Tag Archives: finance

The problem with Eurobonds

7 Jun

As the Eurozone crisis deepens, some new ideas are emerging. Some have been aired for a while but are only beginning to be taken seriously. In this post, The Current Moment considers the issue of Eurobonds. In future posts, we will consider some of the other solutions being suggested, such as the idea of a banking union, the plans for which have been recently floated by the European Commission.

 

In a continued deepening of the Eurozone crisis, attention is focusing on Spain. Rather than investing in production during the boom years, bank capital in Spain was mainly channelled into property development. As the bottom fell out of the property market, Spanish banks have been left with worthless loans on their balance sheets. The regionalized nature of its banking system has made these problems less transparent than elsewhere and the scale of the problem has only recently emerged. Even now, there is considerable speculation about exactly how much it would take to stabilize Spanish banks. The IMF’s most recent estimate is that Spanish banks will need at least 40 billions Euros of new capital. In the meantime, loans are drying up for business and Madrid is being shut out of the international bond market.

There is some debate about whether in the longer term the Spanish economy will be able to raise competitiveness levels. The boom years were not entirely devoid of productive investment and optimists point to a weaker Euro boosting the country’s exports. Portugal, according to the FT (29/05/12) specializes in high end shoes and black toilet paper. Spain may find some of its exports benefiting from a falling Euro. But these competitive gains are not shared across the Eurozone as a whole: countries dependent on exporting to within the Eurozone will not benefit from a falling Euro. Any Spanish gains in competitiveness in the medium to long term are likely to come at the expense of the French, the Italians and other Eurozone member states.

For many, this all points to Eurobonds as the solution to the crisis. Far from exaggerating the differences between national economies within the Eurozone, Eurobonds are seen as a way of mobilizing these differences (especially German competitiveness) for the common good of the Eurozone as a whole. The basic idea of Eurobonds is that instead of national governments issuing bonds, the EU as a whole would do so. Those countries currently facing punitively high interest rates on new bond issues would find their borrowing costs falling. German bonds, currently serving as safe havens for international investors, would see a rise in interest rates, costing the German taxpayer but stabilizing the Eurozone as a whole. This idea was raised back in 2010 by the Bruegel think tank with its blue bond proposal. The idea here was that a Eurobond could be issued for debt of up to 60% of GDP for Eurozone members. Debt in addition to that would have to be financed by purely national government bonds. This would mean lower rates for sustainable debt levels and higher rates for excessive debt levels. The idea was batted away by Chancellor Merkel as a poor substitute for supply-side reform in crisis-stricken countries.

As opposition to austerity politics as strengthened, consolidated in recent months by the election of François Hollande in France and the inconclusive Greek elections, Eurobonds have come back onto the agenda. The term is used by Hollande as a rallying cry and as a measure of his success in Europe: if he is able to get the topic onto the EU agenda, he will have won his battle of wills with Merkel. Ever supportive of measures that may increase its own powers, the European Commission supports Eurobonds, as do leaders such as Mario Monti in Italy.

The more technical discussion about the exact modalities of any Eurobond issue asides, there are two major problems with this idea. The first is that as a solution to the Eurozone’s economic crisis, Eurobonds essentially rest upon the idea that borrowing more money can help Europe grow out of its current recessionary state. Given the performance of this particular growth model, that seems unlikely. As already argued on The Current Moment, Europe faces an impasse on growth: stuck between Hollande’s European neo-Keynesianism and Merkel’s insistence on national supply-side reforms, there are few alternatives to these two positions, neither of which inspire confidence.

The second problem is that Eurobonds present us with a direct clash between technocratic rationale and political reality. From the technocrat’s perspective, Eurobonds appear as a sensible solution to a thorny problem. Politically, they run against almost all the trends in place today in Europe. They would imply wealth transfers across national boundaries, something that is firmly resisted by national publics who would be expected to pay more. They would require considerable institutional strengthening at the European level in order to put in place the mechanisms needed to make decisions about how Eurobonds should be issued and how the funds raised should then be distributed. This comes at a time when the EU, according a recent Pew poll, is experiencing a “full blown crisis of public confidence” (see here for an overview of the poll).

Eurobonds would only exacerbate the democratic failings of European integration whilst at the same time they fall short of answering key questions about Europe’s growth model.

