Friday, 12 September 2008

Capitalism in crisis! Or is it?

There’s several million articles out there on t’interweb about the implications of the Fannie and Freddie bailout in the US. If you believe some people this marks a further decisive shift (on the part of governments, regulators and even bits of the financial world) away from the idea that markets are best left alone. Everyone loves that quote by the Chinese politburo member who said it was still too early to tell what the impact of the French Revolution had been. I suspect we could be in the same situation right now. There’s a possibility that things take a radical turn.

I used to be gob-smacked at how little reaction there was to the post-2000 stockmarket correction. I thought it was a) a real-life rebuttal to the argument that the stockmarket is efficient at allocating capital b) another nail in the coffin of active fund management and c) a big pain in the pension funds that would surely provoke a reaction.

It clearly did hurt pension funds, and in my mind is one of the supplementary reasons for the collapse of DB in the private sector (longevity is the biggest factor IMO). But unfortunately a bit of clever framing on the part of some politically-motivated types has created the narrative that the abolition of ACT credits did that (it didn’t help, but not the smoking gun). The failure of pension funds’ decades-long punt on active equity management wasn’t really called into question.

In addition discussion of the broader issues raised by the correction failed to emerge, at least outside the finance world itself (there was a good bit of introspection in the EAMA book on the bubble). If anything, as Warren Buffett noted (see page 18 of this PDF), institutions bought into the idea that they were not trying hard enough (or paying enough) to generate alpha, hence the rise of hedge funds and private equity, and of investment fees. Unfortunately, if unsurprisingly, the extra piles of cash we have thrown at the market don’t seem to have paid off.

In tandem the broad outline of political debate seemed to exclude discussion of the proper function of the financial sector. It appeared like a faustian pact had been struck with the financial services industry, to leave it alone as long as the tax revenues were coming in. I say ‘appeared’ because actually I think that the Government did have one or two attempts at radical-ish reform. The first Myners report on institutional investment remains a really good critique of how the system works, and probably informs a lot more of people’s thinking than they would care to recognize. I also think the Sandler report said a lot of good stuff, but it ultimately went nowhere.

The net result was that there was no serious challenge to the way the City works and how, and how much, people working in it get paid.

This time around it could be a bit different. The general feeling out there is that this is a crisis in no small part due to the actions of banks and other financial institutions. Whether because of outright dishonesty (ie mortgage salespeople), conflicts of interest (ratings agencies), misaligned incentives (UBS, etc etc etc), or just a lack of understanding of the complex instruments they themselves had created, the financial sector is being blamed for causing major economic damage. I can’t believe that this isn’t going to affect both popular and political attitudes to reform.

I suspect many people’s thumbnail sketch of the situation used to be that people in the City were smart, hard-working and broadly beneficial to the economy, so it was OK to leave them alone to get on with it, even if we had the odd moan about how much they got paid. Now we’re going to have a revised version where the headline view of many could end up being ‘they get paid far too much, and muck things up for the rest of us’.

At the same time, if you see your pension (or ISA if you have one) heading south, and the threat of negative equity in respect of your home, how much are you going to accept the idea that the market is getting things right? A lot of people’s assumptions have been built on the back of a long stretch of economic growth and rising asset values. If the former stutters and the latter reverses, plus prices go up, you can see how this might lead people to a fundamental reappraisal of how the world works. To nick Taleb’s analogy, we’re like the turkey that has been fed every day, and believes this is normal life, until one day just before Thanksgiving when the farmer appears with meat cleaver…

This ought to be fertile territory for the labour movement to re-establish its relevance, but it will need some sort of programme to work to. Time to get working on some ideas then...

2 comments:

Charlie Marks said...

I agree with you, the labour movement must be proactive. Already the TUC has voted for the renationalisation of public utilities (very much against the advice of Barber and co) and for a progressive tax system with the burden on the wealthiest (this bit was Barber and others). Compass has been campaigning for a windfall tax on the energy companies, something which has galvinised Labour MPs and perhaps reawakening a sense of social justice.

I note that the governor of the bank of england has warned against public intervention in the mortgage market - the fear being that custom will dry up for the big banks. Given that reckless mortgage lending has been problematised and the actions of the banks with regards charges and record profits, there's not going to be much sadness at their decline amongst the general public... As it stands, the cooperative bank and the building societies are benefiting from growing distrust in the big banks.

Now consider that the financialisation of the economy in the last three decades has occured in tandem with the managed decline of the productive economy - which though unpopular, appeared sustainable. But now the costs of imported food and fuel are rising, necessitating investment in domestic energy supplies and increased domestic production of food and perhaps other consumer goods.

This is not yet a systemic crisis. The ability of the capitalist class to excerice hegemony is weakened, but not threatened politically by a counterveiling bloc led by the party of organised labour...

Tom P said...

Everything to play for now!