I recently posted the following to “TheMarketMogul” , a relatively new publication. It was a different experience – my first of being subject to editorial review before publication….
Here is the link: http://themarketmogul.com/financialisation-and-politics/
I have reposted below for convenience, but the site is worth a look.
In George Monbiot’s How Did We Get Into This Mess, he discusses the failure, as he sees it, of Neo-Liberalism. As one considers the history of the financial crisis and the talking points it has provided for the candidates in the recent Presidential election in the United States, it is a subject worth pondering – an emerging theme.
Friedrich Hayek’s The Road to Serfdom has some great insights. Capitalism, he says, is very much aligned with human nature: it relies on the creativity of the majority outside the government to figure out, in the free market, the best allocation of resources. Friedrich Hayek details the deep flaws of five-year plans and the tendency of a centralised government to gather ever more power to itself to reinforce its goals and, when they go awry, to cover up the mistakes. Remember the time he was writing: WW2, fascism, totalitarianism, the rise of communism. He correctly describes the tendency of socialism to evolve into totalitarianism.
Hayek’s insights are as relevant today as they were when he was writing. However – and there is a risk that this sounds like the same apology that socialists made that the system was never properly implemented – the problem is that Friedrich Hayek’s philosophy depends on free markets. In many areas, the scales are tilted. People, whether in government or the private sector, have a tendency to want to accumulate power and protect it. Monopolies are a good example. Libertarianism deals very specifically with this, setting out certain areas where monopolies are indeed more efficient and must, therefore, be regulated. The book Winner Take All Politics describes how the system is “rigged”. It talks about how, traditionally, trade unions have provided a counterweight to the power wielded by corporations over workers and that the demise of unions has been to the detriment of workers. In this sense, the Bernie Sanders diagnosis has a lot of truth to it.
There is lots of good diagnosis and remarkably few prescribed cures. If you want to know why people are having a hard time getting things done in the US, take a look at a book called Ratf***ed. The argument is not that the Democrats are free of blame – rather that the Republicans have done a very good job of doing a very bad thing.
Even someone who has benefited from the financialisation of the last 30 years may feel ambiguous about all this. The Hayek model is appealing and receives wide support in the financial community, a community that aligned closely with Thatcherism and Reaganism mostly out of self-interest. Even within this community, though, there are many who, thinking about the next generation making its way in the world (frequently advising career paths outside financial services), are pausing to reflect and find it hard to ignore the anger of those who have been left behind. Support for President-Elect Trump was born out of this anger.
Playing Into Biases
Trump, Clinton and Sanders certainly polarised the electorate and it has been hard to distill the distinct arguments from the passions surrounding the campaigns. There is undoubtedly a tendency to select information that confirms biases. The discussion between the media and elite bubbles is currently heated. Perhaps, a letter-writer to the NY Times suggested, the NY Times should stop telling people what to think and how to behave and report more of how people are feeling and behaving.
Exploring opinions from all sides is important but requires discipline and a willingness to hear points of view that may change one’s own. The credibility of the writer is, of course, important. The books “Winner Takes All Politics”, “Makers and Takers” and “Ratf***ed” are well written, well researched and, while not without a point of view, cannot be dismissed easily. The book “Hillbilly Elegy” is an important insight into a social group very foreign to those not familiar with Appalachia.
The ultimate challenge is to figure out how to create a playing field that is sufficiently level to embrace a broad distribution of wealth. If there are too many people in the cart and no-one to pull it, the cart falls over. The purpose of economic growth cannot be an unfocused celebration of the path without any idea of where that path leads. The greatest good for the greatest number sounds great provided there is clarity about what “good” is. It does, of course, imply something of an enlightened elite to promote the greater good.
As the recent election in the US shows, there is tension between elites and others. “WWCM” (white, working class males) have clearly found a voice in this election. Traditional party affiliations are shifting. Those policymakers ignore this at their peril. Enlightened self-interest should inform our behavior and shape our actions. Enlightenment may need a little more attention.
What Markets Are Signalling
Traditionally, the financial markets have been thought to provide an objective point of view, reflecting the enlightenment of millions of transactions, millions of decisions about current events and their implications for the future. Monbiot asks people to consider that this point of view may not be as representative as it should be of all the viewpoints one needs to achieve a balanced assessment of how well the economy is doing for all its stakeholders.
Financialisation is the term used to describe how the markets may have lost their way in their mission to aggregate and disburse capital to productive ends. One key data point is that, over the last decade, factoring in dividends and buybacks, net equity issuance has been negative $416bn per year. Main Street, in other words, has been starved of equity capital as this capital has been returned to the financial sector. Has corporate America become too much in thrall to the short-term concerns of its shareholders and forgotten how to build long-term shareholder value, valuing and investing in all capital including its human capital?
Another academic, Thomas Philippon, discusses the cost of financial intermediation and notes that its cost has remained remarkably stable for over a hundred years: 2%. The implication that rent-seeking behavior in the financial sector has been at work for many years is clear. Given the fact that most large banks and investment banks are currently valued at below liquidation value (pace Trump rally), it suggests there may be room for disruption – hence the Fintech ‘revolution’.
In conclusion, Monbiot has a point. Financial markets can go awry, banks can do very bad things absent thoughtful regulation and well-designed incentives, corporations need to pay attention to a more diverse set of interests than just those of the capital markets and politicians must pay attention to leveling the field of play to ensure the market, broadly defined, can do its job in distributing wealth and avert the need to re-distribute through taxation.
The assumptions that markets are the best arbiter of economic outcomes, that thoughtful government policy always represents unwelcome interference need to be questioned without fear of being labelled a liberal heretic. If people fail to pay attention, there are more surprises ahead.