Blunders without borders
Calls for financial institutions to be subject to tighter rules may prompt a return to economic nationalism but a liberal market demands multilateralism.
Ft.com
When enough banks have been nationalised or gone bust, when the last reputations have been properly shredded, and when prices of Fifth Avenue apartments and Mayfair townhouses have fallen finally to earth, politicians are going to have to think hard about the lessons of the financial crash of 2008.
Even now, someone somewhere is penning The End of Capitalism. Experience tells us snappy book titles should be treated with caution. The global financial system will never be the same again. But just as history survived the collapse of communism, so the market economy will weather the demise of Bear Stearns, Lehman, Merrill Lynch and HBOS.
Wise after the calamity, central bankers, market regulators and the rest are already saying what are needed are tighter rules, closer oversight and a premium on sobriety. The rest of us may ask why it has taken so long for these guardians of the system to stir from their complacency. Doubtless we will be told in turn that this is no time for recriminations. The people who presided over this mess must now be trusted to save the global financial system from their past mistakes.
Some of the conclusions are easily predicted. Investment bankers, to the extent there are any left, will see the odd million or five lopped from their salaries and bonuses. Capital ratio requirements for financial institutions will rise, and incentive structures will be re-calibrated to damp risk-taking.
The fiendishly complex products that seemed for a time to define a new financial capitalism will be seen for what they properly are: instruments of deception as much as of innovative genius.
Politicians, I suspect, will demand tough constraints on what more than one has called "the spivs and speculators” who have been short-selling bank shares. Someone somewhere will surely decide that insurance companies should not be allowed to treat pension savings as free chips in the financial casino.
How much good all of this will do is an open question. To the interested observer, it looks that the big mistakes of recent years have not been so much about the absence of regulation, but a failure to act. The central bankers and the regulators were simply asleep on the job.
It should be said that there were one or two honourable exceptions. Take the warnings of Edward Gramlich. A governor of the US Federal Reserve, Gramlich warned publicly in 2004 of the risks inherent in the explosion of sub-prime lending that fuelled the housing boom. Before his death last year, he said that he had been making the point privately at the Fed as long ago as 2000.
Alan Greenspan brushed the evidence aside, courting applause and celebrity as mortgage lenders advanced billions of dollars to people who would never be in a position to repay the loans. I am truly mystified as to why people still listen to the former Fed chairman.
For now, the only thing politicians can do is to ensure in so far as they can that just the bankers lose their shirts: that depositors and small businesses do not join the millions of homeowners already mired in mortgage debt as innocent victims.
It is horrifying to think that the huge liabilities of failing institutions have now been loaded on to the backs of taxpayers: a case, as far as speculators are concerned, of heads, we win; tails you lose. Given where we are, governments scarcely have much choice.
Even so, and for all the richly deserved humiliation suffered by those hollow titans Jimmy Cayne, Dick Fuld and Stan O'Neal, ordinary folk will suffer most. Unsurprisingly, they will blame governments. Political leaders took the credit for the economic boom; they cannot escape blame for the bust.
Yet once the storm abates – and colleagues better versed in these matters tell me that it will take some time – the task for politicians will be to ask some bigger questions. Putting aside the technicalities of collateralised debt obligations, capital ratios and the rest, what does the crisis tell us about the nature of the world in which we now live?
The messages are not straightforward; some appear contradictory. Overall, they speak to a growing tension between global integration and a shortage of credible international governance. Governments have been left with responsibility without power.
One big consequence of globalisation has been to weaken decisively the grip of individual states on the levers of economic management. Few political leaders outside the US were even vaguely aware of the degree to which their own banking systems were held hostage to the sub-prime loans made to American homeowners.
This loss of control has not been matched by any corresponding diminution of responsibility. Voters still hold their own politicians to account for the insecurities that flow from interdependence. Blaming someone else offers insufficient answer to the homeowners trapped in negative equity or to depositors or creditors in a failing bank.
The tensions, of course, do not apply solely to financial markets or indeed to economics. They are inherent in globalisation. Voters want the ease of movement across national borders that comes with cheap travel. But they also want governments to control immigration and cross-border crime. They want to buy cheap electronics from China – and to blame politicians when global supply chains threaten job security at home.
The credit crunch and the financial firestorm have also provided a neat metaphor for the big shift in economic power in the world. Financial crises used to start in the developing or emerging economies: in Latin America, Asia or Russia. All the west had to worry about was contagion.
This time the crisis was made in the US. It is the emerging powers of the east that fear contagion. So far, Asia's rising economies have been largely immune to the shocks, though the demise of the US insurance giant AIG, with its huge interest in China, is a warning that could change.
The tensions are not susceptible to neat solutions. But all point in the same direction. Interdependence is no longer an abstract noun. Governments need to find ways to reclaim some of the sovereignty lost to globalisation. That means more global governance: credible international rules.
Capitalism will survive these financial shocks. The risk, though, is of a retreat to economic nationalism. The stresses of globalisation are visible everywhere. Ultimately, if the politicians want the liberal market system to work, they will have to make multilateralism work.
