Welcome to the new version of European Tribune. It's just a new layout, so everything should work as before - please report bugs here.

Anglo Disease (2) - Martin Wolf's take

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?

Display:
has provided an interesting comparison in the previous thread to gold towns which raises the same issues of "what happens next"? when gold prices go down, and the mono-industry can suddenly no longer sustain economic activity.

Are we oiling up so much the industrial machine that it might drown?

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Jun 19th, 2007 at 05:30:56 AM EST
According to economic theory, when gold prices go down, people and capital will move out of the gold town seeking a new "equilibrium" in greener pastures where all will be well. All the nasty stuff that happens to the people and the town between these two equilibria is just "friction" and would be eased by more "liberal reform" and less attachment to "sunk costs". Didn't they teach you anything in your Economics degree?

Can the last politician to go out the revolving door please turn the lights off?
by Migeru (migeru at eurotrib dot com) on Tue Jun 19th, 2007 at 05:35:03 AM EST
[ Parent ]
I implied in one of my other comments in that diary that one of the first urges would be to invoke Schumpeter... and lo... there he is, invoked at the top of Wolf's column...
by Metatone (metatone [a|t] gmail (dot) com) on Tue Jun 19th, 2007 at 02:50:19 PM EST
[ Parent ]
I should note that perhaps there are two sorts of issues here.

One is the one Wolf is happy to at least sort of acknowledge, if backhandedly: this system isn't tested... we don't know if it is really a "new stability" or just a soon to be disrupted confluence of circumstances.

The second, which Wolf doesn't seem to want to consider so much (although I didn't see the full article behind the subscription wall) is that of the Dutch Disease, (or the Gold disease, or the African diamond disease) whereby the rise of an industry with high returns starves other industries of growth/capital/political influence which sets the economy up for a rude shock when that industry stumbles.

by Metatone (metatone [a|t] gmail (dot) com) on Tue Jun 19th, 2007 at 02:58:10 PM EST
[ Parent ]
Great stuff, Jerome, and capable of leading a dozen different diaries I think.

Just a few thoughts in respect of Wolf's piece, which I have yet to read.

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.

Greed explains it.

Financial intermediaries will constantly invent new and ever more complex and arcane ways of extracting Value from the productive economy, until the parasite kills the host.

It's what they do.

And the complete nonsense of "deficit-based" emissions and carbon trading is just the latest example, the previous one being the invention of credit derivatives enabling credit intermediaries (aka Banks) to outsource the only TRUE value they provide - a Guarantee of a borrower's credit.

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 ability to measure "Time Value" was definitely a huge advance. But imagine what would happen if the "time" element were taken out of the equation entirely?

Which I believe is now possible simply by packaging revenues or production in new legal "wrappers" to give rise to a new - and time-less - form of "asset-based" finance.

It's already happened - imperfectly - in Canada to create two tiers of "Asset-based" Capital - conventional "Equity" and "Income Trusts".

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.

Governments don't create Money (apart from cash). Private Banks do. Period.

The advent of credit derivatives has removed any residual role that Central Banks ever had.

Stable monetary background! What!

<Head Explodes>

The system has never been so unstable, with pyrmaids of risk balanced upon pyramids of risk, a collapse is inevitable sooner rather than later.

We see a mutation all right, but beyond that is an evolution.

Wolf simply cannot see that the disintermediating logic of the Internet has not gone away. ALL intermediaries - and credit intermediaries configured around Central Banks above all - are simply obsolete.

As Gilmour almost said:

"The Internet interprets Banks as damage and routes around them."

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Jun 19th, 2007 at 05:40:58 AM EST
The new financial capitalism represents the triumph of the trader in assets over the long-term producer.
When productivity is so high that you only need a small fraction of the population to be involved in long-term production, you need to employ increasing amounts of people in services. "Trading" is the capitalist market equivalent of Keynes' "government digging bottles full of money into the ground". It's just a way to keep people employed. Of course, there are more useful and fulfilling services people could be doing to keep busy since they can't all be making stuff, but I suppose pushing papers around.