François Hollande and the conservative critique of capitalism

29 Feb

In an earlier post, we criticized the French Socialist Party candidate, François Hollande, for his moralizing approach to economic policy. The ills of contemporary capitalism are, for him, a matter of evil intentions pursued by unscrupulous individuals. In his first major campaign speech, he declared that his real enemy was finance. Most recently, in a television interview for TF1, Hollande announced that if he was elected president he would introduce a new tax on high earners (Le Monde, 29 February). For those earning over 1 million Euros a year, the tax rate would be 75%. This would affect about 3000 people in France and would bring into the French treasury around 200 to 300 million Euros.

Upping the attack on the country’s rich and on its financial institutions seems in part a calculated response, in part a spontaneous reaction by Hollande and his entourage to the dynamics of the campaign. Whilst Hollande’s speech at the end of January was a carefully crafted affair, this latest announcement of a tax hike on high incomes seems entirely off the cuff. Announced by Hollande on TV and radio, even his taxation and budgets specialist within his own campaign team was unaware of the new policy. Hollande’s decision to crank up the anti-rich rhetoric is clearly both a strategy and an integral part of his world-view.

The problem with this moralizing approach to capitalism was put succinctly in a comment to The Current Moment: an ethical critique of capitalism leaves the system itself untouched and in fact only goes to legitimize the status quo further. It does this by attacking the present for being dominated by a materialistic, vulgar and anti-egalitarian culture, encapsulated in the figure of the bankster and the celebrity lifestyle of its political class. In its place, it proposes a deeply conservative alternative: austere, responsible, more egalitarian and less showy in its attitude to wealth and consumption. This is exactly François Hollande’s argument: he justified his new tax measure not on the grounds of how much money it can raise but in terms of morality and national patriotism. France’s rich elite, by paying more into the national coffers, will be doing its patriotic duty.

Instead of being asked to choose between different economic programmes, what Hollande is proposing is a different style of rule. In place of the crass materialism of Sarkozy, with his rich friends and rich wife, we are presented with François Hollande, a more ordinary and serious individual, with tastes that are less extravagant than those of Sarkozy. Here we can see very strong echoes between the campaign in France and developments in Italy. What Monti brings to Italian politics is more than anything a change of style: far removed from the glamour and glitz of Berlusconi, Monti represents the austere alternative, suited to times of generalized national austerity. When asked about the cost of his end-of-year celebrations, Monti replied by publishing a detailed list of his end of 2011 dinner party at the Chigi palace: 10 guests, all family members, a traditional New Year’s Eve menu, and a list of where Elsa Monti went shopping and how much it all cost.

This is in fact the key: this cultural shift proposed by Hollande and others such as Monti is what is required to legitimize the present age of austerity. Hollande’s moralizing critique of capitalism thus preserves the system in two ways: by proposing a set of conservative values, such as patriotism, duty and national responsibility: and by providing a closer fit between the downturn in France’s economy and the values and conduct of its political class. So far this is working for Italy, as Italians welcome an end to the Berlusconian orgy. Hollande’s bet is that it will work for him in the forthcoming elections. It may do, especially if the wealthy in France catch-on that Hollande isn’t out to get them, he is their saviour.

The problem with a Sarkozy-Hollande stand-off

15 Feb

By the end of this week, Nicolas Sarkozy will most probably have announced his decision to run for a second term as French president. The campaign itself has been running for number of weeks and some candidates, such as the Green’s Eva Joly, are already struggling to make themselves heard.

As already commented on this blog, the current crisis in Europe has pushed political life towards both technocracy and populism: more technocracy at the national and the European level, with large swathes of policymaking bound up with pan-European rules and regulations, and more populism at the national level as charismatic individuals rally against the loss of national sovereignty and the seeming capitulation of mainstream parties to the diktat of markets and private investors. National leaders in Europe tie their budget-setting powers to increasingly complex European deals: excessive spending becomes the concern of the European Court of Justice and governments expose their fiscal policies to a kind of pan-European naming and shaming exercise. Governments also inscribe into their constitutions rules about what they can and cannot do with the national purse and technocratic administrations rule in Italy and in Greece. At the same time, populist claims about challenging this hegemonic pan-European consensus proliferate at the national level. From the street violence and protests in Athens and Madrid to the anti-Euro rhetoric of the French National Front, the political fringe is growing in volume.

