Investment bankers, the shock- troops of the Reagan-Thatcher revolution, were allowed to bet their banks on this new market, because regulators and politicians believed so firmly in the magical and self- regulating qualities of the market.
The same process of intellectual overshoot happened with other signature ideas of the Reagan- Thatcher era: privatisation, scepticism about environmentalism and democracy promotion.
Well ... I think there is a kind of "democracy promotion" --- the kind openDemocracy stands for --- that is not neo-liberal and is in the wings, waiting for its open moment, as it were.
That apart, Gideon's judgement of ``overshoot'' is very welcome. I wrote asking him about the idea of "progress" -- did he think that was oversold too? The pessimistic conclusion to his column, in which he saw just a batting back and forth between over-regulation and over-deregulation, suggested that he might be shorting progress too. Can we socially learn from these crises?
The essence of the de-leveraging crisis
Tony Curzon Price
October 7th 2008
Paul Krugman has a simple model of the crisis that is a pretty useful tool to think about what is happening and what should be done immediately. It is not a model of why we got here, but a diagnostic tool for short term action.
First, Krugman's conclusions from the model are a) that taxpayers becoming shareholders in banks is a good next move and b) that international coordination of rescue plans is particularly important. Quoting him directly:
First, it suggests that the core problem is capital, not liquidity - or at least that you can explain much of what's going on without appealing to a breakdown of buying and selling per se. To the extent that this is true, rescue plans centered on making troubled assets liquid, like the Paulson plan passed last week, won't do the trick. Instead, what's needed is an injection of capital, which can't reverse the original shock, but can undo the financial multiplier effect of that shock.
Second, the international implications: to the extent that we regard falling asset prices and their consequences as a bad thing, which we obviously do right now, this analysis suggests that there are large cross-border externalities in financial rescues. Macroeconomic policy coordination never got much traction, largely because economists never could make the case that it was terribly important. Financial policy coordination, however, looks on the face of it much more important. Capital injections by U.S. fiscal authorities would help alleviate the European financial crisis, capital injections by European fiscal authorities help alleviate the U.S. financial crisis. Multilateral Man, come home - we need you!
On the specifics of how to re-capitalise the banks, I have to agree 100% with the basic framework proposed by Willem Buiter.
The model makes it clear why we might want to re-capitalise the banks rather than allow the de-leveraging to run its course. Ordinary savers are quite right to be wanting to reduce their holdings of risky assets--they have understood that the investments they held were much less good quality than they previously thought. The price of houses, art works and all the bubble assets must still fall a great deal. But this adjustment, which is just a welcome return to reality, is creating massive knock-on effects as the ``Highly Leveraged Institutions'' of the financial sector have to reduce their lending because the price of the assets they were using as security for the lending is (rightly) falling. This forces the financial institutions to sell assets, making the problem worse. As Krugman points out, this is exactly the way that contagion spread from the Russian to the Asia to the Brazilian crisis in 1998.
Worryingly, the model leaves open the possibility of instability. In particular, if we --- we the ordinary savers --- become extremely unwilling to hold assets with any risk at all, then the model predicts that we spiral into a very nasty loop indeed. I do not think we are there yet, but the model underlines the importance of investor psychology at this point.
A financial system based on such highly leveraged institutions is not right. But we need to wean the system from that leverage slowly, giving the real economy time to adjust, while the logic of Krugman's de-leverage model is that this is being forced on banks at lightning speed. Re-capitalising the banks is a way of breaking the cycle of de-leveraging. Krugman's international conclusion comes form the fact that the banks all hold assets from all countries, so that asset price shocks ripple through the leverage multiplier much faster than would be suggested by the extent of movements of goods and services around the world. Krugman illustrates this with a nice graph.
So the way forward is becoming clear. Put capital into the banks following the Special Resolution Regime proposal of Buiter's to stabilise the system. Once the real economy has access to the credit it needs to operate, nationalise or hyper-regulate the banks and let the real economy slowly - over five years - reduce its dependence on bank credit.
The chart shows rest-of-world assets in the United States (red) and US assets abroad (blue) as a percentage of non-US GDP. What this shows is that when US asset prices fall, foreign financial firms feel the de-leveraging squeeze; and when foreign asset prices fall, so will US financial firms.