The late Per Bak thought up the following example of his sandpile model. Imagine a large room, with desks arranged in a rectangular array. There are open windows aligned with the ranks and files of the array. Every so often, a paper gets delivered to a random desk. When a person at a desk has 4 papers on his desk, they pass one paper in each direction: front, back, left, right. This can lead to one of the neighbours to accumulate four papers and pass them on in their turn. The people at the edges of the room are dupposed to throw one paper out the window in this case.

This system keeps everyone busy, and it displays periods of quiescence and avalanches of frantic activity in which the arrival of a single paper at one desk causes every paper in the room to be transferred several times on average and a substantial fraction of the papers in the room to be thrown out the window. In addition, when a "large event" happens, there's no particular reason for it, even though one could trace the large avalanche to particular conditions and try to assign them meaning.

I think this is an apt analogy of the financial markets.

Can the last politician to go out the revolving door please turn the lights off?

by Migeru (migeru at eurotrib dot com) on Tue Jun 19th, 2007 at 06:01:44 AM EST
I suppose pushing papers around is better than digging.

Can the last politician to go out the revolving door please turn the lights off?
by Migeru (migeru at eurotrib dot com) on Tue Jun 19th, 2007 at 06:37:51 AM EST
[ Parent ]
I'm too busy to write the lengthy comparison between the hubris of the Victorians of the late 19th/early 20th century and Martin Wolf's vision that comes to mind.

Linda Colley's CAPTIVES, the story of Britain's pursuit of empire and how its soldiers and civilians were held captive by the dream of global supremacy provides a fascinating and clearly unheeded warning.

by Lupin on Tue Jun 19th, 2007 at 10:18:26 AM EST
Thank you Lupin. A fine analogy, applicable for the early twentieth century in many areas: paleo-anthropology (Piltdown Man), engineering and perhaps even physics until quantum and nuclear physics came a-knockin.

In this frame, Jerome is alluding to the approach of a new Titanic to shake humanity out of the new gospel.

by Nomad on Tue Jun 19th, 2007 at 11:25:25 AM EST
[ Parent ]
With no disrespect towards Jerôme, even he will tell you I've been the Cassandra forecasting the decline/collapse of the American Empire on Billmon's & elsewhere since 2003.

I'm hardly alone in this, of course.

And Phil Dick predicted it long before any of us. Bob Heinlein too, actually.

I once wrote here, quite early on, that the first real challenge of the 21st century will be for the world to cope with the collapse of the US of A.

Despite the above, I'm actually quite optimistic, given the people and resources of America; but it'll take a decade or so to transform/adapt.

by Lupin on Tue Jun 19th, 2007 at 01:01:58 PM EST
[ Parent ]
Are writers on matters financial intellectual whores or are they dumb as a sack of hammers?

Having the milk of human kindness racing through my veins I would go with "dumb as a sack of hammers."  Here we see the various incarnations of the financial press: WSJ, FT, Barrons, et.al., as work-theraphy provided by the members of the ruling elites for people who would otherwise be wandering the streets, getting run over by buses, falling down open manholes, & etc. etc. etc.

Otherwise, the complete failure of Mr Wolf to include the gah-whomping increase in M3 on the part of the Central Bankers over the past 12 years in the 'First World' in his little essay as the fuel for the "recent explosive growth in finance."  Since Mr. Wolf is mentally incompetent there is no reason to refer - yet again - to the Federal Reserve Bank of the US which, for several years, effectively gave money to Money Center Banks.  

A cynic might suggest it is somewhat easy for a financier to make a profit when someone else is paying you to haul money away so you can lend it.  And with some of that money purchase themselves a writer on matters financial or twelve.  To support this cynicism he (or she) could point to the Economist .  In that August journal, when the US Federal Reserve quit publishing the M3 statistic, their reported estimate of the growth of the money supply went 8.8%/year to 5.3% in a mere 3 weeks.  A dramatic reduction attributed to -- well ... nothing.  It just happened.  

(Lo!  A Miracle!)

But I, with the Milk of Human Kindness running through my veins, would never consider such a thesis.


Skepticism is the first step on the road to truth. -- Denis Diderot

by ATinNM on Tue Jun 19th, 2007 at 11:09:16 AM EST
Hmmm. I was having a conversation with colleagues this morning, and they were basically telling me that I would go nowhere with my extremist positions and my exaggerations on what the financial markets are doing.

We still need to refine our discourse so that it can be understood, let alone absorbed...