Greece is the extreme example of how the crisis is transforming national political life. The most recent vote on reforms intended to guarantee the next chunk of EU bail-out money has pushed political parties into freefall: around 40 MPs were thrown out of their parliamentary group because they refused to tow the party line on the vote. According to one report in Le Monde (15/02/12), the two main Greek parties – the rightwing New Democracy (ND) and the centre-left Pasok party – are splitting down two lines: support for the technocratic government on the one side, and a rejection of the whole bail-out/austerity package on the other. Legislative elections in April have been the focus of the ND leader, Antonis Samaras, whose criticisms of the EU package in the past have annoyed EU officials and other European governments. Samaras has moved from opposing the EU deal to supporting it in the most recent vote, his calculation being that this would be most likely to help him win the next elections. But it has cost him the support of many of his close collaborators and the party is deeply split.

A key question in France is to what extent any of these trends and pressures will reshape electoral politics. As already commented upon on this blog, the current economic crisis is having an uneven and erratic impact upon national politics and upon national electoral outcomes. Before the campaign kicked off in France, there was some suggestion that the real contest would be fought between Jean-Luc Mélenchon and Martine Le Pen: the populist of the Left versus the populist of the Right. With the main parties indistinguishable in their fight for the political centre-ground, attention would turn to more colourful figures. In 2002, the surprise result of the first round was the success of the far Right National Front and the marginalisation of the Socialist Party. In 2007, it was the success of the centrist candidate Françcois Bayrou, who with over 18% in the first round, promised a radical shake-up of traditional French party politics.

In the end, the surprises of the elections did not translate into any fundamental change in the nature of the party system: the eruption of new faces was short-lived. So far, in 2012, a striking feature of the campaign has been return of traditional bipartisanship. This, of course, is the wish of Hollande and Sarkozy: they both want the campaign to become a two-horse race where from the start voters have to choose between their different programmes. A more varied landscape only makes their job more difficult. But the dominance of the Socialists and Gaullists thus far owes itself to more than campaign strategy. A feature of the current crisis has been the way it has struggled to give rise to fundamentally new political ideas or movements. 2011 was a year of protest in Europe: demonstrators filled the streets of Athens, Madrid, London and Amsterdam. But the electoral results have empowered mainstream figures and parties.

This is unfortunate give that neither side will really engage with the key questions of our time. Neither Hollande nor Sarkozy challenge the dominant reading of the European crisis as a problem of deficit spending. The Socialists want more focus on growth and to combine austerity programmes with a measure of Keynesian pump priming. Their justification, however, is tied to deficit reduction: only growth can cut government deficits, not austerity. The Gaullists are using the crisis as an opportunity to reform France’s labour market and to shift the burden of social contributions from the employer to the general taxpayer (Sarkozy’s famous “social VAT” proposal). Their commitment to the pan-European deficit reduction deal is demonstrated by Chancellor Merkel’s support for Sarkozy’s re-election.

At The Current Moment, we’ve argued that the debt problems faced by Western European and North American governments are not just problems of government profligacy, to be solved either by imposing more stringent rules on elected representatives or by trying to stimulate the economy through some kind of neo-Keynesianism. These problems express a particular set of social relations that form the basis of contemporary society, one rooted in both public and private debt. Debt is a relationship between individuals and collectivities, not just an amount that can be measured and quantified in an impartial way. Focusing merely on debt reduction policies leaves us none the wiser about how and why debt has become such a fundamental feature of contemporary capitalist societies. A Hollande vs Sarkozy election is unlikely to shed much light on these issues.

France’s heterodox economists

31 Jan

Back in June, The Current Moment blogged about a manifesto written by a group of “dismayed economists” in France whose critique of free market orthodoxies was beginning to gain ground. This past weekend, a long interview with one of the original signatories of this manifesto, the French economist André Orléan, was published in Le Monde. Focusing on the role of financial markets in macro-economic policymaking, Orléan makes a number of excellent points.

