Since my last diary here (the credit crisis slowly worsens), things have continued to get worse in the financial world, with more markets collapsing and frantic attempts by banks and other players to save their skin, often at further cost to other markets (see some examples below).
What is interesting is a trend amongst the smarter market commentators to (finally) acknowledge that there were excesses in the recent past, that growing inequality was indeed a problem, and that stark measures are now needed.
While their avowed goal is to save capitalism from its excesses, their proposals are often things that could almost be supported, indeed, they sometimes sound downrightr bolshie.
I write "almost", because they are only coming up with them now, forced by the reality of the coming crash, after mocking for years similar proposals from the left. Reality is moving the Overton Window back in the right direction (ie left), let's not stop at the first sign of compromise and push our advantage...
First, the new spate of bad news:
Debt crisis spreads to US municipalities
A collapse in confidence in a $330bn corner of the debt market has left US municipalities and student loan providers facing spiralling interest rate costs.
80 per cent of auctions held on Wednesday had failed. This is in the region of $29bn, traders said.
Banks advised to walk away from big deals
Leading banks are being advised that it would be cheaper to walk away from big buy-out deals than incur further losses on their funding commitments, increasing the chances that more high-profile private equity transactions will collapse.
This advice from lawyers contrasts with the conventional wisdom that banks would risk serious damage to their reputations if they were to drop out of deals.
If this is too arcane, here's what this means:
- US municipalities are brutally discovering that one of their main sources of funding has disappeared overnight, and that they have to pay extortionate interest rates (one of the articles mentions 20%) to get emergency replacement funding. The same goes to entities providing student loans;
- banks are being advised to dump clients to whom they have already committed money, with the argument that the cost of that (in both financial penalties and reputational damage) is lower than the losses from proceeding with that funding. We're talking pretty desperate measures there.
In both cases, this is blamed on "cataclysmic conditions in the capital markets." As these markets increasingly look like dominoes, falling (or failing) one after the other (albeit in slow motion), as more bad news continue to pour in almost randomly, it is hard to find solace anywhere. But the thing to note now is that the financial crisis is now hitting directly the "real" world - businesses and public entities are getting caught and have to pay a direct price.
Second, the calls for regulation
- Martin Wolf, the doyen of UK economics pundits, edges ever closer to my concept of the Anglo Disease:
A financial sector that generates vast rewards for insiders and repeated crises for hundreds of millions of innocent bystanders is, I would argue, politically unacceptable in the long run. Those who want market-led globalisation to prosper will recognise that this is its Achilles heel. Effective action must be taken now, before a still bigger global crisis arrives.
He has been calling explicitly, and repeatedly over the last few weeks, for tough re-regulation of the banking world
- John Kay, another FT editor, calls bankers gangsters and cult-members, driven by herd mentality and insane short term incentives:
The process by which hysterical groups damage themselves and others in assertion of preposterous beliefs is a recurrent theme in human history. We see it in anti-Semitic pogroms or McCarthyite persecution. Before the mysteries of structured credit there were the mysteries of witchcraft; before investment banks used initial public offerings to turn dotcom concepts into billions of dollars alchemists claimed to turn base metals into gold.
Shared values and beliefs create a group identity. No matter that the beliefs may be absurd or the values contemptible: that Salem was not besieged by witches, the US was not threatened by communist infiltration, that greed is not good and that suicide bombers will not be greeted in paradise by 71 virgins. The very improbability of the belief, the unacceptability of the values, reinforces their social function; these factors distinguish the real members of the group from the less committed.
(...)
Like the politicians who invaded Iraq, executives of major financial services businesses did not reflect on questions to which they did not wish to know the answer.
