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Why We're Losing Our Faith in Capitalism

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Another sordid example of banksterism -- money laundering -- surfaced this week accompanied, not surprisingly, by a blistering global poll that shows faith in capitalism is shrinking.

HSBC (Hong Kong and Shanghai Bank Corporation), the largest financial institution in Europe, revealed "major internal-control problems" and plans to apologize for its lapses next week to members of a U.S. Senate subcommittee into terrorist and trafficking money laundering. The bank could pay up to $1 billion in fines, according to news stories.

HSBC is also embroiled with more than a dozen others in the gigantic LIBOR interest rate rigging scandal, along with Barclays, that made headlines last week. Banks could pay fines of up to $22 billion worldwide, say some analysts.

The bank's statement was candid in advance of the Senate hearing: "Our anti-money laundering controls should have been stronger and more effective, and we failed to spot and deal with unacceptable behavior," Stuart T. Gulliver, the chief executive of HSBC, wrote in a memo to employees on Wednesday.

The period when the money laundering occurred was between 2004 and 2010, before its current management took over.

This scandal plus the LIBOR price fixing has sparked another large-scale Parliamentary probe into British banking in general, similar to one that probed Rupert Murdoch's media empire recently. Just as then, there are calls for an overhaul across the entire "banking culture."

What's also parallel, in political terms, is that HSBC's former chairman, Stephen Green, (in office from 2006 to 2010 when the money-laundering detection problems occurred) is currently trade minister in British Prime Minister David Cameron's government. Likewise, Cameron's former director of communications, Andrew Coulson, had left problems behind at the Murdoch empire then was forced to leave 10 Downing Street this spring because of the inquiry. He was recently arrested for perjury.

HSBC shares have tumbled as the market was notified on the Senate's website as to its agenda for Tuesday: "a hearing on the money laundering and terrorist financing vulnerabilities created when a global bank uses its U.S. affiliate to provide U.S. dollars, U.S. dollar services, and access to the U.S. financial system to high risk affiliates, high risk correspondent banks, and high risk clients, using HSBC as a case study."

But bad banking is only one issue. Another has been the continuing proliferation -- and lack of action by governments or banks -- against secrecy havens. The Organization for Economic Co-operation and Development has crusaded against this for years, the G-7 and G20 have issued countless manifestos against the practice, but absolutely nothing changes. Without prohibiting dirty money havens, the world's capitalist system can never been reformed because they hold billions of dollars worth of deposits on behalf of corrupt dictators or cunning political and business leaders.

This could easily be solved if the world's nations banned travel and trade with these places. The list was published this month by the OECD and contains some surprising countries: The "blacklist" includes Costa Rica, Philippines and Malaysia. Under the heading of "non cooperative countries" are Austria, Belgium, Brunei, Chile, Guatemala, Luxembourg, Singapore and Switzerland.

Then there is the so-called "grey list" of countries that have committed to change, whatever that means, but as yet haven't. These include the usual suspects: Andorra, Anguilla, Antigua and Barbuda, Aruba, Bahamas, Bahrain, Belize, Bermuda, British Virgin Islands, Cayman Islands, Cook Islands, Cyprus, Dominica, Gibraltar, Grenada, Guernsey, Isle of Man, Jersey, Liberia, Liechtenstein, Malta, Marshall Islands, Mauritius, Monaco, Monserrat, Nauru, Netherlands Antilles, Niue, Panama, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and Grenadines, Samoa, San Marino, Seychelles, Turks and Caicos Islands, US Virgin Islands, Vanuatu and Uruguay was recently added to this list.

Such malpractice, and accompanying immorality, are demoralizing enough to ardent free enterprisers like myself, but has created a global backlash against capitalism itself.

This week, the Pew Research Center released the results of its 21-country survey of 26,210 people. They have become increasingly pessimistic since 2008 and disenchanted with capitalism.
Not surprisingly, respondents in fast-growing emerging economies untouched by the financial crimes of 2008 onward, have rosier outlooks and positive opinions toward capitalism. These include countries such as Brazil, China and Turkey.

But the formerly rich basket cases like most of the EU (Germany excepted), Japan and even the recovering US or Canada, have increasing numbers of people who have been, or will be, left behind. They are dissatisfied with the status quo.

Of the 21 countries surveyed, only in China, Germany and Egypt do more than half of respondents say they are content with their nation's direction. Those who are angry about their national situation and direction mostly blame banks and financial institutions. As for belief in capitalism, only half of the respondents in 11 countries agreed that free markets were the best system.

Canadian opinions were not measured separately, but an April poll showed that the majority of Canadians living in booming Manitoba, Saskatchewan and Alberta were happy and confident, but Canadians living elsewhere were not. They worried about the future and a large proportion, 30 percent, claimed they had become incapable of making ends meet.

Frankly, banks, as poorly as they have performed, are not the only culprits that have caused the demoralization of rich nations. This is what the Great Markdown looks like after decades of spendthrift governments and a declining work ethic contrasted with thrift and hard work in emerging economies. It will only worsen.

This article previously appeared in the Financial Post.