by Jerome a Paris
Wed Feb 6th, 2008 at 09:12:16 AM EST
In a pretty explicitly titled piece today (Why it is so hard to keep the financial sector caged), Martin Wolf focuses once again on the structural economic problems created by the financial world. His article, which I'll quote briefly below, provides two graphs that support some of the diagnoses we've been making here and labelling 'Anglo disease':
We can note their increasing profitability (whereas the rest of the corporate world is quite stable in that respect), and their growing place in the economy, both in terms of GDP and, more impressively, of overall profits.
The comparison with the windfall profits of the resource sector, based on extraction of wealth, appears increasingly apt.
So what does Martin Wolf say?
First: financial crises cause economic pain:
When will the next financial crisis come? We do not know. Yet of one thing we can be sure: unless we learn from this crisis, another one will put the world economy back on to the rocks in the not too distant future.
Second: the financial world is inherently unstable and unfair:
the banking sector is the recipient of massive explicit and implicit public subsidies: it is largely guaranteed against liquidity risk; many of its liabilities seem to be contingent claims on the state; and central banks create an upward- sloping yield curve whenever banks are decapitalised, thereby offering a direct transfer to any institution able to borrow at the low rate and lend at the higher one.
In addition, banking institutions suffer from massive agency problems - between clients and institutions, shareholders and management and management and other staff. All this is also exacerbated by the difficulty of monitoring the quality of transactions until long after the event.
Third: crises are almost always systemic and politically hard to pre-empt
As William White of the Bank for International Settlement has noted, banks almost always get into trouble together.* The most recent cycle of mad lending, followed by panic and revulsion, is a paradigmatic example.
Yet, as Mr White also notes, the strength of the pressures against taking "away the punchbowl just as the party gets going", in former Fed governor William McChesney's famous phrase, is formidable. In addition to bureaucratic inertia, such action is subject both to unavoidable uncertainty about the dangers of current trends and to resistance from private interests.
Fourth: it's ultimately a political problem
On the one hand, we have a banking sector that has a demonstrated capacity to generate huge crises because of the incentives to take on under-appreciated risks. On the other hand, we lack the will and even the capacity to regulate it.
Fifth: the system is digging its own grave
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.
That last argument is very important, as far as I'm concerned: it's the smart liberals (in the economic sense) acknowledging that things have gone too far and that their (neo)liberalism needs to be tuned down. It's probably too little, too late, given that the crisis is basically unavoidable right now, but this will help define the political battleground: how much more regulation will be allowed as the crisis unfolds?
Previous "Anglo Disease" content:
- Martin Wolf edges ever closer to the 'Anglo Disease' concept by Jerome a Paris on February 6th, 2008
- Anglo Disease - a summary by Jerome a Paris on February 3rd, 2008
- Tiptoeing around the Anglo Disease by Jerome a Paris on January 26th, 2008
- La Vie Londonienne by afew on January 23rd, 2008
- The Next Domino by Jerome a Paris on January 21st, 2008
- LQD: Anglo Disease: Another Symptom? by ChrisCook on January 16th, 2008
- Anglo Disease - symptoms of failure by Jerome a Paris on January 14th, 2008
- Anglo Disease - Wall St's solution: the Bush way by Jerome a Paris on January 3rd, 2008
- The FT worries about the Anglo Disease by Jerome a Paris on December 10th, 2007
- Anglo Disease: Optimism and Dismay in the Narrative by Jerome a Paris on December 8th, 2007
- Rewriting economic history by Jerome a Paris on December 3rd, 2007
- Anglo Disease: LQD - the Economist is worried by Jerome a Paris on December 1st, 2007
- Anglo Disease - early signs of hangover generate denial by Jerome a Paris on November 22nd, 2007
- Anglo Disease: Dollar Dump & Boom-n-Bust by Jerome a Paris on October 30th, 2007
- Anglo Disease: hangover in Manhattan by Migeru on October 15th, 2007
- Anglo Disease fever by Jerome a Paris on August 28th, 2007
- Anglo Disease - Fools and Bourses by ChrisCook on July 9th, 2007
- Anglo Disease watch (5) - just break the thermometer and all is well by Jerome a Paris on July 5th, 2007
- Anglo Disease watch (4) - No industry is vital - except finance by Jerome a Paris on July 4th, 2007
- The Anglo Disease (3) - an introduction for non-economists by Jerome a Paris on June 24th, 2007
- Anglo-Disease Sidelights (1): UK = Tax Haven by afew on June 22nd, 2007
- Anglo Disease (2) - Martin Wolf's take by Jerome a Paris on June 19th, 2007
- The Anglo Disease - Financiers worried about end of great bull run by Jerome a Paris on June 18th, 2007