(I must admit I was quite impressed to read in such a paper the notion that bankers belong to the same category as George Bush, suicide bombers or McCathyists, and the explicit notion that these last 3 are batshit crazy);
- Brian Groom, the Op-Ed editor of the same Financial Times, arguing for more taxes in his review of a book by Robert Peston about how the super-rich are now ruling the UK:
As Peston puts it: "What many will find offensive is that just as the spoils of the boom were disproportionately accumulated by the super-rich, so the costs of the subsequent bust are being heaped on all of us.''
(...)
Peston's argument is not that the rich should be penalised, but that they should pay the same rates of tax as everyone else. That seems only fair, since their businesses rely on society's infrastructure, including its hospitals and schools. The government's fear of driving the super-rich away is surely exaggerated.
We don't know yet if the "same rates" of tax means a flat tax or the same progressive rates, but it's rarer enough to read a call for higher taxes, especially for the rich...
- Finally, the editorial board of the same FT now essentially (same link as above) concedes that the Fed under Greenspan was a serial bubbler and that this needs to be changed:
The Fed's view is that central bankers should respond to asset price bubbles only after they burst. But the bursting of a bubble associated with a credit surge is almost always highly destabilising. Taking at least some preventive action surely makes sense. Finally, the view that financial markets are self-policing is, alas, rather less credible than it was.
So, preemptive action by central banks against asset bubbles... the exact opposite of the Greenspan doctrine, and the arguments that the belief of the market in the Greenspan put (the notion that Greenspan would let the party roll on, and step in to save things as they turned sour) must be killed once and for all;
Now you may say that I'm only quoting one paper, and that this is not representative. After all, the WSJ is still arguing that we're not facing anything that cannot be cured by some tax cuts, and the Economist is pointing fingers at Europeans and Asians for not doing their part to help solve what could still be a minor bump. But the FT, while it has been a consistent promoter of neoliberal ideology in its columns (as I have chronicled in excruciating detail over at the European Tribune over the past 3 years), it has also been a slightly less openly ideological paper, more willing to open its pages to discordant voices and to look a bit further into things.
And thus, its columinists and editorialists, looking at today's crisis, are recommending:
- more taxes for the rich (to pay for society's infrastructure!)
- more stringent regulation of the investment banks (and no longer any right to voluntary self-regulation)
- a more pro-active monetary policy focusing as much on asset price inflation as on "normal" inflation
- and, altogether, less veneration for the world of investment bankers, as it is prone like all others to irrationality, excess and denial of reality, but has the added problem that it makes all of society pay for its excesses
Third, the need to push our advantage
What is remarkable is that this programme is offered voluntarily, with very little political pressure put to bear. Oh sure, Obama and Clinton have sounded increasingly "populist" (note that this is meant as an insult, in the business press), but this has usually been summarily dismissed as politicking, and not debated much (beyond perhaps the topic of "free trade", another totem of the neoliberals).
Which means that if all these proposals are put on the table right now, this should be seen as a gambit to avoid even more stringent policy changes - the kind that could easily be justified by the increasingly dire economic situation and by the unavoidable responsibility of the current ideology of tax-cutting, deregulation, and debt bubbles (what I have labelled the Anglo Disease).
Our reaction should be to cash that in, and push for more.
- for an acknowledgement that the past 30 years have caused an hollowing out of the middle classes to make it possible for the very rich to capture a growing share of income and wealth;
- for an acknowledgement that wage stagnation is the problem, not the solution to everything
- for an acknowledgement thaty growing inequality is a problem, not the tolerable price for some future prosperity (that never actually comes)
- for an acknowledgement that government can be the solution rather than the problem, and that redistribution, taxes and regulations can be good things - and are absolutely necessary
- that "the economy" should be evaluated by hows the bottom 10% fare, not by how the top 0.1% fare
- and that the Washington consensus is reached by people that are almost all part of that 0.1% and are thus not objective in any meaningful way.
The next president, whoever s/he is, will inherit a massive mess, and in all likelihood a full-fledged economic crisis. It's essential that the narrative be ready for change then, and the babysteps made by some financial commentators should be used as stepping stones to a more ambitious policy.