As a supplement to earlier posts on the sociology of the global financial crisis from Kim and dk.au, I thought I’d note something very interesting written by Henry Farrell at Crooked Timber. Farrell traces the shift in paradigm in the regulatory architecture of finance, one that has supplemented the first shift away from direct involvement of the state in economic ownership:
The second is more specific and recent – the tendency to replace ‘heavy-handed’ forms of regulation with ‘regulation with a light touch’ and self-regulation. This has been most marked in Anglo-American economies, but other countries (in continental Europe and elsewhere) have faced persistent ideological pressures to move in this direction. This is a large chunk of the so-called ‘reform’ agenda that the Economist magazine, the OECD and other such bodies keep pushing. Both of these shifts are largely ideological – that is, they gained much of their impetus from changes in the ideas which constitute policy-makers’ shared collective wisdom about how to deal with the economy.
The second shift (the reform agenda) is now a busted flush. Its proponents are in disarray (if I’m feeling in a vindictive mood, I may well buy a copy of the next Economist to see how its editorialists try to rationalize all of this).
Any reasonable assessment of the actions of the Fed and the US Treasury would suggest that they’re driven by confusion and are very much ad-hoc measures. Neither Bernanke nor Paulson seems to have much of a big picture grip, and politicians reciting “the fundamentals are sound” is clearly not going to cut the mustard now, even, as with John McCain, precipitating something of a backlash.
John Quiggin has speculated on how all this will play out. The confusion has led to some quite bizarre moments, such as pundits on Lateline Business declaiming “capitalism is in crisis” and “the financial markets may not be viable”. What we’re seeing – among other things – is a decomposition of that abstraction “the markets” and a reduction of these so-called impersonal forces to the panicked reactions of individuals. If Robert Skidelsky is right, and a tipping point has been reached, it begs a very big question, which Farrell answers in terms of process (because no one can know the outcome of such a fluid conjuncture).
Mark Blyth’s book, Great Transformations has a theory of the relationship between economic crises and economic ideas. Very roughly speaking, when a crisis occurs that is difficult or impossible for the prevailing wisdom to explain or deal with, intellectual entrepreneurs have an opportunity to create a new (partly self-reinforcing) collective wisdom. We’re most likely in just such a crisis now. Which set of intellectual entrepreneurs are going to succeed in reshaping a new collective wisdom – economic nationalists like Sarkozy and Putin, social democratic globalizers like Dani Rodrik, or some other crowd entirely – I have no idea.
Farrell rightly quotes Tyler Cowen:
The economic fallout from these events is dominating the headlines. The intellectual and ideological fallout we are just beginning to contemplate.
There’s no doubt as well, particularly in the US and in the UK, that an enormous climate of fear has been created and that there will be huge pressure on politicians to act. In the UK, Gordon Brown’s last shred of credibility – his claim to be a competent economic manager – has collapsed as the realisation has sunk in that his own out-deregulate the Americans strategy to make the City of London a more attractive financial node than Wall Street in the wake of Sarbanes-Oxley puts the British economy at great risk, even if the bursting of the housing bubble has not been as acute as it has in the States. It can confidently be predicted now that Brown’s premiership is terminal.
Many within the Labour Party are suggesting that the time has arrived for the British government to shut the door on neo-liberalism, including Jon Cruddas MP, who was recently in Australia and spoke to Labor MPs about the successes and failures of the “Third Way” project. Cruddas writes in The Guardian:
Labour now has an historic opportunity to seize the political high ground. The era of selfish individualism is on the wane. The electorate is increasingly concerned with social insurance, safeguarding living standards and ensuring social stability and ecological sustainability. From stranded holidaymakers to pension holders, to those falling ill, they are discovering that these collective goods are in dangerously short supply. The future will demand a more active and democratic state engaging with economic development and regulation. The redistribution of wealth and resources will be essential in rebalancing a dysfunctional economy.
However, it’s very difficult to see how these sentiments could be easily translated into policy action – here and now.
I don’t have any particular glee, unlike others, in observing that the US government has now become a huge player in its own economy. The US Treasury, if you read anything about the history of globalisation and global finance, has long been a massively influential player – as the point at which the state and capital meet in the world’s central financial node. Having 80% of equity in Freddie and Fannie and the AIG rescue has no particular implication for any project to use the power of the state for truly public purposes. In fact, even such minimal redistribution and healthcare reform as Obama has promised is likely to be impossible in the face of the enormous costs now being borne by the US state. We’ll end up, if Obama is elected, with the same “Eisenhower Republican” strategy Clinton bemoaned.