When enough banks have been nationalised or gone bust, when the last reputations have been properly shredded, and when prices of Fifth Avenue apartments and Mayfair townhouses have fallen finally to earth, politicians are going to have to think hard about the lessons of the financial crash of 2008.
Even now, someone somewhere is penning The End of Capitalism. Experience tells us snappy book titles should be treated with caution. The global financial system will never be the same again. But just as history survived the collapse of communism, so the market economy will weather the demise of Bear Stearns, Lehman, Merrill Lynch and HBOS.
Wise after the calamity, central bankers, market regulators and the rest are already saying what are needed are tighter rules, closer oversight and a premium on sobriety. The rest of us may ask why it has taken so long for these guardians of the system to stir from their complacency. Doubtless we will be told in turn that this is no time for recriminations. The people who presided over this mess must now be trusted to save the global financial system from their past mistakes.
Some of the conclusions are easily predicted. Investment bankers, to the extent there are any left, will see the odd million or five lopped from their salaries and bonuses. Capital ratio requirements for financial institutions will rise, and incentive structures will be re-calibrated to damp risk-taking.
The fiendishly complex products that seemed for a time to define a new financial capitalism will be seen for what they properly are: instruments of deception as much as of innovative genius.
Politicians, I suspect, will demand tough constraints on what more than one has called "the spivs and speculators” who have been short-selling bank shares. Someone somewhere will surely decide that insurance companies should not be allowed to treat pension savings as free chips in the financial casino.
How much good all of this will do is an open question. To the interested observer, it looks that the big mistakes of recent years have not been so much about the absence of regulation, but a failure to act. The central bankers and the regulators were simply asleep on the job.
It should be said that there were one or two honourable exceptions. Take the warnings of Edward Gramlich. A governor of the US Federal Reserve, Gramlich warned publicly in 2004 of the risks inherent in the explosion of sub-prime lending that fuelled the housing boom. Before his death last year, he said that he had been making the point privately at the Fed as long ago as 2000.
Alan Greenspan brushed the evidence aside, courting applause and celebrity as mortgage lenders advanced billions of dollars to people who would never be in a position to repay the loans. I am truly mystified as to why people still listen to the former Fed chairman.
For now, the only thing politicians can do is to ensure in so far as they can that just the bankers lose their shirts: that depositors and small businesses do not join the millions of homeowners already mired in mortgage debt as innocent victims.
It is horrifying to think that the huge liabilities of failing institutions have now been loaded on to the backs of taxpayers: a case, as far as speculators are concerned, of heads, we win; tails you lose. Given where we are, governments scarcely have much choice.
Even so, and for all the richly deserved humiliation suffered by those hollow titans Jimmy Cayne, Dick Fuld and Stan O'Neal, ordinary folk will suffer most. Unsurprisingly, they will blame governments. Political leaders took the credit for the economic boom; they cannot escape blame for the bust.
Yet once the storm abates – and colleagues better versed in these matters tell me that it will take some time – the task for politicians will be to ask some bigger questions. Putting aside the technicalities of collateralised debt obligations, capital ratios and the rest, what does the crisis tell us about the nature of the world in which we now live?
The messages are not straightforward; some appear contradictory. Overall, they speak to a growing tension between global integration and a shortage of credible international governance. Governments have been left with responsibility without power.
One big consequence of globalisation has been to weaken decisively the grip of individual states on the levers of economic management. Few political leaders outside the US were even vaguely aware of the degree to which their own banking systems were held hostage to the sub-prime loans made to American homeowners.
This loss of control has not been matched by any corresponding diminution of responsibility. Voters still hold their own politicians to account for the insecurities that flow from interdependence. Blaming someone else offers insufficient answer to the homeowners trapped in negative equity or to depositors or creditors in a failing bank.
The tensions, of course, do not apply solely to financial markets or indeed to economics. They are inherent in globalisation. Voters want the ease of movement across national borders that comes with cheap travel. But they also want governments to control immigration and cross-border crime. They want to buy cheap electronics from China – and to blame politicians when global supply chains threaten job security at home.
The credit crunch and the financial firestorm have also provided a neat metaphor for the big shift in economic power in the world. Financial crises used to start in the developing or emerging economies: in Latin America, Asia or Russia. All the west had to worry about was contagion.
This time the crisis was made in the US. It is the emerging powers of the east that fear contagion. So far, Asia's rising economies have been largely immune to the shocks, though the demise of the US insurance giant AIG, with its huge interest in China, is a warning that could change.
The tensions are not susceptible to neat solutions. But all point in the same direction. Interdependence is no longer an abstract noun. Governments need to find ways to reclaim some of the sovereignty lost to globalisation. That means more global governance: credible international rules.
Capitalism will survive these financial shocks. The risk, though, is of a retreat to economic nationalism. The stresses of globalisation are visible everywhere. Ultimately, if the politicians want the liberal market system to work, they will have to make multilateralism work.
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