Wednesday, May 8, 2013

Iron Lady's Lasting Legacy: Releasing The Kraken of Global Finance

At this time last month the passing of Margaret Thatcher was met with fulsome tributes from supporters and derisive attacks from detractors -- such was the polarizing nature of the Iron Lady. Thatcher's refusal to compromise, and belief in what she believed [1], was countered with her own contradictions: the ostensible promotion of classical liberal ideals contradicted by support of dictators, most notably Augusto Pinochet, who clamped down on the freedom and democratic choices of citizens [2]. As Richard Dowden wrote in The Guardian "A close aide once told me that she opposed apartheid more on the grounds that it was a sin against economic liberalism rather than a crime against humanity. She also was bitterly against sanctions of any sort – they were a crime against free trade." [emphasis added]
Readers of this blog understand the unapologetic empathy towards all people --particularly the lower classes-- finding their voice in society and having a say in their right to a decent livelihood. In contradiction, Thatcher famously went on to state that (in terms of society):
I think we have been through a period when too many people have been given to understand that when they have a problem it is government’s job to cope with it. ‘I have a problem, I’ll get a grant. I’m homeless, the government must house me.’ They are casting their problems on society. And, you know, there is no such thing as society.[emphasis added]
 The late Baroness' mastery of rhetoric belies an appalling acknowledgement  (or lack therof) of history, the ebb and flow of social relations that underpin economic transactions and the role of power and class in everyday life. Without an adherence to community and finding one's place in society there is no place for individual responsibility --as the individual would not be alive to make that choice; the two are different sides of the same coin and commentary to the contrary is na├»vely pernicious.
Government is not the answer to all problems but it isn't necessarily the source of all problems either. The Old Institutionalist Economics framework of Thorstein Veblen, most eloquently forwarded by John Kenneth Galbraith in the modern era, understood the place of power: the power of Big Business, that of Government, and of Labour (or Unions in the 1970s) acting as a counterbalance against each other. More recently, William H. Janeway, who is a private equity veteran not a socialist, made the case for government in The Two Innovation Economies:

In the United States, the government constructed transformational networks (the interstate highway system), massively subsidized their construction (the transcontinental railroads), or played the foundational role in their design and early development (the Internet). Activist states around the world have funded basic science and served as early customers for the novel products that result. For a quarter-century starting in 1950, the US Department of Defense – to cite one crucial example – combined both roles to build the underpinnings of today’s digital economy.
Thatcher's rise to the top came not because the British people appreciated her ideas on economic policy but due to the complete detachment of Britain's public sector unions from the reality that the rest of the British public faced during the severe Winter of Discontent. The mere fact that Britain's old Labour party was seen as weak in the face of union militancy meant that the voting population's choice of Thatcher over James Callaghan was 'a rational choice.'
Sam Gindin, formerly of the CAW and presently a part of York University has framed unions in the following manner in a Jacobin magazine interview:
Unions emerged out of the working class but they are not class organizations. They bring together a subset of workers with a common workplace who look to the union to represent their particular interests. During the postwar period of growth and near full-employment, the wage gains and private welfare state negotiated (pensions, health care) spread to other unionized workers (and a few more universal demands like Social Security spread even more generally). But – and this is the lesson of the past three decades – that period has ended. Sectional unionism, even when militant, was no match for the corporate/state counter-attack of the 80s and 90s.
The capitulation of unions, and the defeat of labour by extension was made possible by the Iron Lady's lasting legacy: releasing the Kraken of Global Finance. The Kraken analogy is apt as the former sea creature has effectively defeated the Leviathan of Big Government in shaping policy that has ultimately shaped society over the past three decades. (Any resemblance of the Kraken below to Matt Tabbi's "great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money" is entierely deliberate.)

There is no alternative: Release the Kraken

It happened in the City by way of The Big Bang in 1986 and set the stage for the deregulation of policies that had been enforced during the period after The Great Depression:
 From the 1930s to the 1980s, many countries had policies of financial regulation that included many of the following (See Endogenous Money 101 [4]):

  • (1) Interest rate ceilings;
  • (2) Liquidity ratio requirements;
  • (3) Higher bank reserve requirements;
  • (4) Capital Controls (that is, restrictions on capital account transactions);
  • (5) Restrictions on market entry into the financial sector;
  • (6) Credit ceilings or restrictions on the directions of credit allocation;
  • (7) Separation of commercial from investment (“speculative”) banks;
  • (8) Government ownership or domination of the banks. (Ito 2009: 431–433).
Jayati Ghosh, a professor at the Centre for Economic Studies and Planning at Jawaharlal Nehru University, wrote recently about global finance: capital flows, financialization [3], and the resulting asset inflation ("bubbles" in speculative rather than productive assets) in the developing world
Meanwhile, the other concern is that many developing countries are trying to cope with the continuing ramifications of the global crisis by generating their own bubbles in domestic asset markets. This happens in a variety of ways: stimulus measures that target sectors like real estate and housing; other fiscal concessions granted to encourage more financial saving and investment; liberal rules for extension of consumer finance for purchase of durable goods; financial liberalisation measures that encourage more expansion of the sector; and so on.
These may create temporary mini-booms in certain economies, but these are temporary at best and in the current fragile external environment they may be even more short-lived. And the bursting of those bubbles will be even more painful in the context of the global economic headwinds. At the same time they will also encourage the same tendencies that continue to make developing countries export capital to the North, at the cost of meeting their own citizens’ needs and fulfilling their own development projects.[emphasis added]
It was in relation to a McKinsey Global Institute report on "Financial Globalization: Retreat or reset?" and a PDF of Ghosh's article "Is Global Finance Finally Shrinking?" that is available here
With the financial crisis in the rear view mirror there has been a creeping tendency to believe that all is well and that trend growth is set to return after austerity sets economies back on a self correcting path of growth.
This is unfortunate in both the delusional sense of self correction and the prescriptive sense of an unwelcome lost decade that will certainly be the result in Europe and a possibility elsewhere without a necessary rebalancing globally. 

Orthodox thinking supports the concept of financialization through the argument that it enhances efficiency because markets are best in pricing future economic outcomes and financial speculation --when prices diverge from a fundamental value-- is, as the argument goes, a stabilizing factor. Reality informs us otherwise.  
While we understand that this may be the case in an idealized abstract world justifying general equilibrium, in  the messy real world the opposite is true.

The effects of policies from a generation ago can be papered over but not forever. What we are living with now is the unequalled strength of the Kraken of Global Finance where capital inflows can be fleeting. In effect, we have business cycle that are led by asset bubbles where speculation has driven capitalist boom phases. The flipsisde to this are the ensuing financial crises with busts and central banks scrambling to stop debt deflation. This blog will explore the rich history of deflation theories --as subscribed by Veblen, Schumpeter, Minsky and Fisher-- in future posts.



 
[1] "Hayek's powerful Road to Serfdom, left a permanent mark on my own political character, making me a long-term optimist for free enterprise and liberty"
[3] Financialization means the increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of the domestic and international economies. (Gerald A. Epstein "Introduction: Financialization and the World Economy")
[4] From the blog Social Democracy for the 21st Century: A Post Keynesian Perspective (link: socialdemocracy21stcentury.blogspot.com )