Nor do I necessarily think that state ownership is either a good in and of itself or some sine qua non of social democratic respectability. It has its purposes, but it shouldn’t be turned into a shibboleth. The lack of participatory and democratic administration of nationalised industries – a fact whose legacy can be traced back to the elitist Fabians – opened the door for privatisation, by failing to actually involve citizens democratically in the economy.
But here’s the rub – there may be an opening here for a revived social democratic economic policy framework. As far as I can see, though, no one has really developed such a framework at the very time it’s needed – so blinded have the left been by the nostrums of neo-liberal “no alternativism” in macro-economic policy. Many of those assumptions, as Farrell indicates, are now collapsing like a house of cards.
The sorts of questions being asked now are precisely the ones that can’t be answered by orthodox economics with a human capital theory supply side twist or by chanting mantras drawn from exogenous growth theory. If there’s a historical moment here that needs to be seized, then the intellectual resources to make a difference appear lacking.
We will probably just have to rely on muddling through. Fingers crossed. But I can’t help feeling that the left is in as much ideological and intellectual disarray here as the right.
Update: Gary Sauer-Thompson:
The significance of this is that politicians are on the sidelines watching like the rest of us despite their claim to inside information from those who really know what’s going on. They really don’t know what is happening or what to do about it.
Or the politicians could ghave mentioned how this financial crisis was different from the previous ones. The previous ones started on fringes of the global financial system– in the developing or emerging economies in Latin America, Asia or Russia— and the West (G7) worried about the contagion. This crisis was made in the US–the heart of the global financial system— and it is the emerging powers of the east that fear contagion. Doesn’t that highlight the big shift in economic power in the world?
The bailout of these financial insitutions by governments is an appaling hypocrisy. It is an uneven socialisation that again skews the redistributive system. I may not take glee in the fact that the US government is intervening to protect their own asses, but I admittedly do feel some sense of satisfaction every time the ‘market’ fails. Surely this only sways public opinion toward a more socialist organisation of shared resources. I am not aware of the intricacies of social democracy as an economic framework, but it is hard for this cynical man to see any significant shift in social policy without a fundamental overhaul of the way individuals and companies operate in the economy, particularly with (presumably) shared resources: natural resources, land, the environment, money. I can’t see people being accountable to others without an agent acting for that collective right. I would like to see intellectuals of both persuations stop skirting around the margins of the debate and cut through the centre without apologising for and appeasing a socioeconomic system that is fundamentally flawed.
Why is the U.S Treasury prepared to use taxpayers’ money to underwrite the financial health of Wall St., but not the actual health of American families?
Is there much of a successful historical precedent for “participatory and democratic administration of nationalised industries”?
I’m interested in the Wall Street/American citizen duality.
It seems to be based on a somewhat anachronistic model of American political economy.
Once upon at time Wall Street had more than its fair share of tycoons and robber barons. These persons were in possession of giant private fortunes.
But the corporatisation of wealth has changed much of that.
Now those firms, such as AIG, Lehmans, Fannie and Freddie are owned be stockholders, some of which are pension funds which are in turn agglomerations of the money of many people.
Clearly, the top execs of these firms are making lots of money, but in the end they are employees and functionaries. Their incomes and perks add up to only a small percentage of the total earnings of those companies, at least in normal times.
Thus, when one speaks of “Wall Street” it is more accurate to picture its special interest as the interest of this corporatised wealth.
But Wall Street is not egalitarian — far from it. These corporations represent the interests not of all Americans but rather only those Americans who aim to derive capital growth and/or dividends from financial markets, either directly or through their pension funds. Millions of Americans fall outside that category.
Thus, when the Federal government steps in to “save Wall Street” it is stepping in to save America’s middle classes, who are property owners, enthusiastic consumers, and voters.
The millions of Americans who fall outside that category thus find themselves cross-subsidising these favoured folk, either directly through taxes channelled to build and to maintain policy walls between the middle classes and the under-classes, or indirectly by opportunities foregone to put these taxes to alternative uses.
Wall Street is the embattled middle class, fearful of falling through the fragile barriers into underclass hell.
Though the imagery isnt as dramatic, ideologically, I suspect we’ll look back at this is the Berlin Wall 1989 moment for Reaganomics, and particularly for the always risible “self-regulation” plague that has spread through the AN glo economies, as Farrell puts it.
Meanwhile, the Palin effect seems to be passing!
No need to buy a copy of The Economist to see how it “tries to rationalize this”. Its lead editorial this morning is at http://www.economist.com/opinion/displaystory.cfm?story_id=12263158
I think it’s a bit rich to start calling the end of Reaganomics or neo-liberalism – the stock market hasn’t fallen past 2002 levels yet, which in a proper rout would have happened by now. People have just forgotten what a good old bear market looks like (basically, overall falling trend with hiccups and false dawns and the occasional yawning chasm with a nice glimpse of hell). It’s small potatoes in comparison to the other, bigger issues we face as a society.
