Crises are endemic to financial systems. Attempts to regulate them may do more harm than good
For three decades, public policy has been dominated by the power of markets—flexible and resilient, harnessing self-interest for the public good, and better than any planner-in-chief. Nowhere are markets deeper and more liquid than in modern finance. But finance has stumbled and there are growing calls from all sides for bold re-regulation.
This is the lead editorial of the Economist, the bible of the neoliberals and deregulators around the planet, and it is worth deconstructing in detail. Just this very short paragraph above is a good example of how to set the parameters of the debate and preempt decisions:
- markets are described as an unalloyed good, better than government (caricatured as the Gosplan), even to the extent that they are said to provide for the "public good" - the biggest lie of all, but repeated endlessly until it gained "common wisdom" status, ie that of a fact that needs not be proven anymore (truthiness could be a way to describe that common wisdom);
- in that context, the use of 'stumble' is a very aggressive gambit: it means to convey that the current crisis is but a temporary hiccup after a very long and strong period of prosperity - and it is meant to separate the current consequences of deregulation from their earlier proclaimed successes, ie the way to assess deregulation is not to take boom and bust as a whole, but to focus on boom and treat the bust as an inevitable, exogenous event that must be dealt with separately;
- of course, underlying this is the fact that markets are described as a natural policy choice - a choice made by all, over a very long period of time, and justified by their supposed "power." This is a way to avoid the discussion of deregulation as an ideological choice. The use of "re-regulation" in the last sentence is the only acknowledgement that these policies are by no means irreversible nor the only way to do things;
- most importantly, in a display of how expert the right is at controlling public discourse, one finds the notion that the Economist is a solitary voice facing an overwhelming consensus ("calls from all sides"), as opposed to one of the biggest loudspeakers of the only ideology that can be heard in all official discourses and throughout "serious" media. Accuse the other side of your own failings, claim victimhood, and push forward again with the same ideas as the only solution to everything.
As the title of the piece shows, the goal is the same as it has always been: reduce regulation of finance. Whatever the facts, they never stop promoting their selfish, self-serving and destructive agenda. They claim the (supposed) good times, and say that the bad times are inevitable (and thus not their fault) and that only their solutions can bring back the good times. It's a simple recipe, and unfortunately it works.
And the looting will go on as it does.
It is natural and right that regulators should seek to learn lessons. The credit crisis will damage not just the reputation of the financial system but also the lives of those who lose their houses, businesses and jobs as a result of it. But before governments set about reforming financial regulation, they need both to be clear about the causes of the crisis and to understand just how little regulators can achieve.
Again, with barely concealed contempt for the poor losers of the crisis (their plight comes after the "reputation of the financial system" and they probably deserve what happened to them anyway - suckers) this subtly underscores that notion that nothing bad happened until the crisis. Before it, all was well, prosperity was growing for all, there were no poor, no foreclosures, nothing. Financial markets were working their wonders.
The goal is to separate as much as possible the boom and the bust, in order to claim the boom and blame the bust on somethng else. But, even more importantly, it is about creating a mythical version of the boost, where the good times were shared by all - and were naturally created by de-regulation.
This is the context were governments come in - they are well meaning, trying to do their best to react to the bust - it is their responsibility, after all (another subtle reminder that it is not the markets'). But sadly, being governments, there's little they can do, you see. This has been repeated so many times that it fits naturally in existing notions (cue in Reagan "I'm from the government and I'm here to help you" - he was so funny ... ah, these were the days - back when we were tough enough to beat the evil Soviets and bring back the morning). So that layer fits in - don't expect government to do much now.
there are two reasons to hesitate before plunging headlong into a purge of the system. First, finance was not solely to blame for the crisis. Lax monetary policy also played a starring role. Low interest rates boosted the prices of assets, especially of housing, which in turn fed into complex debt securities. This created a spiral of debt that is only now being unwound. True, monetary policy is too blunt a tool to manage asset prices with, but, as the IMF now says, central banks in economies with deep mortgage markets should in future lean against the wind when house prices are rising fast.
The first paragraph is another attempt to try and separate the good of markets from today's crisis, by blaming something apparently unrelated : the monetary policy run by central banks (coincidentally, a government body).
As if lax monetary policies were not part of the same ideological corpus that sees wage inflation as evil (forced by evil reactionary collectives grubbily fighting for privileges and cutting into corporate profits, urgh) and asset price inflation as good (growth and prosperity spreading and properly valued by free markets).