He notes that historically, the role of specific economic interests, such as those of finance or of specific sectors of the real economy (export industries, domestic farming interests etc.) have been contained by the wider concerns of governments. The universality of the general interests holds sway against the particularities of individual groups. He makes the good point that this battle has often been fought through national central banks. They have been the main tool used by the executive power to pursue the interests of wider society. This gives us a rather different perspective on what is often assumed to be the narrow partisanship of politically-controlled central banks. In the mainstream economic literature, independent central banks are the guardians of the public interest; central banks directed by national executives are prisoners of political short-termism. This may be the conventional view today but Orléan reminds us that the historical record supports the opposite view: politically-controlled central banks were the vehicles for the articulation of the public interest. The primacy of politics over economics, as Orléan puts it, has had as one of its main tools the power of the central bank. This might shed a different light on the Orban government in Hungary: attacked for its anti-democratic ambitions, one of Orban’s proposed reforms was to curtail the independence of the Hungarian central bank. Rather than welcome this as an attempt to regain political control over macro-economic policy, Orban was criticized for his nascent authoritarianism. In fact, the more powerful assault on the democratic control of macro-economic policy has been waged over the years by the European Court of Justice, particularly its attack on the notion that national public sectors should be shielded from the competitive pressures of the private sector.

Orléan also has an interesting reflexion on the nature of finance. Contrasting it with the market for goods or services, he notes that finance has a “directly collective dimension”: it is concerned not just with individual sectors but with the economy as a whole. He gives the example of the infamous downgrading of France’s triple A rating by the agency, Standard & Poor’s. In its report, S&P referred to the EU’s new fiscal compact agreed upon in December 2011 (which the UK and the Czech Republic are today refusing to ratify), which it judged inadequate to meet the demands of the Eurozone debt crisis. Orléan notes that it is exactly this kind of very general judgement that is typical of the financial sector; and yet such generality does not pass through – as with democratic decision-making – a system by which a variety of different views are confronted via the freedom of the ballot box. This curious combination of its very narrow representative claim along with its interest in the economy as a whole can go some way of explaining the rise of technocratic governments in Europe today: they express the same peculiar combination, with individual technocratic leaders such as Italy’s Mario Monti having a history of very close relations to the world of finance.

Orléan’s views on the way out of the current crisis are based around a reassessment of the idea of value in the economy and of value creation. He argues for a much greater focus on the creation of value within the real economy, as this is ultimately where jobs and growth are created. He suggests that a new law should be introduced that firmly separates savings banks from investment banks, an argument included in the French Socialist Party’s programme. There is nothing radically new in Orléan’s arguments but his attack on conventional assumptions in economics is both powerful and welcome.

The Housing Problem: More than a matter of fraud and finance

26 Jan

Amidst the waves and waves of fraud, it is possible that the root of the housing problem – inequality – has remained buried. To be fair, the fraud was monumental. Enough lawsuits have been filed, legislative reports published, investigative media reports run, for us to know that all kinds of illegal schemes, high and low, were an integral part of the housing bubble and financial crisis. At the top there was the way that funds, banks, and other financial outfits, like Goldman Sachs and General Electric Co., bundled and sold mortgage backed securities. There was also fraud at the bottom, in the forging of income statements, robosigning, and other dishonest and illegal methods for generating mortgages. Fraud that continued even after these mortgages were issued, as mortgage servicers did all that they could to prevent loan modifications, jack up fees, and keep borrowers underwater so that they could collect while the system tanked. The bottom-feeding was linked to the high-tech fraud at the top, insofar as the demand for MBS, CDOs, CDO-squareds, was so immense that the only way for mortgage issuers to generate large enough quantities in such a short time was by throwing due diligence to the wind. Then there is the systematic corruption in the fact that, at least at the top, banks made money both by turning shit into gold, and then by waiting for that gold to turn back into shit.

In the midst of all of this fraud, we have to remember that cheap and easy credit was supposed to solve or at least address the housing problem itself. It was supposed to make access to housing possible for borrowers who otherwise had trouble getting loans. That was one of the justifications for many of the changes in regulations that fraudsters took advantage of. Moreover, so long as cheap credit served its welfare-function of increasing consumption, especially of houses, there was less incentive to look into just how this was all made possible (there were, of course, many other factors contributing to indifference towards systematic fraud, not to mention the perfectly legal ways in which systematic risk was spread around the financial system.) What we can say, first off, is that the tradeoff – of increased homeownership for financial innovation in housing finance – was not worth it. The tradeoff was not even close to worth it. As the graph below shows, there was very marginal increase in home ownership. Even if we arbitrarily choose the year of the lowest rate of ownership (1993), even though it is not the beginning of the housing bubble, and compare it with the peak (2004), we get a 7% rise in homeownership, which can hardly all be attributed to financial innovation itself – and by the time the bubble burst most of the gain was wiped out.