The 1987 crash was almost as bad, yet within eighteen months money was being made hand over fist again.
Barings bank failed and nobody even blinked.
LTCM built a derivatives trading book built entirely on fantasy, failed due to the equivalent of butterfly wings flapping in the amazon, yet the world didn’t end.
Dot-com stock bubbles didn’t finish us off.
In reality, it’s just a bit of a chasm. After the fantasy financial positions are unwound, hived off to governments or taken back from shareholders, the markets will simply resume where they left off. Yet, the carbon levels will keep steadily rising along with the sea and the air temps. A few bankers losing their jobs is hardly even worth considering.
With regards to the inclusion of the middle class into the stock market, it is a very clever mechanism that incorporates and ties people’s interests and ideological investment to a corruptable and unfair system. The onus of financial responsibility (and reward) is placed upon the relatively passive investor. Everyone else must rely on the trickle down effect, an effect dreamt up in the minds of a particularly notorious economic tradition. One that has assumed authority for the world’s resources and managemnt. Because of the unpredictability and inequity of the stock market and because of people’s responses to external factors – speculators, herd mentality and irresponsible and unaccountable investment – there ought to be a much tighter regulatory system, if not a public-private co-operative system of ownership.
David: and the rich keep skimming off most of the gains of economic growth (particularly in the USA, though to some extent in Australia). But they’ve being doing this for decades, so it doesn’t get headlines.
Rob @ 3 – that’s a good question! The historical debate in the British Labour party was between those who aligned with the Fabians – who were obsessed with teh wonders of modern bureaucracies – and those who took the co-operative movement as an exemplar of how nationalised industry could be self-managed by workers. There’s also a debate around the welfare system – some of which has been picked up by the communitarians (the wrong bits imho) – in terms of “democratic administration” – which was actually tried in LBJ’s Great Society before a bunch of inner city machine pols put a stop to it.
David @ 7 – no it’s not just a bear market. A number of commentators (from within the “markets” and the economics profession) have pointed out that the difference is that when past bubbles burst, trust in the integrity of the financial system was never questioned in the same way it is now. Central to what’s occurring is that players within the finance system have ceased to trust each other, and no one knows where a lot of the poisonous debt is hiding. So the bear market is over and above the usual bursting of a bubble.
And it’s not just a matter of “a few bankers” losing their jobs. The American economy is going to tank big time.
Well, Im hardly calling an end to neoliberalism here – but I am most definitely calling a fundamental ideological crisis in ‘self-regulation’; particularly egregious sub-set of policies heavily associated with Reaganomics.
Back home, CASA is rightly getting bucketed by both sides of the house for its failed self-regulatory model. Self-reporting of greenhouse gas emissions in some self-regulated jurisdictions have turned out out to be 5% of actual emmissons. This idiotic model must and will die now.
To pretend it isnt in crisis after sub-prime is a mistake – but of course, we must also all act to hasten its demise. This is my clarion call. Death to self-regulation!
Robert Merkel wrote:
Yes, they do. The self serving Economist “mea culpa” editorial referenced above does a pretty good job of explaining why they think this is necessary (i.e. economies grew as a whole, rising tide lifting all boats etc) but it’s a load of bullshit cooked up to disguise what a rotten system it is.
Nobody has proposed a better one though. I don’t think anyone is really that keen on Keynes as much as nostalgia might yearn for that bucolic 1950s image that social conservatives are so enamoured of for other reasons.
What will happen is regulatory over reaction for political reasons which is going to hurt the restructuring of economies rather than help them. I’m not advocating a libertarian “hands off” approach, but governments (and more importantly, financial institutions) need to get a lot smarter about pricing risk and setting regulatory hurdles associated with risk. Let the rich bleat, but tax the f*ck out of them as well, everywhere. Just to curb their enthusiasm, not to make any money.
Update: Gary Sauer-Thompson:
I am not sure how convinced I am of fundamental shifts and new paradigms. We’ve been here before several times in the last twenty odd years, not just in the West but especially in Japan in 1992, East Asia in 1998, etc. And there are some big demographic changes in Western countries that would seem to alter the dynamics to say nothing of the effects of China and India on the global economy.
Part of my scepticism is driven by comments like this: “I don’t have any particular glee, unlike others, in observing that the US government has now become a huge player in its own economy.” The US government has always been a huge player in its own economy. Not just through farm subsidies and industry assistance and huge government sectors at the federal and state levels, but especially through the US military.
Yes, but that was my point, really, MH. The “nationalisation” doesn’t make any difference per se.