Sounds like a firm of City lawyers -- Krugman, Blinder & Co. In fact, it is half the panel line-up on this excellent film of the Princeton Economics Department panel on the subprime crisis.(YouTube embedded below - the whole thing is about 1 hr, with the first 1/2 hour most informative, IMO).
Unfortunately, Blinder is mostly cut. Brunnermeier is fascinating on really detailed stuff---economists will never be short of clever fixes to regulation problems; Hong is really interesting --- I want to post on his point about the psychology and sociology of systems prone to bubbles; Krugman --- well, if you've followed him in the NYT, you won't find any surprises here.
The progressive pressure group Campaign for America's Future - the left counterpart of the centrist Democratic Leadership Council - welcomed the House's rejection of the bailout and released three guidelines for further government action. Tony Curzon Price critiques the American Left's remedy for the current financial crisis. For more of Tony's analysis of the meltdown, go here. (editor's note)
Invest In Main Street: On Main Street, jobs are disappearing, infrastructure is crumbling and local budgets are straining. A $200 billion economic rescue package for Main Street would generate clean American energy, extend unemployment benefits, aid states and localities to avoid debilitating cuts and modernize our crumbling infrastructure.
More redistributive taxation in the US makes sense, as does generous, Danish-style unemployment insurance tied to re-training. Convincing America of this is a different matter. New Deal-style public works programs do not (yet) make sense. Most of the spare money for US investment is coming from Asia. Does it make sense to spend the savings of India and China on better roads in the US? No! Public works are useful in a depression, but we're not there and may never get to that point. It is not useful to confuse the finance bail-out with every other pet project one might have.
My note to Willem Buiter on his praise of the Fortis "nationalisation":
Dear Professor Buiter,
I agree that Fortis shows that the worry - expressed just today by Munchau in the FT - that Eu cannot respond in a crisis is wrong. But the outcome of the capital injection seems favourable compared to what would come out of TARP, no?
51% of old shareholdings preserved --- doesn't this show that a little more transparency to voters in the Benelux might have got them a better deal?
Taxpayers are unwilling risk capitalists here, and that should make our representatives negotiate harder for our upside, not less hard.
Yesterday, I (and many others, I imagine) were surprised to discover how polarised American politics really is. Tactical explanations of the vote abound--Mark Thoma points to Bloomberg's report that explains the Republican anti-vote as `Because somebody [Nanci Pelosi in her speech to Congress] hurt their feelings they decided to punish the country.' Jeff Frankel concludes wearily: ``I suppose it is not surprising that Congressmen facing elections in 5 weeks don't want to go on record supporting something so unpopular.'' Brad De Long gives up on analysis and appeals to extra-economic solutions: ``raze the Republican Party to the ground. Plough it under. Scatter salt in the furrows so it can never grow back. We need another, very different opposition party to face the Democrats. We need it now. ''
openDemocracy's netvibes pages on the economy are here
But tactics arise out of a climate of belief. Yesterday's surprising discovery of polarisation was here. Vocal voters in marginal districts think and believe--this is what connects tactics to fundamentals. They phone Representatives with opinions influenced by media, church, thought, conversation. Willem Buiter comes closer to a real account when he writes that there were two types of vote against the bail-out: Libertarians (mad but principled) and voter-scared populists (mad and bad). He wishes a short recession to the first and a nasty recession to the second. I imagine the compartments are not so water-tight: the populist is responding to a climate of opinion carefully nurtured by the ``mad but principled''. What are these mad principles, and what are they saying tactically about the bail-out vote? I set out to find Buiter's ``mad principled'' voices to understand the climate of opinion which leads to the electoral tactics we saw yesterday.