And of course this way of financing access to housing came at the price of an immense credit crunch, doubling of unemployment, years of stagnation or recession, collapse of home values, long-run declining access to homes, declining household formation and, as we noted last week, a massive redistribution of wealth upwards.

But it would be a mistake just to blame those in the financial system who benefited, legally and illegally, from this permissive climate. After all, when it comes to housing, they alone did not create the poverty, and in particular the inability to afford housing, that lies at the root of the housing problem itself. Behind all the fraud is the cold hard fact that many are too poor to be able to securely hold or own a house without fraud. That is the root housing problem.

Looking to innovative credit mechanisms and market ‘incentives’ to make housing available to the poor is one of those neoliberal, post-Cold War ‘solutions’ that ultimately created a bigger problem. It registered, among other things, the fact that there is so little class power at the bottom that direct claims to the social product, in the form of low-income housing, public housing, rent controls and other forms of public provision are supplanted by mechanisms that make claims to housing contingent on becoming subject to the discipline of deeply inegalitarian financial and credit markets. But the inability of poor and middle income workers to control enough social product to meet a basic need like housing is a function not just of the economic power of financiers, but of ownership more widely. It is not just finance capital that keeps workers separate from the means of production. In this sense, the housing problem is wider than and predates the fraud and the legal forms of exploitation that it eventually gave rise to.

The Occupy Effect

25 Jan

In an earlier post, we commented on the difficulty movements such as Occupy Wall Street or Indignados were having in influencing the course of electoral politics. In Spain, in spite of all the protests in Madrid and other parts of the country, elections late last year saw the return of the Right to power after a campaign where its leader, Mariano Rajoy, pointedly avoided setting out anything like a detailed economic plan. In Italy and Greece, protests coincided with the replacement of elected governments by technocratic administrations rather than with any lurch to the left or any real change in austerity-based politics.

This may now be changing. Recent campaign speeches suggest that these popular mobilisations have begun to shift the terrain of representative politics. In France last weekend the Socialist Party candidate, François Hollande, in a keynote speech, made a point of targeting the world of finance. Two moments of his speech took on a confessional, intimate tone. I shall let you into a secret of mine, he said, clearly trying to differentiate himself from the current incumbent of the Elysée palace: “it is people that interest me, not money”. And a little later, with the same confessional tone: “let me share with you who my real enemy is… It is an enemy without a face or a name; it governs without being elected… It is the world of finance”. Hollande’s proposed policies to disable this “enemy” were in line with what has been suggested elsewhere: to isolate the speculative activities of banks from their commercial lending; to introduce a comprehensive financial transaction tax, not just a tax on the trading of stocks; to set up a public ratings agency at the European level and to renegotiate the EU fiscal pact so as to make explicit its growth model. Hollande called this a pact for responsibility, governance and growth.

In Obama’s 2012 State of the Union address, given yesterday to Congress, the same themes were apparent. Invoking much of the Occupy rhetoric about the 99% versus 1%, Obama argued for a fairer, less unequal US society. He endorsed the Warren Buffet idea of raising taxes on the most wealthy and dismissed any claims that he was engaging in class warfare, calling these policies common sensical rather than partisan (see here for the Guardian’s write-up). The Republican primaries have similarly been taken up with the same themes. One of the problems faced by Mitt Romney is that he not an industrial magnate or oil man but gained his wealth through finance, making him the target of people’s anger at Wall Street and at bankers. The battle with Gingrich has been focused on tax with Romney forced to disclose his tax returns. Romney’s fight-back after his defeat in the South Carolina primary has been to highlight, under the banner ‘Newt Gingrich cashed in’, the payments received by Gingrich from the mortgage brokerage company, Freddie Mac.

If recent political mobilisations have indeed given this current economic crisis its political narrative, it is worth asking what this narrative is. So far, it is mainly an ethical critique of contemporary capitalism. Critics of finance take issue with the unscrupulous actions of bankers and hedge fund managers, their conspicuous wealth, the brazenness of new inequalities. In its place, Obama, Hollande and others call for a return to more traditional values where money matters less than people and the common good. There are obvious limits to such a critique. A defining feature of capitalism is its systemic nature: it is based upon a set of social relations that are more than merely the accumulation of individual intentions. Without uncovering the specific set of social relations that are the basis of today’s financialized capitalism, invocations towards a better, fairer society will only breed disappointment as changes fail to appear.