Mark wrote:
Boy, what short memories and/or lack of knowledge of history they have. Every time this happens, somebody “questions the integrity of the financial system”, only because it usually takes three months or so to shake out all of the inter-relationships. For the vast majority of ordinary people who live in or around their means, have a house as their primary investment vehicle and aren’t carrying crazy debts (like using home equity borrowing to invest in the share market), it’ll be a pretty mild recession, although your super is going to look pretty sick for a few years.
Right now, it’s very hard to sort out the facts from the hyperbole simply because some big names like Lehmans have crunched. It’s just not unusual for firms who bet the farm on a narrow business to fail – it happens all the time. It’s only fifteen years since Lehmans were hived off from American Express – their self serving “150 years” bullshit is just a bit of Wall street myth-making, not the catalyst for a financial implosion. I’m convinced that all this hoopla is little more than getting people to watch Bloomberg and sell newspapers.
Well the Democrats haven’t wasted any time. In the Congress they’re now laying the groundwork for the abolition of central bank independence, presumably in league with their soon-to-be-president. Of course it never really sat well with Teh Left: an unelected body making very important decisions pretty much along economic rationalist lines. And this is precisely the kind of thing that The Economist’s editorial is getting at: faced with a short-term crisis, we need to try not to make stupid long-term decisions.
BBB
Well, I agree with that – the bit about taking precipitate and badly thought out action, that is, though not with the ideological bit at the end of the Economist’s editorial. I wish people would stop equating the Democrats with teh Left, though. They’re really not.
The diagnosis of what’s going on – contra David Rubie – in the Economist piece is worth reading:
http://www.economist.com/opinion/displaystory.cfm?story_id=12263158
People like George Soros don’t agree that this is some usual “correction”, and the “this will all wash out within a few months” thing is what people were saying – wrongly – last year. At the very least, you’ll end up with a US economy with a much smaller financial sector, which is a very different beast – and with an even more crippling deficit, as I said in the post.
How this continues to be funded is an interesting question – one which applies equally to Australia insofar as our balance of trade deficit needs to be paid for. You can bet that the Asian sovereign wealth funds will have taken a hit. I’m not so sure that we’re anywhere near as insulated as conventional wisdom has it. Conventional wisdom, as we’ve been suggesting, seems to be falling to pieces in front of our eyes.
I really do think you have to separate prospects for the US from prospects for the rest of the world. The US was nearly half of the world economy in the 60s – it’s about a fifth now, and that share will decline further over the next few years. They are in for a prolonged period of slow growth as the chickens of very poor policy come home to roost, but that aint necessarily so for the rest of the world. I think it’s more likely most countries will have a fairly rough year, with some arbitrary wealth transfers being made by the crisis, and then growth will resume.
Oh, and what David Rubie says is perfectly correct – you lot have very short memories. Financial crises are part of capitalism. Capitalism doesn’t distribute wealth according to people’s deserts (as even Hayek noted) but it creates far more total wealth, in fits and starts, than any other system.
It just needs someone to redistribute some of the wealth created.
Not all Democrats are Teh Left, Mark. Just the ones at the top like Nancy Pelosi who, not coincidentally, are the ones now questioning the wisdom of an independent Fed (a Fed staffed, of course, by an un-democratic and secretive cabal of economists, bankers and lawyers).
BBB
I agree that a crisis of American capitalism is not necessarily a crisis of global capitalism now, unlike say 20-30 years ago. The interesting geo-political question is who will now be permitted to buy up bargain basement economic assets in the U.S. A lot of the world’s liquidity is held by Chinese financial institution and Middle East sovereign wealth funds, and from my experience in the U.S., American TV and talk radio hosts start getting very twitchy at the thought of the Chinese or Arabs buying up American assets.
This is the end of the last stinking rotten empire. Not markets, not the means-of-exchange or the free movement of peoples and ideas. Certainly not capitalism so long as we have Intrade.
But darlings we can’t simply rely on the tyranny of distance anymore.
We need a more distributed defense network – a people armed – and the opportunities for all to educate themselves better in self-defense. An AK-47 and a Stinger in every garage.
We need a shrinking state sector and a rapidly evolving mass social-revolution. Such as the greatest revolution of all time. Spain 1936. Libertarian socialism eluded us then but that’s no matter. Tomorrow we’ll run faster. Stretch out our arms further.
Robert @ 3,
Years ago I reviewed a book which did a comparative study of, among others, Australia, US,UK, Sweden and the Soviet Union during the Great Depression. One of the things whicxh strucvk me was the Depression copletely passed the Soviets by, according to the article in the collection. Regret I cannot recall the title of the book (20 years ago,.)
