How the Masters of the Universe are murdering the middle class by gambling on black gold

The Masters of the Universe, those big-name traders of the City and Wall Street, have a brand new toy to play with: oil.

Last month, waves of speculation pushed the price of 'black gold' to all-time highs.

Although world supply and demand are thought to be roughly in balance, the bright young things working for the investment banks and hedge funds have bid up the cost of a barrel of crude oil through the stratosphere.

Despite some easing last week, the price remains at record levels.

We will all have to pay, and not just at the filling station. Expensive energy means slower economic growth, fewer jobs and less tax revenue, hence less money to spend on health, education and public safety.

Social tranquillity and the quality of life could take a big hit. Thanks, guys.

In fairness, we ought to be getting used to this by now. After all, we are only just starting to foot the bill for the financial elite's last jolly jape: the sub-prime mortgage crisis.

Here, they bundled up huge quantities of flaky American and other mortgages, declared them to be top-quality investments and flogged them to investors - including banks - around the world.

So complicated were these packages of IOUs that nobody was sure which bank held how many.

Once - as was inevitable - low-income Americans started defaulting on their home loans, banks stopped lending to one another because no institution could be sure which of the others could be brought down by these 'toxic securities'.

Northern Rock in Britain and Bear Stearns in the United States were the biggest victims of the lending drought that followed. We bailed out the former, US taxpayers rescued the latter.

And the fallout means there are fewer mortgages available for would-be homeowners, and people with perfectly good credit ratings are having their plastic cards taken away.

Before all that, we had the massive speculative bubble in commercial and residential property in Britain, now deflating with consequences that can only be guessed at, and the crazy boom in dot.com shares in the late Nineties, regardless of the fact that few of the companies involved had ever turned a profit.

The bursting of the dot.com bubble in March 2000 threatened to drag the West into recession, hence those other Masters of the Universe - the much admired central bankers led by America's Alan Greenspan - cut interest rates, flooding the system with the cheap funds that would make possible ... the next bubble.

Normally this funny money would have fuelled inflation, but a combination of cheap goods from countries such as China and cheap labour from largely uncontrolled immigration has kept the lid on price rises - until now.

This happy (for some) arrangement is drawing to a close, and with it the low inflation era. But more of that later.

With the lifeblood of the world economy falling victim to the financial elite's mania for speculation, oil contracts for delivery as far ahead as eight years were snapped up, driving the long-term price to $140 a barrel, more than 12 times its level ten years ago.

Of course, if the traders truly believe this is what the price will be, their actions make sense.

But there is one big problem with this case for the defence: the majority of these contracts never involve actual delivery of oil. They are purely speculative instruments - or gambling tickets, to put it less politely.

Like crazed versions of Sergeant Bilko, financiers always have to find something to bet on.

Unlike the gambles of television's maverick serviceman, however, these bets can inflict real damage on the economy.

Ten years ago, for example, the gilded elite of the City and Wall Street were wagering heavily on oil. But this time, they were betting on the price going down.

Then, as now, supply and demand were broadly in balance, but the price of a barrel was driven down to about $10.

Giant energy companies reacted the only way they could, which was to tear up plans for new drilling and extraction.

The $10 level was clearly unsustainable, and became even more so as China and India joined the queue at the world's petrol pump.

The extra oil that would have been pumped from those cancelled wells could have helped satisfy that new demand and moderated subsequent price rises.

Again, everybody has paid the price for the speculators' profits.

Strangely, it was the oil market that gave the Masters their big break in the first place.

Prior to the 1973 energy crisis, banking, broking and commodity trading were kept firmly under control.

The City and Wall Street had been in the doghouse since the Thirties, when they were blamed for the speculative bubble of the Roaring Twenties whose crash in 1929 ended the era of The Great Gatsby and heralded the Great Depression.

In the post-war world, they were rigorously supervised by national authorities. Masters of the Universe they were not.

But the soaring price of oil in the mid-Seventies, and the inflation that went with it, changed all that.

After decades of keeping their heads down, the financiers and their intellectual fan club had a riposte to the 1929 Wall Street Crash.

Here was a crisis that could be blamed on politicians rather than bankers and traders.