Towards a European Tobin tax?

23 Jan

Reports in the press this week suggested that German Chancellor, Angela Merkel, had been won over to the idea of introducing a tax on financial transactions at the European level.  This has been primarily a French idea so far, with Nicolas Sarkozy a convert to a policy he had previously dismissed as ridiculous. The Tobin tax idea had been taken up by the French anti-globalization movement at the end of the 1990s and early 2000s and was virulently opposed by most of France’s political class. Today, in a very different political climate, the idea has been given a new lease of life.

Whether or not a financial transaction tax is finally introduced remains uncertain. This week’s press also reported that Sarkozy – who faces an election in the coming months and has committed himself to this tax as a demonstration of his activism in regulating financial markets – might settle for a tax on share trading as a first step. This already exists in the UK in the form of stamp duty on stock exchange transactions. Keeping the UK on board with any new European regulations would be welcomed by other European leaders as lasting rifts and real isolation are anathema to the EU. Bringing Cameron back in from the cold would be attractive to all involved in last year’s falling-out between the UK and the EU. Such a tax would, however, leave unregulated all other kinds of financial trading like derivatives and high-frequency trades. These have been identified as the real targets but an initial tax on share trading might solve Sarkozy’s problem of having committed to introducing a financial transaction tax before the election.

Is a financial transaction tax really the solution to the current crisis? The main rationale for it today is that it would serve as an alternative source of revenue for bail-outs and other expensive public actions that have up until now been funded by the taxpayer. That such a tax could improve government balance sheets to the point of reducing the need for austerity seems rather fanciful. What it would challenge, however, is the idea that governments defer unconditionally to their financial sectors. Whilst governments routinely stand by and watch as industries relocate to the Far East and shed thousands of jobs, they seem unable to accept that any such “creative destruction” should operate in finance. To many, this smacks of double standards and a tax on financial transactions would demonstrate – at the very least – the exercise of some political muscle vis-a-vis banks and financial services.

This argument about the symbolic nature of such a tax is not a bad one. But it tends to miss the bigger picture. The reason why a Tobin-style tax has become a popular idea amongst European governments is that it is like the famous phrase of Tomasi di Lampudesa’s The Leopard: things must change so that they remain the same. There is nothing in a financial transaction tax that really challenges the relationships and interests that together have given us this debt-finance growth model of the last 40 years. Nor would the tax really reverse the striking rise in inequality that has come to characterise our societies. The theory of the present crisis of capitalism contained within the Tobin Tax idea is that responsibility lies in the financial sector and that whilst the economy is generally sound, a few bad financial apples are bringing us all down. By taxing them and redistributing the revenue according to priorities set by elected representatives, we can return to the status quo ante.

One argument we’ve been pushing at The Current Moment is that financialisation is as much about a change in the real economy as it is about the financial sector itself. Isolating finance from its place in the wider economy, as the idea of a financial transaction tax does, misses the nature of the problem. This idea is also naive in that it imagines that relationships between real people can be transformed via a state-levied tax. Societies, today as in the past, are based around relationships that can only be changed by real political struggle. There is no short-cut or easy way around the problem of either redistribution or of making European societies more productive. The financial transaction tax is a coward’s way out of tackling today’s economic and social crisis and will only entrench, rather than transform, existing inequalities.

The Fear Index

12 Jan

In a recent article for the Financial Times, Gillian Tett observed that discussions about finance tend often to rely upon turns of phrase taken from nuclear physics. From “toxic assets” and “meltdown”, to the “containment” of the “fall-out” from a bank run or a sovereign debt default, the language of finance mirrors that of hard science.

A perfect illustration of Tett’s point is Robert Harris’s recent thriller, The Fear Index. Known for historical thrillers such as Fatherland (a book based on the premise that the Nazis won the Second World War), Harris’s new book is closer to science fiction. The main character is Alex Hoffmann, a Princeton-trained scientist working at the CERN research centre just outside Geneva. Interested in developed automated processes run entirely by machines that include a capacity for learning and adaptation on the part of the computers themselves, Hoffmann was sacked from the CERN after his research ran out of control. Approached by an English banker looking to break into the world of hedge funds, Hoffmann ends up running an incredibly successful company, Hoffmann Investment Technologies. The key to the success of this hedge fund is its faith in its own algorithms: the fund’s office is a far cry from the noisy bustle of a trading floor. It is made up of quantitative experts who oversee – but do not intervene in – the trading automatically generated by Hoffmann’s own algorithms. The algorithms themselves are based on the simple idea that one of the human emotions that most dominates financial markets is fear. And that with the steady digitisation of all aspects of our existence, fear can – along with most other emotions – be calculated and measured. Bringing all the existing data together, Hoffmann’s hedgefund makes money by exploiting the role of fear in financial transactions.

