The governance of money

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The idiotic ideological battle in Washington over the debt ceiling was yet more evidence of the failure of governance in Western economies, which is the real crisis. Then, after the stock market carnage of last week, the attention was focussed, reasonably enough, on government’s MANAGEMENT skills — how good they are at being efficient bureaucrats pulling levers in the financial system and in keeping debt levels under control.

But this crisis goes much deeper than that. In a sense the Tea Partiers are right. This is a POLITICAL battle over the state’s right to be a state.

That was the lesson from last week’s debacle in the US Congress. It was argued that if no deal could be struck, then the ratings agencies will reduce the US government’s AAA rating. This then happened, with Standard & Poor’s downgrading America’s debt to AA+.

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Who exactly are these ratings agencies? Oh, those corrupted, easily deluded companies who are to sane analysis what a croupier at a roulette table is to an insurance policy. They showed in the lead up to the GFC that they go to the highest bidder and that they have little or no credibility. Suddenly these private companies have authority over the US government? And then let’s look at what happens to demand for US dollars if there is a downgrading. Nothing. The $1-2 trillion that they are arguing about is about six hours trading in the greenback. The US dollar is the world’s reserve currency and will be for some time.

So what is really going on? In one sense, it is just nostalgia for a time when America was stronger. It reminded me a little of the Hitchiker’s Guide To The Galaxy where the world is about to be destroyed by Vogons, an alien race. Arthur Dent asks an informed alien, Ford Prefect, what he should do. He is advised that he could put a paper bag on his head and sit in a corner of the pub. “Will that help?” the terrified Dent asks. “No, but you might feel better,” Ford Prefect cheerily responds.

And that is what the Tea Party morons were and are doing. Putting a paper bag on their head to make themselves feel better. While loudly reading the Constitution of the USA, one supposes.

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They are nevertheless a symptom of a much deeper, long term issue — the replacement of the nation state with the market state, as historian and professor of law Phillip Bobbitt describes it. The issue is not about big government or small government, although they are certainly issues in a country that is rapidly losing its middle class. The problem is whither government itself? So successful has been the attack of the libertarian market worshippers, there is no government worthy of the name in the Western post-industrial financial system.

Alan Greenspan egged on his Wall Street cronies then scratched his head in wonderment when they turned out to be greedy and rapacious. Obama ducked the real issue, letting the banksters off the hook. Ben Bernanke was so preoccupied trying to fix up the mess, he has been, well, preoccupied trying to fix up the mess. There has been no real leadership about what the system should look like and what is government’s role in it. Yet these fundamental questions must be answered because those who believe markets should rule do not think governments have any role at all (other than to bail them out when the markets fail). They operate under the Ayn Rand delusion that people who make money are the true creators, the Atlases who impel the world, while everyone else is just an evil taker, sucking from the system.

This is nonsense. Not only does government have to set the rules that determine the frameworks of markets, in the case of the monetary system, which consists of rules, they are, by necessity, the only final point of reference (literally where the buck stops). Ratings agencies cannot be that, they are just another private player and an easily corrupted one at that.

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So to try to remove government from the financial markets, as the market worshipers wish to do, is to set out to destroy the system itself (something the GFC almost achieved). When people are allowed to invent the rules of money themselves, make money from their invention of new forms of money that exploit the rules of the system, self organisation may work for a while — the competing self interests will for a time balance out — but eventually it will just collapse, as we saw in 2008. Making up new rules of money can be infinite, wealth creation cannot. It must have limits. Hence the necessity of the state’s role.

Now the same kind of bomb is being allowed to build up with high frequency trading in the stock markets, futures markets and foreign exchange markets. Nothing has been learned by governments about the real causes of the GFC. And have derivatives been brought under control? Nope, they have increased in volume.

So, as the high tech Vogons descend and start preparing to destroy the Earth, the Tea Partiers and others are entirely justified, I suppose, in putting paper bags on their head and sitting in the corner.

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But here’s an idea. How about some Government? Why not tax these lunatics in the derivatives and HFT markets? It doesn’t have to be a big tax, in fact it can be extremely small. But as soon as there is any tax, the speculation will disappear, because it is all based on highly leveraged marginal activity. Sure, the global character of the capital markets makes it difficult for national governments to have adequate jurisdiction, but they can always act together. Leadership is achievable, if extremely rare. The financial world, and the real world, would become a much safer place.

If that is not possible, as it is surely not, then we can at least have a debate about what is the role of the state in these globalised capital markets. There has been plenty of time to digest the lesson of George Soros, when in 1992 he broke the Bank of England. The question is not about MANAGEMENT, it is POLITICS. Not least because the world’s second largest economy, China, is communist and there are plenty of despots still running countries around the world. Important questions need to be posed about how a democratic market state should operate in the post-industrial world. So far, the silence is deafening.