All complex economies need a strong financial sector. Finance, unlike traditional banking that slowly accumulates capital, can be thought of as a capability for making capital - and hence enabling the launch of major projects. Financial assets are basically debt, but debt with the special feature that it promises to make great profits. This ingredient of finance rests in turn on the need to "financialise" non-financial economic sectors. Because finance is about debt it needs grist - bits and pieces of the "real" economy - for its mill.
Saskia Sassen is professor
of sociology at Columbia University,
New York, and at the London
School of Economics.
Her books include Losing
Control? Sovereignty in the Age of Globalization (Columbia University Press, 1996), The Global City: New York, London, Tokyo
(Princeton
University Press, 2001) and Territory, Authority, and Rights: From Medieval to Global Assemblages (Princeton
University Press, 2006)
"Fear
and camouflage: the end of the liberal state?" (22 December 2005)
Free speech in the
frontier-zone" (20 February 2006)
"A state
of decay" (2 May 2006)
"Migration
policy: from control to governance" (13 July 2006)
"Globalisation, the
state and the democratic deficit" (18 July 2007)
"Lahore:
urban space, niche repression" (21 November 2007)
"The
world's third spaces" (8 January 2008)
"The new
new deal" (23 September 2008)
"Cities
and new wars: after Mumbai" (29 November 2008)
"Too
big to save: the end of financial capitalism" (2 April 2009)
"The
new executive politics: a democratic challenge"(25 June 2009)The larger economies are among the most dependent on their financial
sectors. The value of financial assets in (for example) the United States,
Japan and Britain
by the time the global crisis erupted in 2008 was 450% to GDP (see "Mapping
global capital markets", McKinsey Global Institute Report, January 2008). The European Union average is 350% to GDP, while Germany and France - at 250% - are at an even
lower level, in a way that bears on their economies' comparative performance in
the recession.
From the 1980s, the grist that finance requires was provided by the "bundling" of large numbers of corporate debt, but also of millions of small individual credit-card loans, automobile loans, and residential mortgages.
By 2000, the complexity of what was getting bundled had intensified - via derivatives on interest rates on long chains of corporate debt, credit default swaps (CDS), and other mechanisms. In fact CDSs had become the ultimate power-tool, a "made-in-America" product whose quantitative value jumped from $1 trillion in 2001 to $62 trillion in 2006 (more than the combined GDP of all the world's countries, $54 trillion). This rampaging innovation was the system's demiurge: when these swaps were called in during 2008, amid rising alarm among investors that something was wrong, the result was an all-consuming financial crisis (see "Too big to save: the end of financial capitalism", 1 April 2009).
By September 2008, finance had run out of grist and was reduced to scraping the bottom of the barrel - taxpayers' bailouts and (in the US) over 15 million sub-prime mortgages to modest and low-income households (most of which have or will wind up in foreclosures long after many investors had made their profits).
The relentless finance-mill found a respite in taxpayers' bailouts. But it is still in trouble. The major economies face a critical choice: do they really want to rescue a system with such a high level of financialisation - especially when there are other ways for the average firm and household to secure credit?
A neat package
Small, local banks and credit unions can in great part meet the credit-function needs of complex economies. After all, most firms and households in major states (such as Germany, the United States and Japan) do not need high finance. The proposal of the New Economics Foundation is excellent in this respect: namely to use Britain's existing post-office network and infrastructure as a platform for the credit function (see Delivering the Post Bank, New Economics Foundation, July 2009).
In the US, there are over 7,000 small banks with capitalisation under $1 billion (and half of these under $500 million). These small institutions need to service local firms and local households; that is what they are about. It is not that the owners or directors of these banks are particularly enlightened or nice as people, but that they have a systemic requirement to service their market. Many of these small banks have lost market-share in consumer credit, as the global banks aggressively sought consumer accounts that could (through diverse types of flat charges, in part illegal) generate very high profit-rates. The big banks' policies hurt consumers and local banks alike.
The time has come to definancialise major economies to a reasonable level. This would be an act of strength not weakness; for Britain to reduce its financial sector to the levels of Germany and France would represent a great advance in its overall position. It won't be easy, but the proposal of Adair Turner (of Britain's Financial Services Authority [FSA]) to tax financial transactions is the little tool that could begin the process (see Gillian Tett, "Could ‘Tobin tax' reshape financial sector DNA?", 27 August 2009).
If it were implemented, quite a few banks would (at least for a while) leave London. That would be good, for a smaller core of high-finance institutions may well suffice if that economy had a lower level of financialisation than Britain has now. True, there would also be accompanying losses. But the landscape of losses that this financial debacle has produced is so much deeper, and far more widely wired into all economic sectors, than any loss of financial pre-eminence. It is time for policy-makers too to show boldness and imagination.
Comments
Saying that finance in the UK is too big is now uncontentious. But the Tobin tax may well be the wrong answer.
One of the lessons of the crisis is that bad regulation catches up with you: it was US insurance regulators' willingness to accept that insurance companies like AIG could take on mortgage insurance without increasing their capital requirements that led to the CDS/CDO debacle.
