Finance and the Mafia State

The argument advanced by the historian Philip Bobbitt that a transition is occurring in world politics from the nation state to the market state has long appealed as a snapshot of what is occurring in world politics. It is, as with any thesis about a large subject, far too simple to reflect accurately all that is happening, but it is nevertheless a fine starting point. As we witness the political travails plaguing southern Europe, it gives us a useful analytic to trace the outline of what is happening.

That, at least, is what I used to think. I am starting to wonder if something very different is happening. Several tensions seem to be occurring that suggest that the transition to a “market state” is problematic at best. The first, and most obvious, is the resilience of nationalism, or at least approximations of it. Max Walsh commented in the AFR that the Europe experiment was designed to mitigate the effects of nationalism:

The EC is about buying time. This was the strategy originally favoured by Jean Monnet, the “founding father” of “modern” Europe. Monnet judged that unification between the previously hostile nations of Europe would never be delivered through the ballot box. Instead, he advocated, it could be achieved by incrementally transferring more and more government functions from national to European administrations.

The EC has been successful in increasing its writ by stealth.

The delaying is just papering over the absurdity of enforcing a union that does not have underlying cultural support, yet purports to be “democratic”. As the historian Anthony Beevor points out the rise of nationalism in Greece — anti Nazi slogans against Merckel, for example — is a gloomy portent. Europe is already falling apart and likely to revert to nationalism of some sort:

“The great European dream was to diminish militant nationalism,” he says. “We would all be happy Europeans together. But we are going to see the old monster of militant nationalism being awoken when people realise how little control their politicians have. We are already seeing political disintegration in Europe.

Meanwhile, the nationalism of America, Russia and China is much as it has been. Military systems are national, and will remain so. The current geo political battle is over Central Asia, both for reasons of military positioning and for its economic significance, the reserves of gas. There is no sign of a fading nation state, as John Chan reports:

“In Beijing, Russian and Chinese leaders publicly stated their opposition to the drive by the US and its allies towards military intervention in Syria. In a joint statement, Putin and Chinese President Hu Jintao declared: “Russia and China are decisively against attempts to regulate the Syrian crisis with outside military intervention, as well as imposing… a policy of regime change.”

Writing in the official People’s Daily, Putin declared: “Without the participation of Russia and China, without considering Russia and China’s interests, no international matter or issue can be discussed and implemented.” Russia and China have blocked UN resolutions for sanctions against Syria.

Both Russia and China have a great deal at stake in opposing US machinations in the Middle East. Russia has longstanding ties with Syria. Moreover Putin and Hu are well aware that the drive for regime change is also directly against Syria’s main ally, Iran, that is confronting threats of war from the US and its allies. China and Russia have significant economic interests in Iran.”

It could be argued that this is just transition, but the problems of the “market state” go much deeper. Bobbitt’s argument is largely justified with reference to commerce: international trade and globalisation, altthogh he does mention the capital markets. But what is evident with the series of financial crises over the last 15 years, which used to occur mainly in developing countries but which are now consuming the developed economies, is that the markets that have the real power are financial markets. And these are stateless.

Worse, they have taken over the role of the state to set the rules of money in a deeply pernicious fashion. Indeed, we can go further. Global financial markets have become destroyers of states, not a new kind of state. That the traders rely, as citizens, on some sort of state structure to live, is merely an irrelevance, an inconvenient aside.

As I have argued before, it is impossible to deregulate financial markets because money is rules about value and obligation. So what happened instead when financial markets were “deregulated” is that the governments’ role as the setter of rules was handed over to traders, who made up their own rules: more than $700 trillion of derivatives, intense high frequency trading and so on. It results in a weird contradiction: governments trying to save their systems from the new rules being created by the traders, yet the traders relying on the state’s rules about finance to overlay their games of meta money. Meta money traders have to have conventional share trades between buyers and sellers to apply algorithms to manipulate the markets at high speed.

You need conventional commerce in commodities to use derivatives to play commodity futures, for example. It is why governments are constantly attacked by players in the financial markets who are simultaneously hard at work exploiting those “errors” to make money. Meta hypocrisy to accompany the meta money, I suppose.

The tsunami of this meta money, which is borderless, stateless and has no thought for its effect on governments or polities, still relies for its very existence on the rules set up by governments. And as has been obvious since the GFC, governments and tax payers are expected to clean up the mess when it inevitably all goes wrong. That can be done once. When it goes wrong a second time, the firepower will not be there, as is increasingly evident in Europe. The conventional rules will have been weakened too much by the rules invented by the traders of meta money.

It represents a comprehensive failure of government, and will not lead to the creation of a new type of state. It is rather a new type of chaos. It is especially pernicious when governments start to dabble in the meta money, as Greece did when the government covered up its debt by using derivatives. That is wholly unforgiveable. It is bad enough that governments have allowed traders to make up their own rules with money, in effect playing Russian roulette with money itself. But when they, too, start using the same tricks, then the road back to sanity becomes long indeed.

The danger is that it is a road to anarchy, no matter how often one quotes Adam Smith and fantasises about the invisible hand. Even Alan Greenspan eventually figured that out: that letting self interest and greed run rampant is not a sure fire route to an altruistic result. Such liberalist logic can be defensible in commercial markets; it is nonsense in finance.

Rather than Bobbit’s market state, the breakdown of rules, the capturing of policy and the utter mess that is confused public and private interests suggests something more redolent of Moises Niam’s “Mafia State”.