by Jerome a Paris
Tue Jun 19th, 2007 at 05:03:17 AM EST
While not calling it a disease, Martin Wolf has an article this morning about how [u]nfettered finance is fast reshaping the global economy, i.e. about the onset of what I've decided to call the Anglo Disease.
While purporting to be neutral about it (noting how it has good sides as well as bad ones), he cannot quite hide his glee at the fact that it's a momentous event, and it's driven exclusively by the Anglos, whether in London, New York or Honk Kong.
I'm quite happy to make sure that the paternity of this phenomenon is agreed by all, so that we can make sure that the right ideology is dicredited when this momentous event sours.
The cultish nature of the underlying ideology is underlined by the quasi-messianic tone of the introduction, and its - now unsurprising - claim to be the real vanguard of humanity, in grab for the inevitability cloak of Hegel and Marx:
It is capitalism, not communism, that generates what the communist Leon Trotsky once called “permanent revolution”. It is the only economic system of which that is true. Joseph Schumpeter called it “creative destruction”. Now, after the fall of its adversary, has come another revolutionary period. Capitalism is mutating once again.
Much of the institutional scenery of two decades ago – distinct national business elites, stable managerial control over companies and long-term relationships with financial institutions – is disappearing into economic history. We have, instead the triumph of the global over the local, of the speculator over the manager and of the financier over the producer. We are witnessing the transformation of mid-20th century managerial capitalism into global financial capitalism.
And what has made this possible is a combination of several factors, which Wolf identifies:
What explains the growth in financial intermediation and the activity of the financial sector? The answers are much the same as for the globalisation of economic activity: liberalisation and technological advance.
Two further long-term developments help explain what has happened. The first is the revolution in financial economics, notably the discovery of options pricing by Myron Scholes and Fischer Black in the early 1970s, which provided the technical underpinning of today’s vast options markets. The second is the success of central banks in creating a stable monetary background for the world economy and so also for the global financial system. “Fiat” (or government-created) money has now worked well for a quarter of a century, providing the monetary stability on which complex financial systems have always depended.
Yet there is also a shorter-term explanation for the explosive recent growth in finance: today’s global savings and liquidity gluts. Low interest rates and the accumulation of liquid assets, not least by central banks around the world, has fuelled financial engineering and leverage. How much of the recent growth of the financial system is due to these relatively short-term developments and how much to longer-term structural features will be known only when the easy conditions end, as they will.
As I wrote in my previous diary (and copy in the following paragraph), I think that these short term (we are talking 25 years there, so it's short term only in historical terms) were the main cause for today's financial bubble economy. At least Martin Wolf acknowledges that it's so far impossible to know either way:
Increasingly cheap money, underpinned by ever more optimistic prognoses about inflation and, more generally, future returns on financial assets, has fuelled the massive financial boom we've been in for most of our lives and which has so transformed our economic landscape. By making high returns possible, it has generalised the requirement for such returns in all economic activities, and thus the need for constant restructuring of businesses, for cost-cutting, offshoring and, often, for the wholesale dismantlement of whole sectors of activity that could not generate the required profitability.
Which does not seem so far from Martin Wolf's own analysis:
The new financial capitalism represents the triumph of the trader in assets over the long-term producer. Hedge funds are perfect examples of the speculative trader and arbitrageur. Private equity funds are conglomerates that trade in companies, with a view to financial gain.
He is also trying to identify both sides of the argument on whether this is a sustainable phenomenon:
Optimists would argue that the new financial system combines efficiency with stability to an unprecedented degree. Publicly insured banks not only take fewer risks than before but manage the ones they do take far better. (...)
Pessimists would argue that monetary conditions have been so benign for so long that huge risks are being built up, unidentified and uncontrolled, within the system. They would also argue that the new global financial capitalism remains untested.
Last but not least are the challenges to politics itself. Across the globe there has been a sizeable shift in income from labour to capital. Newly “incentivised” managers, free from inhibitions, feel entitled to earn vast multiples of their employees’ wages. Financial speculators earn billions of dollars, not over a lifetime but in a single year. Such outcomes raise political questions in most societies. In the US they seem to be tolerable. Elsewhere, however, they are less so. Democratic politics, which gives power to the majority, is sure to react against the new concentrations of wealth and income.
The inequality issues have been pointed reasonably enough nowadays and more people are beginning to be aware of them. what is less discussed is the combination of that inequality with the 'untested' nature of the new system. What's the resilience of the new system? What will happen if there is a real crisis (as I have been predicting)? Will there be a a rollback to previous ways of functioning, or have too many irreversible changes taken place that prevent that (that's my theory about "Anglo Disease", i.e. that other activities have simply be eliminated as financial engineering is more profitable and crowds them out altogether, and forces them to shrink or disappear)?
Who will pay if there is a shock? Those that have concentrated wealth to an unprecedented degree, or those that have already paid for today's mutations? Can the system manage to share such a burden in a tolerable way, or will "political" solutions be required?
Our brave new capitalist world has many similarities to that of the early 1900s. But, in many ways, it has gone far beyond it. It brings exciting opportunities. But it is also largely untested. It is creating new elites.
The early 1900s brought us the gilded age and the destruction of WWI. Will it be as bad this time?