I think the failure is in the issue of transparency. How many people, organisations etc were involved in vetting the quality of the sub prime loans yet did not blow the whistle? The answer is not more regulation but to just make sure the system calls a spade a spade. Shire Councils in Australia need to be in a position to know they are actually investing in US mortgages of people with no job and no deposit. If they had merely had accurate informnation they would not have invested and the size of the sub prime market would have remained where it should have. This is an informational breakdown not the end of Friedmann style economics blah blah blah. What needs to be examined is how to breakdown the perverse incentives in the system that enable a dud to be marketed as a Rolls Royce investment. Exposure to daylight is the answer not more regulations. I come back to the HIH failure, the judge presiding over the commission into noted that in term sof ticking boxes, having all the right policies etc it was A1. However I think it is at this point where those on the Left might have a win. ie should finance institutions audits be only conducted by Big 4 Accounting Firms who won’t get the audit fee next year if they qualify this year’s? Maybe there needs to be dare I say it some auditing of the auditors by a government authority whose employees get the same pay each week whether they blow the whistle or not?
We need to focus on what actually happened here not what your political biases hoped happened.
In the Australian context where we should be looking is at low and no doc loans.
What genuine reason does someone have for entering into these? The best I can come up with is an actual financially solvent person needs to move quickly. These loans actually INSIST you do not put on your paperwork how much you earn! This to my mind proves they are deliberately targeting the niche market of people wishing to avoid paying their legally required income tax or child support!
That on top of lending to people who would not meet the financial hurdles to get a loan conventionally from a bank. How is society served well by these loans?
Yes autarky has this uncanny knack of shielding an economy from the highs and lows of other economies. There are long-run costs for this wonderful service though…
BBB
I suspect that selling a dud investment scheme to a local council financial officer would be like shooting a fish in a barrel. Fancy local councils thinking they could play the market and win. Their expertise typically resides in knowing how to stop someone from putting chairs outside their cafe, or taking six months to rule on an application to put up an awning.
Of course, Stalin was engineering a man-made famine in the Ukraine at the time of the Great Depression.
Milions died.
No one noticed that, either.
The Germans got cheap food.
The Soviets bought heavy German industrial machinery that turned out to be very handy for manufacturing T34 tanks, which killed very many well-fed Germans, many in the Ukraine.
It’s a funny old world.
Mark wrote:
Every time I see that statement (or “It’s different this time!”) I just have to call bullshit. It’s never different, it’s just the same-old same-old with a new set of knickers.
Conventional wisdom would have it that Pierce Brosnan should never sing in public, but people lined up and payed good money to see it. In other words, there’s no such thing as conventional wisdom (or common sense). There’s just greed and hangovers.
This is not surprising Paul as the Soviet Union had a command economy with very little linkage to world trade at the time. This is not to say that the Soviet Union was blessed by happy times during the period of the Great Depression.
This was the period of forced collectivation, and with it the death of millions through State induced famines, of the extensive use of slave labour on civil engineering projects with the death of millions resulting from that and of course throughout that period the NKVD implementing Stalin’s Great Terror.
Missing the Great Depression was for the Soviet Union a bit like missing an influenza epidemic but having a epidemic of the plague instead.
“Shire Councils in Australia need to be in a position to know they are actually investing in US mortgages of people with no job and no deposit. If they had merely had accurate informnation they would not have invested and the size of the sub prime market would have remained where it should have.”
Kingsley, from what I heard, NAB was most exposed to sub prime because executives, paid exorbitant fees for their expertise in picking the right investment horse, ultimately ran with the added advice of a ratings company that gave the plan a triple a ratings. As Terry says, local council financial officers would be easy pickings if supposed experts were so easily caught.
Funnily enough ,last time I heard NAB was waiting to see whether it’s rating would be downgraded by said agencies for poor investment decisions.
Of course, Stalin was engineering a man-made famine in the Ukraine at the time of the Great Depression.
Milions died.
No one noticed that, either.
I suppose you mean “no one outside the Ukraine”? Not much bad news being passed around the USSR by heroic Soviet journalists? Not much truth escaping out into the non-Soviet world? Not sure if it was a “funny” old world. It was certainly nasty and brutish. Meanwhile European starry-eyed visitors were duchessed and passed glowing reports back to their home audiences. Piffle!
I think people are missing the point and perhaps being a wee bit too patronising of Local Shire Councils. The point is that if sub prime was called “junk” or ccc- then the shires would not have invested. They invested because it was called AA+ or similar. Give them accuracy and the problem is solved. If they knew what they were buying they would not have bought them. Get the information right and the rest follows. Markets will work if they are correctly informed.
Indeed they are probably a more instructive example than I first realised because they do have regulations a plenty about what they are allowed to invest in and how much. That regulation was completely useless to them because the information was wrong. Regulation that says you can’t invest in low quality investments doesn’t help you if people have been allowed to call crap loans AA-.
This is what we need to be targeting not some ambiguous call for more reulation whatever that is.
