Leader: Break the bonds

WHEN Adam Smith wrote about market forces in The Wealth Of Nations he described an investor being "led by an invisible hand to promote an end which was no part of his intention".

Like so much of what Smith said this has often been misinterpreted. The fundamentalist view of capitalism has it that market forces are a force for good per se, and that even when they appear to be out of control they are not failing, they are merely adjusting and correcting themselves. The market is therefore possessed of its own dynamic, it's own irrefutable logic; the invisible hand belongs to an infallible deity that cannot do wrong. After the events of the past two years the number of those who still advocate a form of capitalism that is completely unfettered and unregulated has - unsurprisingly - diminished somewhat. The general view is that a framework of control is necessary, if only to save the corporate world from its own misjudgments and excesses. There is too a greater acceptance of the notion that corporations owe a duty to more than just their shareholders - that they also have a wider social responsibility to the societies in which they operate.

Yet there is one part of the financial sector where corporate responsibility seems to be an alien concept, where faith in the benevolence of the invisible hand is unswerving, and where the cruel logic of the market cannot be gainsaid, whatever the cost. This is, of course, the bond market. What makes this more than just an interesting debate from the more obscure corners of the financial pages is the extraordinary power exerted by the bond traders. They are regarded as the ultimate imperative in affairs of state. After the UK general election earlier this year the timetable for the horsetrading on who would form a government was dictated not by considerations of what arrangement would best reflect the democratic verdict of the British electorate; rather it was dictated by the need to keep the bond markets sweet lest they come to the conclusion that Britain was about to default on its loans. Now the bond markets are the arbiter of whether a country such as Ireland or Portugal is permitted to remain a functioning sovereign state or become a basket case country, forced to ditch its government, ruled by proxy by anonymous bureaucrats at the International Monetary Fund and the European Central Bank. Of course these countries ultimately have their governments to blame for their troubles, but the punishment does not remotely fit the crime.

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There seems to be two givens in the current financial crisis - one, that the bond markets are king; and two, that it is the poor who will pay the price when the traders lose faith. The unavoidable truth is that while the traders grow rich through activities sometimes described as "hearse-chasing", it is the poorest who will suffer from measures such as the cut in minimum wage in Ireland.German chancellor Angela Merkel last week declared it was time for the bond markets to share the cost of the massive economic readjustment Europe is having to make. She is right. They act only in their own narrow interests, have the power to bankrupt countries and yet cannot be held to account. International financial governance is a daunting political project, as Gordon Brown found when he tried to introduce the idea of a global tax on currency transactions. The United Nations, perhaps the obvious organisation to enforce such a scheme, lacks the political weight to do so. And yet to dismiss a reform as too difficult or impractical would be to allow the quality of life for tens of millions of people to be decided by forces who operate as if they are completely divorced from society and the values enshrined in democracy.