Wednesday, November 23, 2011

Does the Rule of Law Exist Anymore?

I have heard, and read, a number of pieces recently about the state of the US legal system in regards to how it has reacted (or not) to the financial crisis..

With all that has gone on with the financial crisis, it is surprising and perplexing that no one has been prosecuted in the US.

One difficulty is that you need to be quite well heeled to even entertain the idea of suing a delinquent counter-party to a contract in the US. You need very good securities lawyers who do not come cheap. The costs of prosecuting someone can just make anyone who loses less than, say, $1 million throw up their hands in despair and just take their losses on the chin. This is by no means ideal of course, and those in large financial firms know they have this protection and use it accordingly. Think of all those people caught in the MF Global thievery. Their money was stolen, and they are stuck without access to justice.

Another facet of all this is that the financial system can just 'up and change the rules' anytime they wish. This, of course, is a two-edged sword. Investors don't like this type of volatility which cause business to drop for the Financiers.

Markets like stability and the way small investors are being treated right now is going to cause huge disruptions as confidence is lost.

Erik Townsend recently said on The Financial Sense Newshour (not verbatim): We may have come to a point in our society for Governments to say that they need to take extreme measures, and those extreme measures include things like abrogation of contract law. If they had allowed the CDS (on Greek debt) to be triggered, that would have potentially set of a  domino effect of counter-party risk to banks that didn't have the capital reserves against it. So Governments reward this bad behaviour because they won't allow the system to crash.

This means that you can't count on anything. What if gold investing triggers the anti-American Act and you can't have the gains on your gold investment because someone decided it didn't suit the country's best interests. This is not anymore ridiculous than having your collateral with MF Global literally stolen by John Corzine who don't seem to be subject to any criminal culpability. If you stole $500 down at the local Store, you'd be held accountable.

Because the system cannot be allowed to falter, certain institutions are literally above the law.

New Zealand has probably fared a bit better than some other jurisdictions. There have been prosecutions here for corrupt Directors involved in Finance Companies that went bust after 2008. There doesn't appear to be the tight cronyism that exists amongst corporate America and the Government here in New Zealand.

Once a trusted system like the US financial and legal system loses its mandate, then what happens? Perhaps the Occupy movement is the beginning of stronger winds of change to come.

The rule of law does exist. But does justice depend on the greater good as Regulators appear to be signalling? And who decides the 'greater good'? If it is those in charge right now, they are getting it wrong.

Gold in New Zealand dollars: $2273.75 per oz
Previous all-time high: $2311.02 per oz (15 Nov, 2011)

Silver in New Zealand dollars: $43.85 per oz
Previous all-time high: $59.19
per oz (30 Apr, 2011)

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