We English have an old saying: “The law may seem slow, but it works small.” It may take some time to get to the heart of the problem, but it certainly gets there. This is something that financial regulators in Dhaka are putting to the test. The Bangladesh Securities and Exchange Commission (BSEC) is reopening 27-year-old stock and stock exchange fraud cases. This takes slow grinding to a new level, but it’s still worth doing this grinding.
Those of us who are free market capitalists – perhaps the few of us – should support this. Because we should support that these same authorities are a holy terror to those who cheat on these public stock markets. This is not, as some people think, a “white-collar crime” in which no one is actually harmed. It may not be violent, but it is even worse. It’s the kind of crime that hurts the system itself, not just those who lose money. The entire economy loses, meaning future growth is lost; The nation as a whole is becoming poorer.
To switch examples for a moment. What is the only crime that will earn you a quick and severe prison sentence? The one where the courts don’t worry, don’t hesitate and just send you into the abyss for a decade? Perjury: Lying under oath in court.
This is the case where they don’t even bother to read the law books before accusing you of it – because perjury undermines the very system of courts, evidence and witnesses. If we cannot trust what is said on the witness stand, the system of justice itself cannot function. So perjury is not a crime against a person, but a crime against the system itself – and is punished as such.
The same applies to stock market fraud. It’s a crime against the system. Certainly some investors who may have been naive or overenthusiastic had their money stolen. In this sense it is a case of wallet theft, albeit of larger sums. So why worry about it too much? Because cases of fraud on the financial markets damage the idea of the financial market.
These crimes, such as they are – a crime against the system – must be punished harshly, quickly (well, okay, but better late than never) and decisively. Put them in prison, take all their money, steal their pensions – these are harsh punishments. Not just reparation, but the holy terror of the law.
Much work has been done in development economics on how and why development occurs. What makes a poor place rich? Sure, there are some who have shockingly bad answers to this question – the Maoists, Soviets and Socialists, for example, have all given wrong and bad answers. But among people who actually do it, there is one observation: great trust.
We’re still not entirely sure whether a society in which a stranger can be widely trusted is a prerequisite for economic development or a result of it, but there is a clear connection. Trust here doesn’t mean not upsetting your wife and taking the bigger piece of meat out of the pot. But in business in general, they will follow the law – broadly do what they say.
This can be taken to the extreme. In the early 1990s, I signed a contract in Russia with a handshake – for about $500,000. My Russian customer said that everyone knows that for the English their word is the link. So no further contract was necessary. Of course not all English people are like that and I’m not always like that either, but how could I then break the contract (which would have been surprisingly easy)?
It is one of those historical observations that Britain was one of the few societies with such high levels of trust at the time of the Industrial Revolution. It was possible to invest with someone and assume that they would invest the money. Of course companies fail, things go wrong, but investment would lead to investment in this factory, not in wine and women. Overall, you mostly get it. Those who violated this were also imprisoned.
This is so important because only with this general trust across society can investments across society be made. Some of my savings are going to a factory I’ve never been to and run by people I’ll never meet. If I can only trust my family (and who really trusts all their cousins?), then a business can only be as big as the family can finance it. Or maybe we move a little further afield, to an extended family or extended clan – but that would make us Pakistani.
The whole point of a stock market – financial markets in general – is that we can aggregate the savings of millions and then distribute them across thousands of projects. This will only work if we can trust the system in general. Yes, of course some of these projects will fail, some of these savings will be lost. But the system as a whole works, and it is this system – the mobilization of savings into investments – that makes our future richer.
Fraudsters in this system? Their crime is not only against those whose money they stole, but against the system itself. Therefore, the punishment should not be the usual slap on the wrist given to those who steal with paper. It would have to be a tremendous revenge, precisely because of the danger to the entire economic structure.
Now where did I put this very interesting little book about medieval torture…
Tim Worstall is a senior fellow at the Adam Smith Institute in London.
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