'There has been an energy crisis because government created one,' wrote Milton Friedman, doyen of freemarket economists, in 1979.

He was good enough to add: 'Of course, government has not done so deliberately.'

With controls removed, Friedman and others argued, the smooth flow of money round the world would restore calm to global markets as prices stabilised at their correct level.

Controls were duly dismantled, but things did not work out exactly as advertised.

For example, the sterling exchange rate was $2.44 in 1980 and plunged to close to $1 five years later.

Not a lot had changed in the British economy, so which was the 'correct' price for sterling?

Much the same could be asked at different times of most major currencies, most stock market indices, most commodities and most other financial instruments.

The guilty secret is traders need to trade; they need to make bets, and to make a bet you need things to change one way or another. They would rather be wrong than not bet at all.

But the gambles of this new aristocratic class of bankers, brokers, traders, hedge-fund managers and corporate financiers are just one aspect of their activities.

Another is the relentless asset-stripping that has been under way for at least 20 years, especially in Britain, which in many ways has been the laboratory for their activities.

First, they broke up and sold off British manufacturing industry, then came the railways and the airports - with all the benefits for the passenger that we can see.

Thanks to the Private Finance Initiative (PFI) - a sort of hugely expensive mortgage scheme under which public assets are pawned for decades to come - they have now
got their hands on schools, hospitals, nursing homes, fire and police stations and many other public facilities.

In return for keeping the huge debts involved off the Government's books, Ministers have promised PFI investors lavish returns in future years.

Hungry for fresh meat, financiers and their cohorts now have middleclass careers in their sights.

Pillars of the community such as solicitors and family doctors are in the process of being turned from independent professionals into corporate wage slaves, thanks to legislative and organisational changes already in train.

The telling phrase, 'Tesco law', makes our future clear. From 2010 investors will be able to take shares in legal practices and mass-produced legal 'advice' will be dispensed through booths in supermarkets for corporate profit.

Similarly, plans to bulldoze GPs into 'polyclinics' may sound like something from the Soviet Union, but the added twist is that the clinics can be owned by commercial operators and the doctors turned into mere employees.

Before too long, accountancy will also be robbed of its independent status and transformed into a profit-earning arm of financial corporations.

What the consequences of this will be for the accuracy of company audits, given that accountants may end up auditing a business with which their own employer is associated, has yet to be determined.

And in the furore surrounding the closure of Post Office branches across the country, it is forgotten that the supposed reason behind it is the 'need' for Royal Mail to compete with private operators.

In the early Nineties, proposals to throw postal services open to competition were shelved after massive public opposition.

They were taken off the shelf again quickly enough, this time without much by way of public consultation.

Sceptics may suspect that our Masters of the Universe won't use the mass-produced, off-the-peg professional or medical advice they plan to sell to the rest of us. They prefer one-to-one consultations in a traditional setting.

More worrying still is the fall-out from the financiers' activities involving middle-class finances.

Perhaps the most curious behavioural trait of the Masters of the Universe is their willingness to demand public bail-outs, which is very puzzling given their readiness in the old days to condemn the fondness for subsidies for the likes of British Leyland and British Steel.

Now, however, the taxpayer is exposed to £25 billion-odd of Northern Rock liabilities and £50 billion-plus of Bank of England support for the banking system as a whole, details of which are to be kept secret indefinitely.

Beyond that, the need for the Bank, the Federal Reserve Board and other institutions to pump the system full of money to spare the Masters the consequences of their mistakes is now, finally, feeding through into higher inflation.

And inflation has traditionally hit the middle class hardest, as will any tax rises that may be needed should those bail-outs go wrong.

It was the American novelist Tom Wolfe who, back in 1987, wrote that Wall Street high-flyers saw themselves as Masters of the Universe, sticking our financiers with a nickname they have never shaken off. He did so in a novel called The Bonfire Of The Vanities.

With soaring oil prices, resurgent inflation and the prospect of higher taxes, that bonfire is now well and truly blazing.

• The Gods That Failed, by Larry Elliott and Dan Atkinson, is published by Bodley Head on Thursday. To order your copy for £12.99 inc p&p, call 0845 606 4213.

Dan Atkinson
UK Daily Mail