David, I’ll call bullshit in return. Looking at anything in a historical frame, it’s obvious that what is commonly accepted as true changes from time to time. Logically, therefore, there must be a point at which the old assumptions cease to hold. Thomas Kuhn extended this to the sciences, but it’s not rocket science to figure it out.
It’s obviously possible to overplay the whole “crisis” tag, but having devoted a bit of time to reading some of the analytical stuff in the financial press over the last few days, I’m reasonably convinced that there are levels at which it can be stated – as a matter of fact – that what is occurring now is unprecedented.
For instance, Peter Martin:
http://petermartin.blogspot.com/2008/09/how-bad-did-things-just-get.html
Now, obviously, the way all this perceives also works as a “social fact” – and if enough actors come to believe that there is a crisis, then that will shift the grounds on which they act.
Quiggin on the latest developments:
http://johnquiggin.com/index.php/archives/2008/09/19/now-for-the-really-big-one/
The issue was too much leverage. Everyone was prepared to turn a blind eye to the risks when asset prices were rising, liquidity was plentiful and interest rates were low. But not those factors have all gone into reverse, the risks are exposed, and some.
To those who blame lax regulation, I could point to any number of warnings from central banks, the IMF and the OECD in recent years about the dangerous consequences of financial intermediaries moving out on the risk frontier and adding umpteen layers of leverage.
Shortly after he took over as RBA governor in 2006, Glenn Stevens gave this very prescient speech in Hong Kong on Risk and the Financial System. Among his remarks:
Mr Denmore – I agree with your views also but so far it hasn’t been the Private equity funds etc that have blown up. They are more likely to hit the skids if interest rates rise which in the near future isn’t likely to happen. It has been more the mis-labelling of sub prime that has been the real killer. Well so far anyway. I think what you are describing is your more traditional bubble.
I still maintain the final end market for the sub prime securities would not have found anywhere near the number of buyers they did if it had been correctly labelled.
Mark wrote:
For some subset of unprecedented I assume. Central banks intervene in currency transactions all the time, sometimes reported and sometimes not. The RBA here steps in heavily every time the $AUD goes south of $60USD and always has. That the US Federal reserve didn’t step in 5 hours before their normal opening is of little importance – they merely facilitated what they would normally have done in the circumstances (call it outsourcing). There’s always a simpler explanation (perhaps there were simply no USD available to effectively write currency hedging transactions in Europe where the capital adequacy requirements are high).
I still don’t buy the idea that any of this is going to rewrite our economic textbooks in favour of socialism which seems to be your implication.
I have a lot of respect for Peter Martin but I suspect he’s a little caught up in the excitement of the moment and we’ll have to wait for a more sober analysis. It was only 8 years or so ago that the european central bank were heavily supporting the Euro, plus ca change I say.
Unless I missed it Mark, I think one of the key underlying things in your piece is the extent to which there is centralised vs decentralised decision making. The balance between centralised and decentralised decision making can have very big impacts on how entities in an interacting environment behave and their subsequent outcomes (e.g. the national electricity system, in which I work).
I’d like to suggest that basic organisational matters such as this, which might be considered as mechanical, can be key as they can greatly impact participant behaviour (unless you’re in a completely centralised system).
Sacha, yes, that’s right – though it’s only one aspect of it.
Huh?
Did you even bother to read the post, David? That couldn’t be further from what I’m saying. A bizarre interpretation like that hardly gives me much confidence in what you have to say more generally, because it’s so contrary not just to my “implication” but also to what is actually written.
Mark wrote:
Yes Mark, I read your post. did you?
I’m not so sure about that. There are a bunch of left-of-centre economists whose point of view has been sidelined by the dominant narrative of the boomtime. They’ve got their framework ready to go – should anyone care to listen.
And further left there are plenty of Marxists who can tell you exactly what’s happening by reference to the concept of fictitious capital.
Of course, they don’t get a lot of play in the meeja.
Socialism and Social Democracy are not the same thing, David.
One of the things the Crash (from which we may or may not have recovered – its hard to keep up -)has got me thinking about is how did we get on before Capitalism was invented about the time the world first got into mass industrialisation. There were systems like protectionist mercantilism (which went for 2-300 years I think), a whole lot of weird medieval stuff, which so far as I can work it out depended on plunder and being kept going by extremely rich popes and emperors, (though I’m sure medievalists on LP will tell me it was a lot more complicated than that, then, the plunder, bread and circuses + slavery of the Romans and so on, and so on.
My point is, if this is The End of Capitalism, which, sadly I don’t believe it is, we will go on.
And btw, how much of the world today actually is capitalist? Its a point worth contemplating from our Eurocentric eyes, don’t you think? And I don’t mean socialist, I mean, not capitalist.
