We English have an old saying -- the law might grind slowly, but it does grind small. It might take time to get to the heart of the issue, but it does get there that is. This is something that the financial regulators in Dhaka are putting to the test. The Bangladesh Securities and Exchange Commission, BSEC, is reviving 27 year old share and stock market fraud cases. That's taking grinding slow to new lengths but it's worth doing this grinding all the same.
Those of us who are free market capitalists -- those few of us perhaps -- should be supporting this. As we should support those same authorities being a holy terror on those who defraud on those public stock markets. This is not, as some think, a “white collar crime” where no one is really harmed. True, it may not involve violence, but it's all the worse for that. It's the sort of crime that damages the system itself, not just those who lose money. The entire economy loses, that is, future growth is lost; the nation becomes poorer as a whole.
To switch examples for a moment. What's the one crime that gets you jailed both quickly and seriously? The one where courts don't worry, haver nor hesitate but just send you down for a decade? Perjury: Lying under oath in court.
That's the one where they don't even bother to read the law books before throwing them at you -- because perjury undermines the very system of having courts, evidence, and witnesses. If we can't trust what is said in the witness box then the system itself, of having justice, cannot work. So, perjury is not a crime against a person, it's a crime against the very system itself -- and punished as that.
Stock market fraud is the same. It is a crime against the system. Sure, some possibly naive or overenthusiastic investors had their money stolen. So in that sense it's like purse snatching, but of larger sums. So, why worry too much about that? Because cases of fraud in financial markets damage the very idea of the financial market.
These crimes need to be punished as they are -- a crime against the system -- harshly, swiftly (well, OK, but better late than never) and resolutely. Jail them, take all their money, steal their pensions sort of harsh punishments. Not just restitution, but the holy terror of the law.
There's been a lot of work in development economics about how and why development happens. What does turn a poor place into a rich one? Sure, there are some with appalling bad answers to that question -- the Maoists, Soviets, and socialists have all proffered wrong and bad ones for example. But among people who actually study this there's an observation -- high trust.
We're still not really sure whether a society in which you can broadly trust a stranger is a precondition for economic development or a result of it but there's a definite correlation. Trust here doesn't mean you won't upset your wife and take the larger piece of meat from the pot. But in the economy in general they'll obey the law -- roughly, do what they say they'll do.
This can be taken to extremes. Back in the early 1990s I did a contract in Russia -- for about $500k -- on a handshake. My Russian customer said that everyone knew that for the English their word was their bond. So, no other contract was necessary. Of course, not all English are like that and I'm not like that all the time, but how could I breach the contract after that (something that would have been amazingly simple to do)?
It is one of those historical observations that back at the time of the Industrial Revolution, Britain was one of the few such high trust societies around at the time. It was possible to invest with someone and assume that they would invest that money. Of course, businesses fail, things go wrong, but investing would lead to investment in that factory not in wine and women. Roughly, most of the time, you understand. Those who breached that were jailed too.
The reason this is so important is that only with that general trust across the society can investment be made across the society. My savings go, in part, into a factory I've never been to, run by people I'll never meet. If who I can trust is restricted to my family (and who really trusts all their cousins?) then a business can only be as large as the family can finance. Or perhaps we move out a little further, to the extended family or clan -- but that would make us Pakistan.
The entire point of a stock market -- of financial markets, more generally -- is that we can assemble and then allocate the savings of millions across thousands of projects. This is only going to work if we can trust the system in general. Yes, of course, some of those projects will fail, some of those savings will be lost. But the system as a whole works and it's that system -- the mobilization of savings into investment -- that makes our future richer.
Fraudsters in this system? Their crime isn't just against those whose money they stole, it's against the very system itself. Thus the punishment should not be the usual rap on the knuckles given to those who steal with paper. It should be a monstrous revenge precisely because of the danger to the whole economic structure.
Now, where did I put that very interesting little book on medieval tortures …
Tim Worstall is a senior fellow at the Adam Smith Institute in London.