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Jun 19th, 2007 at 11:46:11 AM EST
[ Parent ]
Did M3 come up in the conversation?

There is a story to be told about the structural growth of the equity markets, with the expansion of pension funds after WW2, followed by the wave of deregulation and then the sea-change of policy (didn't you write a diary about "Bubbles" Greenspan at some point...)

by Metatone (metatone [a|t] gmail (dot) com) on Tue Jun 19th, 2007 at 02:47:51 PM EST
[ Parent ]
We may of course be wrong about "what happens next", after all, anyone who tells you futurology is easy is a liar.

But these are natural questions to at least ask if you look at things from a "systems perspective" it seems to me... aren't they?

by Metatone (metatone [a|t] gmail (dot) com) on Tue Jun 19th, 2007 at 03:03:52 PM EST
[ Parent ]
the debate was about whether Sarkozy's policies are, as i caricature them only a bit, to take from the poor to give to the rich, and whether he is a fascist with his anti-immigrant drives and fearmongering (that's where they called me not-credible, when I called on his fascist leanings by making Le Pen's ideas mainstream).

The other point is that they see the PS as being unreformed, marxist and hopelessly out of touch.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Jun 19th, 2007 at 04:49:23 PM EST
[ Parent ]
I really wonder if I live in the same world as people who think the PS is unreformed and marxist. (which seems to be the general opinion in most of the French Blogosphere that's a bit to the right of Fabius...)

I could understand this for people that were over 20 years old in 1981, when the PS nationalised, but as a young'un, it took me quite some time to understand that then the PS was actually strongly on the left at the time, not the party of "a little bit of redistribution to the poor, please" in the middle of the neo liberal market that I knew for most of my life.

Un roi sans divertissement est un homme plein de misères

by linca (antonin POINT lucas AROBASE gmail.com) on Tue Jun 19th, 2007 at 05:53:35 PM EST
[ Parent ]
The idea that Europe's Social Democrat and Labour parties are "left" in an absolute sense just indicates how far right the Overton window has shifted.

Can the last politician to go out the revolving door please turn the lights off?
by Migeru (migeru at eurotrib dot com) on Tue Jun 19th, 2007 at 05:57:17 PM EST
[ Parent ]
What were, if I may ask, the most substantive counter-arguments they offered? Or did they just dismiss your arguments as outlined above out of hand?
by Almanax on Wed Jun 20th, 2007 at 08:28:14 AM EST
[ Parent ]
I wouldn't expect any more substantive argument than "investment bankers don't get customers by being pessimistic about the financial markets"

Can the last politician to go out the revolving door please turn the lights off?
by Migeru (migeru at eurotrib dot com) on Wed Jun 20th, 2007 at 08:31:56 AM EST
[ Parent ]
Gee Marty.

I have been writing about the rise of finance "capitalism" at the expense of the productive industrial kind since the 1980s.  I do NOT think this process is harmless.  In fact, I believe it will lead directly to the destruction of the planet and will prevent the rest of us from doing anything about it.

I certainly HOPE Jerome is correct that this is an "Anglo" disease that can be confined to the original sufferers.  But I am afraid this disease can infect almost anyone.  I see that even in sensible places like Sweden, you can find dangerous lunatics like Wolfie--anyone ever hear of Mr. Bildt??

Sigh


"Remember the I35W bridge--who needs terrorists when there are Republicans"

by techno (reply@elegant-technology.com) on Tue Jun 19th, 2007 at 11:54:48 AM EST
Our brave new capitalist world ... is creating new elites.
And that is an unqualified good because as long as there are elites, Martin Wolf has his subsistence guaranteed.

Can the last politician to go out the revolving door please turn the lights off?
by Migeru (migeru at eurotrib dot com) on Tue Jun 19th, 2007 at 12:09:14 PM EST
Absolutely. He even turns up at Bilderberg meetings....

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Tue Jun 19th, 2007 at 03:54:23 PM EST
[ Parent ]
As someone with no economics knowledge beyond general reading these are quite difficult concepts to understand.