Here’s an interesting story : http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article4795072.ece
From the article linked to by Tyro Rex
“Price Waterhouse Coopers (PWC), the administrator to Lehman’s European operation has demanded that the firm repay £4.4 billion that was transferred from the UK to Lehman’s US holding company just hours before the firm collapsed. This left London with no money to pay staff. ”
.
Further on there is evidence that the penny has dropped.
“The way that Lehman has set aside cash to reward staff has angered politicans. John McFall, chairman of the Treasury select committee, said: “This is socialism for the fat cats. Everyone in financial services recognised that the remuneration system is the cancer on the financial body politic here. Until that is tackled we can’t move on.”
Vince Cable, Liberal Democrat shadow chancellor, said: “This is outrageous and deeply cynical. Part of the problem with Lehman and the other weak investment banks was that they were driven by the bonus culture, which rewarded big deals rather than good deals. It was what destabilised the institutions in the first place. They are being rewarded for having adopted business behaviour that has wrecked their bank.”
.
If this pay practice and the hunt or be hunted attitude are wound back who except the extremely self interested will complain?
Paul Burns @ 43 … Certainly the Roman Empire’s expansion was often driven by it’s need to fund individual activities, especially in the republican period. You do of course have an agricultural slave economy but trading is an important part of their economy. Luxury goods in the early part of the Roman economy were frowned upon – a simple harsh life was the Roman ideal – ‘virtus’ or manly, martial vigour being the primary means of achieving ‘nobilitas’. At least in THEORY (or let’s say, in the national mythology the Romans told themselves).
However the after the defeat of Carthage (a ‘typical’ date chosen as representing the beginning of the end of the Roman republic, especially by the Romans themselves), the Senate simply refused to deal adequate reforms to their political and military system. For example, they did not pay their legions adequate pensions and did not equip them from the resources of the State, while simultaneously refusing to acknowledge the merits of many ‘new men’ to the highest honours of the state (i.e. the Consulship). So what happened is the innovation of those commanding a legion to be personally responsible for equipping it and promising pensions and the like (an innovation of Marius during the Numidian war). So now you’ve got large armies personally responsible and loyal to a single man or faction and not to the republic.
This then leads to the republic taking control of new territories really on the whim or expediency of paying for it’s soldiers, or under the sway of enormously rich plutocrats (e.g. Pompeius Magnus) – typically landowners who were descendants of the senatorial class and themselves made up the senate.
This was not uniform – talent was recognised – Caesar was not rich before his conquest of Gaul. But he needed to conquer Gaul (which was illegal under Roman law), i.e. obtain its gold and other wealth, in order to pay the debts he incurred to fund his rise to power – especially his legions. It was not the only province to suffer Caesar’s requirements for gold. In my estimation he also appointed Sallust governor of ‘Nova Africa’ (Numidia) with a specific understanding to extract as much of the gold and wealth as possible out of it. After an accusation of extortion in the province, and probably protected by Caesar, Sallust retired and wrote his bitter histories only a few years later ensconsed in a ‘notoriously luxurious’ villa.
In the final analysis, the failure of adequate political reform by the Roman senate led to the increasingly rapacious economic exploitation of the provinces by powerful men desperate for control of the State. Which in the end, led to the downfall and complete restructuring of that state into one controlled by a single man with a veneer of republican form and a standing army with a pension scheme. No single man not totally beholden to the Emperor was ever allowed control of a legion in the province of Egypt, the bread basket of the empire and the key to control of Rome itself.
I don’t truly know what any of this really says about the idea of ‘Capitalism’ in the modern age. In my historically-driven *opinion*, such -isms are a total joke; the time evolves structurally according to the conditions of the age. Romans certainly had trade and investment – some of it was directly controlled by the State, some in the form of official monopoly sanction, rather lots of it regionally-based (i.e. governors of provinces), some of it ‘outsourced’ (tax collection), and some of it in something like a ‘private enterprise’ model. Whether it works or not has *nothing* to do with how ideologically pure it is according to some post-hoc theoretical framework such as ‘communism’ or ‘capitalism’ etc but *everything* to do with how pragmatically adapted the particular system is to the particular time. There’s no divorcing politics and economics – both are functional manifestations of the underlying society. In my view our current one is definitely showing its cracks. But, as someone who is a student of the specific discipline of *history*, I can only tell you about it *after* the fact.
Excuse the long and boring post. I should get back to my research!!!
Tyro Rex,
It was not a long and boring post. I found it fascinating. My reflections on this were prompted by my current interelated studies of 18C England and America, esp. from 1763-c1788, and of Australa, 1788-1792. I find all history inordinately fascinating. Consequently, reflecting on this current crisis of capitalism, and having some knowledge of the economics of mercantilism, I couldn’t help asking the question before and after Capitalism, what? Ot wasn’t that long ago in historical terms that Australia (and probably even the US under the New Deal) would have been described as semi-planned economies. Are we going back to that, out of fear of something worse than the Great Depression ?
