore rules that are not enforced, and try to manipulate rules and principles that are enforced; so we should be prepared now to treat market participants with firmness - and no exceptions - if rules or precepts are broken.Then new, simple rules can be made and new precepts for the conduct of market operatives can b established.

Within share markets, rules should specify that only registered owners of shares could ever vote on those shares: and company secretaries [or equivalents] should be required to certify compliance [with draconian penalties for breaches].  A corset can be applied to movements in the valuation of shares, such that sales and all other types of transfers of shares are frozen after the price has moved up or down by more than 1% in a day, or 2% in any three-day period. The period of the freeze would then be announced by the regulator, and would not be less than the time necessary for the buyers to pay for the last shares sold and register their new ownership. Exactly similar rules could apply to sales of state bonds and other financial instruments. Derivatives, swaps and other gambling slips that are created and traded as 'hedging' instruments should be subject to gambling tax of at least 10%, and subjected to gambling laws and the regulation of the Gambling Commission. The Commission could establish its own corset on the creation of each class of betting instrument.

Market participants and their conduct can be controlled - and should be controlled. The control need not be complex: just the opposite. The best control would be simple control, and breaches of both the rules and the principles must be punished by both financial levies and penal servitude.