I go first to Chicago economist Gary Becker to find the thoughtful Libertarian commentary. Gary does not like the plan much, and picks away at the details that Dodd and the Democracts insisted should go in. He wants the economy eventually to move away from ``too big to fail'' banking institutions, hoping for a less brittle, less catastrophe-prone system:
the "too big to fail" approach to banks and other companies should be abandoned as new long-term financial policies are developed. Such an approach is inconsistent with a free market economy. It also has caused dubious company bailouts in the past, such as the large government loan years ago to Chrysler, a company that remained weak and should have been allowed to go into bankruptcy. All the American auto companies are now asking for handouts too since they cannot compete against Japanese, Korean, and German carmakers. They will probably get these subsidies, even though these American companies have been badly managed. A "too many to fail" principle, as in the present financial crisis, may still be necessary on hopefully rare occasions, but failure of badly run big financial and other companies is healthy and indeed necessary for the survival of a robust free enterprise competitive system.
But--and this quote is from a pre-vote analysis--he concedes that short term intervention is needed.
I get closer to the principled objectors at the Cato institute web site where Jagadeesh Gokhale writes of the vote: ``score one for supporters of the free market who insist on allowing market reorganization of the financial sector to continue unimpeded...albeit at high risk to the economy over the next few months.'' Although thin on analysis, Gokhale is getting closer to the view that catharsis is needed, that a no-vote is a necessary sacrifice in a long battle of principle. In a separate, pre-vote piece, Gokhale analyses the problem as coming from low post 2001 interest rates; a (causally related) pressure on banks to find more and more projects to invest in, even where their quality was dubious (the subprime crisis) and a failure on the part of regulators to control bad lending. It might seem odd to have the mother-ship of all libertarian think-tanks blaming bad regulation, but the subtext of Gokhale's analysis is that Greenspan was operating in a system of highly government-manipulated interest rates, but justifying a laisser-faire approach in just a subset of the economy. No wonder, goes this view, that laisser-faire failed: it was not real laisser-faire. (The structure of the argument is very familiar in ideological thinking and brings to mind the very common--and similarly correct--argument that the Soviet Union did not represent ``real Communism'', where ``real'', rather strangely, refers to the ideal system and not the real one).
Gokhale's analysis, however, is still not the principled Libertarian objection to the bail-out I am looking for. It leaves room for a Becker-style accommodation with short-term intervention. ``We're not (yet) in Libertarian utopia, and the path to it is strewn with compromise,'' can be the line from Cato.
I find what I am looking for at the Ludwig von Mises Institute , where Frank Shostak argues that ``The Rescue Package Will Delay Recovery''. Skip two sections of throat clearing ideo-babble and you get to the commentary on where we are:
- Loose monetary policy since 2001 has led to money creation through bank credit expansion and bad investment decisions that happen to have appeared in the mortgage sector;
- The tightening of monetary policy since 2004 has slowly been taking funds out of ``bubble activities'', so the finance industry that serviced those bubble activities is naturally going to be hit hard
- Bank balance sheets look bad because banks made bad business decisions, and re-capitalising banks is not going to help the basic problem of wasteful investment--
Decades of nonproductive consumption (consumption that is not backed up by production) that emerged on the back of loose monetary and fiscal policies have severely damaged the store of wealth that serves as the foundation for credit markets [...] it will be futile to try to boost lending by pushing more money into the banking system.Some creative destruction of banks and other firms will be necessary now.
- The errors have all already been made--credit expansion, bad investments--and the bail-out is self-servingly chasing symptoms of these errors
- The virtues of thrift and careful lending must be resumed as soon as possible and the mistakes of the past must be paid for.
From a purely analytical point of view, this position has a surprising amount in common with Ann Pettifor's here on openDemocracy . The surprise is that the hard-core Libertarians should share their diagnostics so closely with Ann Pettifor's progressive radicalism. Her 2003 book and article point to credit expansion, first permitted by Nixon's abandonment of dollar-gold convertibility in the face of the need to finance the Vietnam war, as the false-foundation of apparent globalisation-led growth. She asks for an end to ``easy money'' in much the same way that Frank Shostak points to loose bank lending as the mistake made many years ago, and not solvable by a bail-out now. It is no surprise that neither Pettifor nor Shostak are pro-bail-out.
Both have the sense that the financial system has produced an illusion of wealth while actually, in important ways, eating at the core of what makes for a good society.The difference comes in a disagreement about the nature of the good society, and not in the analysis of what has gone wrong with our own bad societies. Pettifor stands for social equity, Shostak for market-faith. Pettifor goes much further in her analysis of the manufacturing of demand for debt through consumerism and her analysis of the distributional consequences of low input price for banks (in the form of cheap money) and high output prices for banks (in the form of expensive consumer debt).