As Buiter points out, the Tobin tax punishes transactions, not irresponsible risk-taking. Why punish a pensioner living abroad who wants to turn her pension into local currency when what you are looking to stop is an irresponsible trader busy betting on socialisable losses?
Saskia's first proposal---to make sure banks are small--goes in a more promising direction. This addresses the "too big to fail" problem that is at the heart of the irresponsible risk-taking.
tony
I agree that a tax on financial transactions is not enough. But it is a pretty simple mechanism that can take us a long way. And I am thinking of taxation on the intermediate sector of finance –firm to firm—rather than firm to consumer.
I also agree with much that Buiter argues in his excellent piece. Here is the catch: it will take an unlikely combination of agreements from diverse sectors to get there. I just don’t see our political classes able or willing to do it. Not able because they simply do not do their homework on finance – they have decided it is too complex (which it isn’t) and so delegate matters to the sector itslef; same thing in the US. And they are not willing because once you do not think you can understand high finance, you lose your political compass. I think thtis was also Obama’s probem in his (disastrous) selection of Summers/Geithner as his economic/fin team. Here I am with Gillian Tett’s intelligent stance: there is work to be done (not her words) -- there is no easy and no perfect solution but we need to work at finding/developing workable ways of governing finance and pushing it in adifferent direction from where it has been the last two decades.
The key policy is not to reward transactions that are destructive of other eocnomic sectors, or of pension funds etc, and only benefit (hugely) some kinds of firms and investments. This is my critique of how our system has evolved: the privileging of a financial logic ovr an eocnomic one.
A tax on financial transactions can override national jurisdictions insofar as finance is global. That is why confining it to the intermediate sector (often referred to as high finance) is the key. Overriding national jurisdictions immediately comes into play when you have more elaborate and nation-state centered policies, such as default risk (Buiter). In the long run, I think we need to do some of what Buiter proposes. Right now, taxation on intermediate sector financial transactions is a little tool that could be a big first step in a sequence of interventions. The fact that it has financiers slightly terrified is, perhaps, an indication of its potential effectiveness, even if it is a very partial first step.
saskia sassen
http://www.columbia.edu/~sjs2/
I agree with much of what you say, Saskia ... but:
- You make an objection of the form: "solution x, y or z "requires an unlikely combination of agreements" " ... I fear - for the reasons of political abdication of responsibility that you underline - that this is looking to be the case for anything that has any teeth at all in this area. We can't even agree on a workable bonus cap! So I am not sure that this tranches between Tobin and Buiter.
- what happens when we have both a Tobin tax and another system crisis based on bad risk-taking (given the Tobin tax does not address the risk-taking per se)? what will that do to the arguments for control?
We are all 100% agreed that "too big to fail" is just "too big". Yet where are any demands for the break-up of the banks?
It seems to me that all of the following will be needed:
- charging properly for lender of last resort insurance
- breaking up the banks
- getting realistic "living wills" submitted to regulators
- increasing (global, FSB) regulatory discretion to impose ad hoc capital requirements
- giving (global, FSB) regulators powers to veto compensation structures
- encouraging an ethos of public service in the global and national regulators, with the requisite status
All these require political courage and would be strongly resisted by the banks. I suspect a Tobin tax would actually be viewed by the big banks as a good opportunity to return to business as usual. After all, the bigger you are as a bank, the more you can net-off transactions. A transactions tax will therefore impact you less than your competitors.
Tony
Now here is a take on the economy that nobody has mentioned before. It is true, even here in the United States that there are many people who have left the smaller banks for the larger ones. casino
In latest news I read AIG in August set a management team in place for the combined Domestic Life and Retirement Services group, “effectively ending the effort to sell this business,” said Moody’s. Last month it stopped trying to sell AIG Star Life and AIG Edison Life, its two Japanese life insurance companies, and announced plans to hold them for the foreseeable future.
Larger companies can aid employees with finances, but what about those small business owners?! Part of the homebuyer tax credit extension was an unemployment extension. Due to the recession, many people have run out of their unemployment benefits, and Congress has generously decided to utilize an unemployment extension for workers that have lost their jobs. However, for those of you worrying about even more taxes funding it – it isn't. Instead, the extension is being covered by employer taxes, just as unemployment insurance already is. Well, unless you own a business and have to pay employees – in that case you can worry. However, for the rest of us, rest assured that the unemployment extension won't cause you to go into any further tax debt because of enhanced unemployment benefits.
Larger companies can aid their employyees financialy, but I doubt those small business owners. Part of the homebuyer tax credit extension was an unemployment extension. Due to the recession, many people have run out of their unemployment benefits, and Congress has generously decided to utilize an unemployment extension for workers that have lost their jobs. However, for those of you worrying about even more taxes funding it – it isn't. Instead, the extension is being covered by employer taxes, just as unemployment insurance already is. Well, unless you own a business and have to pay employees – in that case you can worry. However, for the rest of us, rest assured that the unemployment extension won't cause you to go into any further tax debt because of enhanced unemployment benefits.
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