How politicians failed us


The global financial crisis and its subsequent repercussions were the inevitable consequence of governments’ abrogating their responsibility to govern. In thrall to nonsense arguments about “financial de-regulation”, they weakly handed over the job of setting the rules of money to the markets. As previously discussed, this did not result in fewer rules. It resulted in a spectacular explosion of new rules such as derivatives and, lately, high frequency trading. Inevitably, the new rules collapsed at some point. The GFC was triggered by collateralised debt obligations and their relationship to the US housing market, but it could just as easily have been credit default swaps or interest rate swaps or some other confection invented by the greedy to profit for (or game) the system.

Having given up the job of governing, the job of saving the system has fallen to “regulators”. This is very important, because regulators do not govern, in the sense of sitting outside the financial system and managing its political and social repercussions. Regulators work from within the system, making sure it operates according to its pre-determined internal logic.

This means they cannot critique it from an outside perspective. They cannot determine its social utility, let alone its morality. They must accept its basic assumptions and it is the acceptance of the basic assumptions of the financial system, especially the proliferation of meta money (such as $700 trillion of derivatives) that is the problem. It is a measure of just how much we are in thrall to nonsense arguments about “de-regulation” (to reiterate, you cannot deregulate rules, and money is a system of rules).


Perhaps the best example of how regulators are insiders, unable to critique the system from outside, is Alan Greenspan’s famous admission to the congress after the GFC:

“Well, remember that what an ideology is, is a conceptual framework with the way people deal with reality. Everyone has one. You have to — to exist, you need an ideology. The question is whether it is accurate or not. And what I’m saying to you is, yes, I found a flaw. I don’t know how significant or permanent it is, but I’ve been very distressed by that fact.”

One notes how Greenspan conflates ideology (a political position concerned with power) with a conceptual framework (an intellectual hypothesis concerned with truth). That is the heart of the problem. What has been avoided, or passed off, is that the financial system is political, like any other system of human organization (sorry to state the bleeding obvious, but the obvious has been very effectively buried). No matter how many anodyne or quasi-scientific prescriptions are applied to financial markets, they are finally about power and social arrangement. So for governments to pass off the job to regulators and traders is to pass off the very job of governing, to give up on their most important role.


It has certainly come back to bite governments – and citizens and tax payers. Politics is increasingly ruled by what the bond markets think. The European financial crisis is the problem writ large. So while the much larger volume of private debt creation largely gets a free pass (that is the “free market”, so fine) relatively small government debt creation, at least in Europe, not so much in the US or Japan, is hammered, producing deep social damage. You know, politics. America, of course, has the world’s reserve currency so can bully the markets and Japan is, well, Japan.

The abrogation of responsibility continues. The job of managing the social impact of markets continues to be handed over to the regulators, while governments try to duck responsibility by observing “processes”. Europe is now ruled by regulators. It is becoming clear that, except for Japan and America, government debt is socially perilous (the lack of Federal government debt is a major reason why Australia has weathered the storm well).

The political failure will inevitably resurface; nothing has been learned from the GFC about the need to govern. The next crisis will come from high frequency trading, one suspects. Tom McDonald from the Australian Risk Policy Institute (ARPI) has described the risks in a recent paper:


“The principal purpose of capital markets is to facilitate the efficient allocation of capital across industries, and by extension, society, and via efficient means of allocation, create financing options to facilitate consumption and future additional wealth creation. Capital markets are unique but constitute the lifeblood of capitalism and thereby promote national growth, opportunity, peace, order, good government and individual welfare.

That said, the risks inherent in capital markets are like no other. Ultimately, when these risks manifest, they can destroy national economies (Iceland), even the world economy, wreak famine and the total collapse of ordered society. Accordingly, any development that carries uncertainty or intrinsic risk must be scrutinised, understood and dealt with to protect the whole.

Put in the bluntest way, HFT is parasitic in relation to capital markets. It adds little or no value and it creates friction, as opposed to greater liquidity. It can also dislocate or render markets unusable. Most importantly, it operates within an environment alien to the underlying structure that underpins markets. In fact, it operates generically across different market platforms so that in a worst case scenario, automated decisions may dislocate multiple markets at the same time.”

The question that needs to be posed of our politicians is: “How did they ever imagine that the financial system was not their political and moral responsibility?” Then perhaps they may notice how they have been seduced by nonsense arguments. It is an old problem. Witness these comments from US president James Garfield in 1881:

“Whoever controls the money of a nation, controls that nation and is absolute master of all industry and commerce. When you realize that the entire system is very easily controlled, one way or another, by a few powerful men at the top, you will not have to be told how periods of inflation and depression originate.”


Quite. Except now it is not just the nation, it is the world.