Nevertheless, Shostak and Pettifor are in a strange analytical agreement over the mechanism of the mess we're in. It is therefore slightly less surprising that many Republicans and many Democrats voted against the bail-out: the orthodoxy at the centre of American politics is under attack--under an analytically similar attack--from both left and right. The vocal voter phoning in to their Representative is pretty likely to be able to justify a strong sense of indignation against the bail-out, whether they are free-market mystics or Democratic progressives. Buiter correctly identifies some of the anti-bail-out sentiment as ``mad but principled''. If the shrinking centre-ground means that it is made up of the ``unprincipled but sane'', it may be time to abandon the centre and to have the real argument over the shape of the good society.
There's a huge amount of excellent and important commentary on the financial crisis. I have collected together the RSS feeds I'm using in 4 netvibes tabs that I am skimming through to keep abreast. You'll find feeds from Krugman, Roubini, Setser, DeLong, Thoma and many others who are commenting regularly on the crisis.
If you're not a netvibes user, go to the link here. You will see tabs across the top of the screen with Economics 1 to 4 - click those for the feeds. Click on a feed to have a quick read of what it contains, or do "shift+click" on a title to open the originating article.
The professional economics blogosphere, mainly under the influence of american academics, offers a pretty complete substitute for the analysis pages of the main newspapers. There are just a few exceptions - like the FT's own economics blogs (and especially Buiter's Mavrecon). An excellent European voice comes from VoxEU, a group blog of Euroconomists.
I hope you find these feeds useful, and drop me a line (tony dot curzonprice at opendemocracy dot net) if you've got some RSS feeds or sites that you think should be added to this list for crisis-watching.
Tony Curzon Price (London, oD): Gamekeeper Hank Paulson has asked taxpayers to put up $700bn
of risk capital to spend on his erstwhile and future colleagues on Wall
Street. He has given permission to his previous employer, Goldman
Sachs, to become a deposit-taking institution. (I am no financial
adviser, but I would caution anyone to think twice before transferring
their balances to Goldman Sachs today). Are the Democrats right to be resisting the blank cheque, or are they playing loose with the world economy?
The dilemma is clear: crises require flexibility, rapid action and leadership; but the power of flexibility can be abused. Paulson, who rose to the top in the macho culture of "take no prisoners'' Wall Street is not the man the taxpayer should trust. Worse, the Bush administration's systematic capture by energy, military and religious interests does not suggest a culture that can be trusted with huge power.
The price of mistrust
Tony Curzon Price
September 22nd 2008
Gamekeeper Hank Paulson has asked taxpayers to put up $700bn of risk capital to spend on his erstwhile and future colleagues on Wall Street. He has given permission to his previous employer, Goldman Sachs, to become a deposit-taking institution. (I am no financial adviser, but I would caution anyone to think twice before transferring their balances to Goldman Sachs today). Are the Democrats right to be resisting the blank cheque, or are they playing loose with the world economy?
The dilemma is clear: crises require flexibility, rapid action and leadership; but the power of flexibility can be abused. Paulson, who rose to the top in the macho culture of ``take no prisoners'' Wall Street is not the man the taxpayer should trust. Worse, the Bush administration's systematic capture by energy, military and religious interests does not suggest a culture that can be trusted with huge power.
Here, concretely , is the worry. The US taxpayer gives Paulson the risk capital. He spends it on buying up the assets that banks do not value--he buys them at a price that the banks find attractive. Once the bad assets out of the way, the banks no longer have to worry that their colleagues and counter-parties will go suddenly out of business and they can start to lend again. It is back to the good old days, except the taxpayer holds all the junk. Paulson has bailed his buddies; the Bush administration has rewarded its friends; bankers and lawyers learn to subvert the new regulation as they subverted the old. Wall Street--indeed world finance--can return to being a cosy club dedicated to personal enrichment.
