20 October 2008

house of cards

It's moments like these I wish I had more than two very small molecules of grey matter to rub together. One of my drinking mates from the weekend sent me a link to two pieces by one John Lanchester, whom I feel I should had heard of, but haven't. The pieces are to do with the collapse of the international financial house of cards and, tellingly, were written in January and October.

The October piece, not surprisingly, tracks the fall and fall of markets, mechanisms, and money over the intervening period. Not much of a fall in people is reported, though, apart from the thousands of unfortunates who were sold mortgages they could never afford. The bonuses were paid from taxpayer funds and were still humungous. The unfortunate borrowers? Caveat emptor, I hear you cry. Maybe so, except I suspect many of these people would not have been capable of understanding their situation: one minute they couldn't get a loan, now they could. Interest rate capped for two years. What could possibly go wrong?

The first article spends some time examining the lives of City of London bankers and as such contains quite a few bons mots:

"In an ideal world, one populated by vegetarians and Esperanto speakers..."

But mainly the articles serve to illustrate the immense sums of money - well, actually not money - sloshing around. It explains how the paper empires of derivatives are formed, packaged, on-sold and so on. The regulations that not so much allow as boost this vaporous creation. And, of course, the stupendous sums earned by bankers.

The second article, analysing as it does the more recent events in the financial world, edges towards looking into the future for what kind of policy and regulatory environment might eventuate, once all the proclamations of the death of capitalism/libertarianism/Friedmanism and so on die away.

Other than that, it’s too early to draw general conclusions from this amazing crisis. What will, what must, die is the mystical belief in the power of the markets that has dominated political and economic discourse in most of the Western world for the last several decades. The markets have so manifestly, so flagrantly malfunctioned that we can’t go back to the idea of unfettered liberal capitalism as a talisman, template or magic wand.

The unquestioned Cityphilia I wrote about earlier this year is gone, I hope for ever. Unfortunately, we have no current model of where to go from here, apart from a more heavily regulated form of growth-based liberal capitalism. There will be more intrusive regulation, more proactive interference. There may even be (there should be) a new Bretton Woods to control the global flow of capital. That doesn’t seem enough, but in the absence of another set of ideas about how the world should work, it may turn out to be what we have to settle for.

In the meantime, it’s seatbelt sign on, sickbag to hand, and that deep, bitter, prayerful longing for smooth air.

That seems a rather pessimistic approach, but that house of cards is so far removed from our ability to influence events it's kind of obvious that we should want to pull the pillow over our head until the noise stops.

The House of VVB has observed the power that was wielded by morally vacant but highly numerate 23 year old cocaine sniffing traders. That was before we discovered automatic trades, but the point remains that the world of financial finagling had grown cancerously unlike what was needed to get things built. For all the arguments raised about the value of hedging and leveraging and who knows what else ing, the thousands of arbitrageurs contributed nothing to the real economy.

As much as it kind of grates (don't forget this is a centrist blog, heh yeah well...), we do need the tools that facilitate the real world projects. As always, the issue is where we draw the line: this is useful, that is not.

Like I said, two small molecules.

1 comment:

Laurie said...

Brilliant, mate - it's a house of cards, all right, fashioned out of abstraction, air piled upon smoke and mirrors. Marx - ever the victim of Friedmanite wishful thinking - put it all together in Capital volume 3, where he forecasted the rise of the derivative traders, who he reckoned were "constructing" capital out of thin air; often a third and fourth variation of the same capital would be added together to miraculously create "wealth" where none existed. And they wonder why a bloke's a commo!

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