I don’t think we are going ‘back’ to any old model. I would say something else. What, I can’t say. Obviously the American government has committed itself to a program of intervention; but the coming election will force some style of political settlement too – which style depends who wins and under what circumstances of course.
A republican win would probably result in this intervention being a ‘once off’ thing: purely profit-maximising business in the financial sector will go on as normal and there will more instances of the public’s money being used to prop up failed endevours which will be initiated by greed. I’ve already heard grumbles by republicans concerned that this intervention will not be an isolated event.
Democrats would obviously be more inclined to push for some ongoing regulation, to make instutitions which are clearly required, from this recent example, to operate in the interest of the whole as well as profits do so.
Are Australian financial instutions subject to more regulation that US ones?
We really need someone to comment credibly and thoroughly on the following:
(1) what are the material differences between the US and Australian housing markets, and what is the risk that there will be a serious price correct in Australia?;
(2) why do higher-risk (e.g. subprime) mortgages comprise a lower proportion of the total market in Australia than in the US (for example, does the Consumer Credit Code operate to prevent many such loans being offered in the first place)?; and
(3) how has the absence of massive government intervention in the form of Fannie Mae/Freddie Mac equivalent in the Australian context contributed to the apparent stability in Australian finance markets, at least compared with the US, if at all?
That’s not too much to ask, is it?
BBB
(3) Both Fannie Mae and Freddie Mac were private companies with the risk offloaded to government, BBB, which isn’t quite the same thing.
And in other news, Alan Kohler thinks hedge funds have been killed off:
http://www.businessspectator.com.au/bs.nsf/Article/Australia-blows-up-the-hedge-funds-JPCC6?OpenDocument&src=sph
True Mark. However the ownership structure is hardly determinative. The GSEs had special roles and privileges under US legislation and, according to a piece that Katz has uncovered, were subject to a high degree of government direction, including with respect to the absorption of higher-risk mortgage securities. And of course it’s not true that all the risk was offloaded, as the terms of the recent nationalisation demonstrate: the shareholders were left with nothing, as was entirely appropriate.
BBB
Yes, but the takeover was hardly something people had been contemplating happening in the normal course of events, BBB.
Mark, what are you thinking about in writing “social democratic economic policy framework” – what do you mean by this?
Sacha, broadly speaking something which recognises that markets don’t only serve the ends of capital accumulation, but that’s too long a story for me to tell at the moment!
Bingo Bango Boingo wrote:
The biggest difference is that the US market is overbuilt at the moment – you could argue that the Australian market is the opposite of this. In the leadup to the last election here in Oz, much was made of the state governments failing to release land for development around our cities. I think we can silently give thanks that they are so inefficient. That’s not to say housing here won’t correct, but it hasn’t got as far to fall as the US. The housing bubble blog has been as good a place as any to watch that particular train wreck in the US. You might have trouble reading it without a primer though: HELOC == home equity line of credit, NINJA loans most people know about, FB = first buyer (at least I think that’s the polite version).
The answer to (3) is probably not so much in the consumer credit laws, but in the conservative nature of banking in Australia where zero deposit housing loans are exceedingly rare and writing mortgages simply for the brokerage is not profitable.
Mark, markets are mechanisms that allow persons/businesses to exchange goods. Briefly, are you talking about the motives people/businesses have for exchanging goods? If so, does this relate to markets as such or to the people/businesses in them?
Markets are great! When things are going well, it’s the market working. When they’re not, it’s those darn pesky market actors, perverting the naturally perfect operation of markets with their “decisions”.
Iron clad argument there, Sacha. I couldn’t lay a glove on it.
Sacha, reflecting on practices such as “short selling” for a moment should suggest markets are about a lot more than “exchanging goods”.
Short selling is a behaviour – one that people might say emerges from the incentives on people and structures they are interacting within.
But this is beside the main point, which is what meant by “social democratic economic policy framework” – whether it means that the incentives on people should be different and if so, how, or whether market structures should be different, etc.
My guess is that, whatever structures you create, people will attempt to optimise whatever they wish to optimise within those structures, and that is usually their own financial position.
Ok, I see your point, Sacha, but I think it’s important to understand that capital markets operate in a very different fashion from markets for tradeable goods. Anyway, I’m doing some reading about all this and I hope to formulate something considered in a few months – post PhD submission. I want to inform myself further before venturing an opinion as to what a framework might look like, although I’m reasonable clear in my mind about what its aims would be.
And incidentally the function of providing capital should, I think, be analytically separate from the practice of maximising returns on capital.