This is why the Democrats now resist nodding through Paulson's plan. Paul Krugman summarises the problem on his New York Times Blog. The presidential politics make this particularly hard. It is a crisis and your leader asks for urgent help. As you start to raise objections, you can easily be turned into the cause of problems. Every time Nancy Pelosi says ''no'', markets will fall. There is a basic political Pavlovianism that will make the Democrats seem anti-economy. Obama's response to the plan--''it seems very big, but this is an emergency and I will not get in the way''--clearly recognises the danger. McCain's response--''Fine, but No New Taxes''--is clever: McCain protects the taxpayer, and no one thinks he would fail to support Wall Street.
The solution? The Democracts must put flexibility into the rescue package so that the next administration is not tied down to supporting a bad bail-out. Taxpayers should agree to put new money into banks in exchange not only for the toxic assets, but also for various options. Firstly, the option to turn those toxic assets into shares in the banks at the price before last Friday's announcement of a bail-out. This means that if world finance does recover past profitability, taxpayers will not have been the ultimate suckers, the ones who will always patiently take on the losses while others take on the gains. Second, taxpayers should require the option to monitor and cap all pay deals in the rescued institutions. As the Lehman case shows, profitability can go down while individuals still command astonishing rewards--not the rewards that an effectively nationalised industry should tolerate. Third, taxpayers should insist that the risk be borne by those who profited most from the leverage-bubble. Mark Thoma is very convincing that this should be done through a strong dose of progressive income tax.
The basic rule of finance is ''Who has the gold makes the rules''. When the banks have no capital, and the taxpayers are asked for gold, they need to remember that they make the rules. This is the moment to set the rules, not tomorrow, after a recapitalisation. There is a critical difference of a few months between today's crisis and the 1932 banking crisis that brought in the New Deal. Banks started failing in November '32, after the election. Roosevelt's plan was the important one. Today, unfortunately, three months make all the difference. It will be Paulson's rescue. The Democracts must avoid being cast as the destroyers of the economy, while standing firm as the rule-makers of last resort on behalf of that unlikely risk-capitalist, the taxpayer. Nouriel Roubini, long the Casandra of the this crisis, warns in his FT commentary that the crisis will spread to the real economy and to Europe's as well as the US's.
It is going to be hard, so now is not the moment to waste the hardship on a crony's solution.
tony curzon price 2008-09-22
The de-leveraging crisis--or the sub-prime crisis or the debtonation crisis--came about through the interaction of wicked plutophiles, genuinely useful financial innovations and lax, cowardly and confused regulators. It is important to untangle these in order to destroy what was genuinely bad in our financial arrangements. The spread of cheap computing, the theoretical understanding of how to price flexibility--option pricing--and the globalisation of supply and demand for capital set the stage for the growth of the financial sector from the 1980s for the next 25 years. In a world of benevolent, professional bankers, these changes would have been welcomed. However, the world of finance became the global magnet for hordes of semi-quantitative plutomaniacs against whom the partially sighted, ideology-bound regulators had no chance of success.
Globalisation, financial innovation and computing have brought benefits that now, when blame is spread generously, should be remembered. The heart of every financial transaction is an exchange of financial risks. When you sell a house, you want an amount of cash in exchange with a known, certain value. When a bank offers a mortgage, it swaps a known value for the likelihood of a stream of payments. The seller of the house has become financially more secure; the seller of the mortgage has taken on the corresponding risk. Moving risk around has real social value. A manufacturing company in Senzhen with good commercial contacts to corporate America can borrow to expand; it wants to take on risk. A fifty year-old office worker in California, at the height of her earning powers and saving for retirement, may find that an investment in a Senzhen factory is attractive. Globalisation of capital markets--whatever abuse it also permitted--expanded the opportunities for these sorts of re-allocations of risk. There is real social value in doing this--as long as you do it right.
Financial intermediaries can often provide more attractive risk re-allocations than would be possible with direct contracting between lenders and borrowers because they can enjoy the statistical effects of pooling risks. This is the basis of insurance: because things tend not to all go wrong at the same time--because ``sod's law'' is not a law--two mortgages are less risky than one mortgage. Information technology expanded the scope for the discovery of offsetting risk of this sort, and so found ways to ``cancel-out'' uncertainty. There is real social value in doing this, as long as you really do it. Only inveterate gamblers prefer material uncertainty to stability, and they can always be served at the casino. The more material uncertainty can be destroyed through social aggregation of risk, the easier we ought to be able to sleep at night ...as long as we are really doing this. Computers trawling great databases of prices could identify opportunities for cancelling risk on an unprecedented scale.