But...... to my untrained eye it seems that once big capital realised that it paid no tax on debt, that many companies could be squeezed of "expensive overheads" such as pensioned workers by outsourcing to asia, and it had banks all too willing to lend the money at a low interest rate there was only one way for this to go. To me it has all the hallmarks of a bubble, theres only so many companies that can be bought by high leveraged buyouts. The companies then spend all their profit servicing the debt with none spent on innovation, supposedly the real driver of capitalism.

But these issues are usually too far from most peoples comprehension so continue unchecked. However recently the impact of private equity has become a talking point in the UK and tomorrow the parlimentary Treasury select committee confronts five leaders of private equity groups. Whether anything comes of it is another matter.  

by darragh on Tue Jun 19th, 2007 at 04:14:39 PM EST
A squeeze for "expensive overhead" to create financial profits and companies strangeld underneath. Which, in the end, as the financiers take very real money out of the companies today, is little more than highway robbery - only it's legal and a lot more profitable.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Jun 19th, 2007 at 04:47:18 PM EST
[ Parent ]
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Jun 20th, 2007 at 07:36:07 AM EST
[ Parent ]

UBS chief warns over lending boom risks

The chief executive of UBS, the Swiss banking group, warned that the growing number of risky loans investment banks are making could lead to lawsuits and damaged reputations.

The warning by Peter Wuffli highlights increasing concern among senior executives that a boom in leveraged finance could drag banks into litigation and damaging disputes with clients if the credit cycle turns.

(...)

Banks that underwrite large loans typically reduce their exposure within a few months by parcelling up the loans and selling them to other investors. But Mr Wuffli said there were broader considerations: "This is potentially risky in terms of exposure to litigation, exposure to quarrels, or just plain exposure to reputation," he said. "So financial institutions that think long-term, such as ours, do perceive a certain responsibility that includes deal terms, leverage, quality of the deals and so on."

His views are shared by other bank executives involved in leveraged finance. "Holding your nose while you're doing the underwriting and lending is fine if you're just passing through town," said the chief executive of one European bank. "But if you plan to be there any period of time, selling duff loans is not a great recipe for good business."



In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Jun 20th, 2007 at 07:24:20 AM EST

Beware the driving forces behind surging asset prices
By Marc Faber

Asset prices have soared in value everywhere in the world since October 2002. Prices of stocks, commodities, real estate, art, and every kind of totally useless collectible have shot up. Even bond prices have until recently gone up as interest rates fell.

That all asset classes increased in value simultaneously around the world is most unusual. (...) the beauty today is that every kind of asset is grossly inflated. How could this happen?

Already ahead of 2000, the US Federal Reserve pursued an ultra-expansionary monetary policy. Then, after the March 2000 peak in the Nasdaq, the Fed eased monetary conditions massively. All asset prices soared, particularly for US homes. A subsequent boom in refinancing and home equity extraction injected an overdose of adrenaline into consumption-addicted US households.  (...)

However, two asset classes stand out as major losers: the Zimbabwe dollar and the US dollar.

The latter has been in a down trend since 2001. Its value depends on the worst possible combination of factors - arrogant, bold and ignorant neo-conservatives, and Ben Bernanke, who prides himself by exclaiming that "we have the printing presses".

(...)

In fact, we have already reached the danger zone. It is no longer the real economy that is driving asset prices.

In a credit, and hence asset price-driven economy, money supply and credit must continue to grow at an accelerating rate in order to sustain the expansion.

The moment credit growth no longer grows at an accelerating rate, the economic plane loses altitude. This is now the case. Not because the Fed has tightened credit but because the market has done by tightening lending standards for mortgages because of the subprime lending collapse. Contracting liquidity and less consumption in the household sector follows.



In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Jun 20th, 2007 at 07:51:37 AM EST
What I find incomprehensible is that after a first-rate dissection of the problem, Faber goes on to advocate buying $ US liabilities..................

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Wed Jun 20th, 2007 at 10:46:10 AM EST
[ Parent ]
that he makes money out of relative values, not absolute ones...

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Jun 20th, 2007 at 05:19:43 PM EST
[ Parent ]
That I know, but if dollars keep on being created ad infinitum, how can they fail to depreciate relative to assets, commodities, and particularly, energy?

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Wed Jun 20th, 2007 at 07:29:23 PM EST
[ Parent ]


Display:
Go to: [ European Tribune Homepage : Top of page : Top of comments ]

Top Diaries