The locus of power has long been the point where banking and politics intersect. But the way they interplay is very different in different parts of the world. The capital markets may be global, but the banking systems on which that activity rests remain national. The tension between the global and the national is making the current situation intractably complex.
In the English speaking world, the banks have become something of a rogue force. After a quarter of a century of “financial de-regulation” – a nonsense claim, given that finance is rules – English speaking banks made up their own rules, almost destroyed the monetary system of the world, then cheerfully handballed the whole problem to governments to fix, making sure to blame governments later and issue threats about the dangers of being “over-regulated”.
The LIBOR scandal is likely to be the last straw. It is one thing to invent financial instruments that no-one understands, even when the wreckage becomes immense. It is quite another to debauch the global interest rate, which is the core of money itself. Even politicians understand how dangerous that is.
In Europe, it is a very different dynamic. Banking is corporatist, subsumed in the system rather than a law unto itself. The euro crisis is in part an unwinding of the worst excesses of that corporatism. Spain is likely to be the place where it finally comes to a head, with the Germans and Italians wanting the Spanish government to submit to supervision before the funds are made available to recapitalise the weakest of the banks.
Aware that there is no real distinction between the polity and the financial system in Spain (mainly because it is roughly the same in their own countries), Germany and Italy are positioning for more centralised control of Europe’s banks, not so much nationalisation of the banks as a kind of regionalisation. Whether it works is another matter. If it doesn’t, the end game will be Italy. Germany can bully Spain, but it can’t bully Italy, which has a primary budget surplus and a large industrial base that would thrive if Italy exited the euro and its currency collapsed.
In Asia (to indulge in generalisations), the banking system tends to be unable to impose basic disciplines of the cost of capital on the industry base. That was seen in Japan in the 1990s, when to boost its mercantile strategy absurdly long time lines for return on capital were used, as R Taggart Murphy pointed out in his book “The Real Price of Japanese Money” There should be a similar study of the real price of Chinese money. Its formal banking system remains communist in spirit and the cost of capital is problematic. I can remember being at conference in China with a number of heavyweight observers of the country. I asked what the cost of capital is in China. No-one was keen to answer.
Overlaid on those national and regional differences between the financial systems is a homogenous trading environment; the global capital markets, in which more than $3 trillion is transacted per day. That means that the regulators trying to fix the banking problems have to look in two directions at once: at the specific character of the banking problems they face at the local level and at the traders who are watching and investing in such a way that they amplify what is happening, whether it is good or bad. The extreme strength of the $A is what happens when these traders think you are doing well, the high rates on Spanish and Italians bonds is what happens when they think you are not.
The volatility and speed of change that these traders create makes the complexity close to unmanageable. The obvious solution is for governments to act in concert to limit the financial traders and their meta money, but that is unlikely to occur.
The tendency for economics to assume that all economics and finance is the same is just as harmful. Because mainstream economics pretends to be scientific, it is ill suited to noticing the differences between countries, only the quasi-scientific commonalities.
And it is not just mainstream economics. The same applies to Marx, another economist prone to blunt and crude generalisations. He was at times prescient as John Lanchester points out in the LRB:
“It’s hard not to conclude from these selected sentences that Marx was extraordinarily prescient. He really did have the most astonishing insight into the nature and trajectory and direction of capitalism. Three aspects which particularly stand out here are the tribute he pays to the productive capacity of capitalism, which far exceeds that of any other political-economic system we’ve ever seen; the remaking of social order which accompanies that; and capitalism’s inherent tendency for crisis, for cycles of boom and bust.
“I should, however, admit that I haven’t quoted these sentences exactly as Marx wrote them: where I wrote ‘capitalism’, Marx had ‘the bourgeoisie’. He was talking about a class and the system which served its interest, and I made it sound as if he was talking only about a system.”
In other words as much platitude as prescience. Lanchester then points out where the generalisations fail:
“Scandinavian welfare capitalism is very different from the state-controlled capitalism of China, which is in turn almost wholly different from the free-market, sauve-qui-peut capitalism of the United States, which is again different from the nationalistic and heavily socialised capitalism of France, which again is not at all like the curious hybrid we have in the UK, in which our governments are wholly devoted to the free market and yet we have areas of welfare and provision they haven’t dared address.
Singapore is one of the most avowedly free-market countries in the world, regularly coming top or near top of surveys for liberalisation of markets, and yet the government owns most of the land in the country and the overwhelming majority of the population lives in socialised housing. It’s the world capital of free markets and also of council flats.
There are lots of different capitalisms and it’s not clear that a single analysis which embraces all of them as if they were a single phenomenon can be valid.”
Quite. Which means economic analyses, and from that solutions to financial crises, need to be specific. Not the crudities of economic schools, whether it be neo-classical or Marxist. But how can they happen when the regulators have to deal with global capital flows that are very much employing a “single analysis”? In fact, it has got to the stage where the “single analysis” of economic indicators and finance has been turned into mathematics and used for algorithms that drive high frequency trading.
That means the threat to the financial systems is coming from two directions.