The development of portfolio theory and option pricing theory by financial economists has opened the way for a greatly increased scope for pooling risks. Even once you have identified uncertainty that can be ``cancelled out'', you need to turn that aggregate into a product that those affected by the uncertainty can buy; and as long as you can assess the price of risk, these become products that those with a collective appetite for risk can supply. So, a retiree might want to swap her accumulated pension fund in exchange for a promise to have her medical care covered, her subsistence needs covered, and a small amount left over for her children. Financial theory now allows such products to be priced and supplied.
In the midst of all this potential to do good came the plutomaniacs and bad regulators. The three forces of good change in finance of the last 25 years--increased opportunities to trade, increased data-processing and increased understanding--could all in themselves justify some degree of increase in the level of leverage. For every pound, euro or dollar of certain value that a financial firm could count on, it could now transform those into more uncertain pounds, euros or dollars of value than in the past. The banking multiplier could increase. Its increase from a traditional value of about 6 to the current value of about 25 is the story of ``debtonation'' that Ann Pettifor has told so well. Even if the forces of good change could justify--an extreme suggestion--a doubling of the rate of leverage, the five-fold increase we have lived through in 20 years can only be explained by the monumental failure to properly guide an invisible hand made weak by the mendacity of many in the financial industries.
As globalisation allowed banks to run rings around national regulators, the Bank for International Settlements transformed itself in the 1980s into a world-wide regulator. All banking institutions need to show consolidated accounts and prove that taking all their operations together, they have sufficient capital to cover ordinary and even extraordinary risks. Banks are required to limit their lending to 8 times their capital, where the value of the capital base is cleverly adjusted for its riskiness. In a world of benevolent bankers, all of them following the rules, these constraints should have worked. The banking money multiplier would have stayed at 8X, a number apparently entirely justified by the good forces for change in finance.
But we know the reality ...Banking ``innovation'' became more concerned with hiding the lending that banks were extending in order to continue to lend a long way beyond the 8 times capital limit. The ``special investment vehicles'' like Granite--the Jersey-based company that Northern Rock set up--existed only to be the repositories of lending that would not be counted against capital by the Bank for International Settlements regulation. Bankers, bonuses based on the volumes of the transactions they performed, had found a way around the spirit of regulation to unconstrained personal gain. Asset price bubbles followed, as the money created by banks chased limited investments. Emerging markets, technology stocks, housing, stock markets, gold, commodities, contemporary art ...anything in vaguely fixed supply--or at least supply slightly more fixed than the unconstrained creation of money by the financial sector--rose in price to absorb the money being created in the cracks of international regulation by the plutomaniacs. We can tell that the crisis still has a way to run from the stellar results of Hirst's last auction.
The crisis we are now going through comes from the fact that the money-creation went into a largely virtual economy. This was not about factories in Senzhen or retirement packages ...most of the growth in money was going to casino chips on which rich-world middle classes became hooked; their appreciating housing assets gave them a sense of righteous enrichment, a reward for who knows what hidden moral virtue they could conjure. The retrenchment today will require de-leveraging from today's absurd 25X to a normal 8X. Two thirds of the debt in the system needs to be eased out.
The dilemma now is this: how do we de-leverage in such a way that the virtual economy is hit, not the real? and how do we protect the real forces for good while cutting off the most destructive tendencies of the plutomaniacs? Regulatory pragmatism is aimed at the first problem now. AIG is too close--or thought to be too close--to the real economy to be allowed to default, while Lehman is sufficiently virtual to need to go. HBOS has strong links to reality--its mortgage business in the UK is tightly related to household savings, and so to the UK economy as a whole--to get nod-through approval to join the stronger balance sheet of Lloyds-TSB. As banker to the real economy and bankrupter of the virtual economy, this regulatory pragmatism is the right approach to the immediate mess.