As if massive debt, made possible by low interest rates, had not been the easiest way to hide to populations too brain-washed or too worried by making ends meet to notice that their incomes were stagnant.
As if Greenspan's ultra-low interest rates and Bush massive tax cuts to the rich had not been simultaneous and coordinated.
The second reason to hesitate is that bold re-regulation could damage the very economies it is designed to protect. At times like this, the temptation is for tighter controls to rein in risk-takers, so that those regular, painful crashes could be avoided. It is an honourable aim, but a mistaken one.
And thus we come back to the claim that markets worked until the "stumble", and will work again, and it would be a horrible error to stop that. The boom should not be blamed for the bust. Why not? Just because. Booms are great - are you against prosperity, or what?
Finance is a brain for matching labour to capital, for allowing savers and borrowers to defer consumption or bring it forward, for enabling people to share, and trade, risks. The smarter the system is, the better it will do that. A poorly functioning system will back wasteful schemes and shun worthy ones, trap people in the present, heap risk on them and slow economic growth. This puts finance in a dilemma. A sophisticated and innovative financial system is susceptible to destructive booms; but a simple, tightly regulated one will condemn an economy to grow slowly.
Note how,the problem is about a 'poorly functioning' system, not about how it parasited society by encroaching on everything and imposing its value system on the real economy (that which has no market value has no value) and then on all social behavior. Finance can be small and innovative while remaining a tool, rather than the sole driver and judge of human activity. But that's probably a debate the Economist would rather avoid...
And, again, the comparison is not between a stable economy with slow growth with a booming-and-busting one, but between that stable one and the boom times only of the finance-driven version. How convenient. Keep the profits and dump the losses into the ether. If only life were so simple for the rest of us...
the system is stacked against [regulators]. They are paid less than those they oversee. They know less, they may be less able, they think like the financial herd, and they are shackled by politics. In an open economy, business can escape a regulatory squeeze in one country by skipping offshore. Once a bubble is inflating many factors conspire to discourage a regulator from pricking it.
Pure and simple concern trolling, tinged with more barely concealed contempt. Regulators are paid less (which means, of course, that they are worth less, ie that they must be less smart or less hard-working); they are stifled by politics (something that never happens in the private sector), and they are just following the herd (ditto). Stupid bureaucrats, what do you expect?
And business is global anyway, so they are powerless - a subtle way to make us think that such globalisation is inevitable, and was not made possbile in place precisely by government policies that can be reversed.
It is quite a sight to see the Economist lamenting about the powerlessness of regulators after having explained year after year that deregulation was the way, that trade barriers, capital controls and taxes were bad, that ever-increasing corporate profits was the best sign of prosperity and the best way to get growth, and that record incomes by financiers were a just reward for their hard work and creativity. They argued that regulators should be made powerless, and now they argue that this current powerlessness is the reason to not do anything? The chutzpah is quite breathtaking, when you actually think about it.
The notion that the world can just regulate its way out of crises is thus an illusion. Rather, crisis is the price of innovation, so governments face a choice. They can embrace new financial ideas by keeping markets open. Regulation will be light, but there will be busts. The state will sometimes have to clear up and regulation must be about cure as well as prevention. Or governments can aim for safety and opt for dumbed-down financial systems that hobble their economies and deprive their people of the benefits of faster growth. And even then a crisis may strike.
And thus the conclusion: financiers are smarter than governments, thus they will inevitably find devious ways to crash the economy (after making loads of money in the process, of course, a just reward for their "creativity" and "innovation"), thus crises are inevitable. Apparently this applies even if you stunt the financial sector and tolerate to grow slowly (an assertion that is, of course, nowhere backed by facts, and even contradicted by earlier paragraphs of that very article). So one might as well have fast growth in-between, right? And, conveniently, governments should still be there in the bad times to pick up the pieces.
From the financiers, this makes sense:
- they gorge during the boom, and are celebrated for their smarts and innovation when what they are really doing is finding legal ways to loot and rape the rest of us;
- they are helped during the bust (sorry, the stumble), as that is a tolerable price to have bigger booms the rest of the time;
- they are right and deserve all of this because they are rich. That wealth has to mean something.
But for everybody else? Oh... they might be rich one day, so being stuffed in the meantime is an acceptable price, I suppose. Even if they are actually trampled upon after the 'stumble.'