But what of the longer term problem of good regulation? Can we have our good financial cake without it being forced down our throats like geese prepared for their liver? A solution to a problem usually comes from choosing the right constraints: what is fixed? what can be assumed to be in our choice? It is important to assume that the plutomaniacs will always be with us: financial regulation must assume that the great magnet of money will always disproportionately attract the iron-like sharks. What was true of politics when David Hume recommended that we design constitutions on the assumption that every man be a knave should now, in a world where the market has become mightier than the sword, be applied to financial regulation. 75 years after Hume's advice, Benjamin Constant, in his essay on the Freedom of the Moderns as Compared to that of the Ancients, reminded us that we ought to continue, all of us, to stay involved in politics in order to prevent the return of tyranny:
we should [...never...] surrender our right to share in political power too easily. The holders of authority are only too anxious to encourage us to do so. They are so ready to spare us all sort of troubles, except those of obeying and paying!
Today, this advice holds for control over finance. This is where the holders of authority lie in wait for us. Politics today needs to be in the shareholder assembly, as activist investors, as savers and borrowers. We must take control of regulation from the demoralised public servant and help ourselves. Where is your pension invested? Who manages the money? How culpable am I for the use that my savings have been put to? In our pre-occupation for the freedom of the moderns, for our cherished ability to get along with our private concerns, we have left a gaping opportunity for plutomania to operate and create havoc. Regulation is too important to be left to the conflicted civill servants.
We need all to become our own regular regulators.
tony curzon price 2008-09-19
Tim Duy has a great analysis of what the week-end teaches us about where we are with Lehman, Merrill, AIG etc. I think he is right that this is a signal from the US authorities that the socialisation of losses is over; that any taking-over of dud assets by the public will now go through Congress, and not through a technocratic nod-and-wink. The danger, as it has been for a year, is contagion to the real economy---when do firms providing real value find that either a) demand has fallen such that they have to cut back operations or b) that their own credit lines for working capital and investment programs are closed, and so have to cut back?
That danger still exists. Certainly, as banks find it harder and harder to satisfy regulators that they have enough capital to guarantee the loans they have made, they will cut back their lending. So far, the Fed has become banker-of-last-resort by allowing bonds and now even shares to be put up as guarantees for cash loans.
In any case, the week-end moves by the Fed mean that the music of time is picking up again. After 1 year of waiting, time-haltingly hoping, that the crisis would resolve itself, the regulator has called time-up. There may yet need to be large-scale public cash injections into the corporate sector to avoid deep depression. But this week-end shows the regulator has, at last, given up on hopes of self-repair. So adopt the pose of the surfer caught between breaking waves: take a deep breath and hope the turbulence of the breaking behemoth does not keep our economies trapped under for too long.
When we re-emerge, expect to see JP Morgan and Goldman Sachs still standing, but not much else in the financial firmament. Expect a divided world of finance---hyper-regulated standard products on one side, and a pool of crazy, gambling sharks on the other. Think twice about risk-reward before surfing in the sharky waters again.
I had not read Murat Belge's remarkable October 4th 2001 essay on Fundamentalism and reactions to it. Murat is a Turkish public intellectual and long-time friend of openDemocracy - he regularly comes in to visit us when he is passing through London. In this essay, Murat disects the spectacle of 9/11 not only from the point of view of Islam's colonial, inferiorist grievances, not only from the resultant ability to form a cold, universalising ideology that legitimates violence, but also importantly from our reaction to it. Hawks obviously play into the hands of fundamentalists by "increasing the distance" to the other; but so do liberal democrats whose tolerant multiculturalism too easily slips into moral relativism. The essay, written less than a month after the World Trade Centre attack, is a masterful account of the bind that violence puts us into.
A part of Fred Halliday's call to understand local agency before jumping the geo-political gun is to know the domestic politics (see his recent article here). War often has deep domestic political repercussions - some anticipated and many not - and Robert Parsons shines a light right into the here and now of Georgian politics. The first surprise -- to Russia, at least -- is that the Geogian institutions have held up and continued to function. There is no immediate call for regime change despite Russia's best attempts to re-open old divisions. The war has, for now, united Georgia. But the end of the war is likely to produce a demand for accounts from within and provides an opportunity for an organsied and compelling Georgian opposition to emerge. This fascinating piece of insider observation points to who we should expect to do what to who else and under what circumstances.