As an introduction into the heady world of finance, Harris’s book is worth a read. He explains well the way hedge funds are inherently risk averse: they aim to maximise returns at the same time as minimizing risks. Rather than just betting on one outcome (e.g. that a particular stock loses its value) a hedge fund will also insure itself against the opposite, namely a rise in the value of that stock. It will thus hedge its bet, hoping that it can make a small gain but making sure that if it loses it will only make a small loss. Large sums are in play but at any one time there are no large, one-way bets. Harris is also clever to pick fear as the human emotion tracked by the Hoffmann hedge fund. The assumption is that financial markets are driven not by rational calculations but by fear. Sprinkled throughout the book are scientific commentaries on the particular physical manifestations of fear. As Harris writes in his book, this is behavioural finance but of a special kind.

Less convincing is the book’s sci-fi plot. The book is ultimately a reflection on the relationship between man and machine, between human beings and technology. Whilst there are some pretty bewildering sides to contemporary finance, its technological development is nevertheless contained by a prevailing set of social relationships. Instead of exploring the social conditions that gave rise to hedge funds, Harris invests the computers themselves with agency and imagines a world where algorithms – initially written by human beings – develop a life of their own. This leaves the book with a chilling open-ended conclusion: would not a hedge fund based on exploiting fear in the market have an interest in stoking that fear? Or indeed of generating some kind of market collapse? In the end, Harris’s book leaves us with same feeling about finance as a strange off-shoot of nuclear physics that Gillian Tett commented on. This works well for thriller writing but is less convincing as an explanation of where hedge funds come from and why they have become such powerful symbols of contemporary finance.

Interview with Wolfgang Streeck

3 Jan

Continuing our series of interviews, today we publish an interview with Wolfgang Streeck. A guest contributor to The Current Moment, Professor Streeck is Director of the Max Planck Institue for the Study of Societies (MPIfG), based in Cologne, Germany. The author of many books and articles on comparative political economy, he recently published ‘The Crises of Democratic Capitalism‘ in the New Left Review.

 

What are the stories right now that you think people either aren’t paying enough attention to, or about which we have the wrong view?

Generally the historical and political-economic continuities between the global inflation crisis of the 1970s, the widespread public debt crisis of the 1980s, the internationally agreed consolidation and financial deregulation policies of the 1990s, and the worldwide private debt crisis of the 2000s, with its commutation into another public debt crisis.

Turning to the Eurozone debt problem, a dominant view is that Greeks and Italians are corrupt, inefficient and lazy, and that is why they find themselves in this mess. What is your view of what is going on?

The Mediterranean version of the debt problem reflects a specific relationship between modern states and societies on the periphery of Europe that have become stuck, partly or wholly, in pre-modern social structures and lifeways. In Italy and Spain in particular, this relationship is furthermore complicated by deep divisions between advanced regions such as Lombardy and Catalonia, and backward regions like the Mezzogiorno and the Spanish South. In quasi-feudal areas, or in an entire country such as Greece, huge concentrations of old wealth coexist with widespread rural poverty and stagnation. Vacationers from the North romanticize this as an easy-going way of life and tend to be envious about it. They also notice that there is corruption, and clearly a lot more than, say, in Sweden or Finland. What they don’t see is that there is also a lot of oppression by local elites with more or less close connections to the legal and illegal markets offered by modern capitalism, not to mention the political parties of the modern state. To be able to catch up with capitalist modernity, these societies would in the past have needed social revolutions to expropriate the old money and clear the way for the new money of middle-class industrial entrepreneurs. But this happened in Italy only in parts of the country, and in the post-fascist democracies of Portugal, Spain and Greece in the 1970s a revolutionary response to backwardness was prevented not least by the containment policies of Northern Europe and the United States. One of the tools of that policy was admission of Greece, Portugal and Spain, first into the European Union, and then into Monetary Union.

The standard recipe for the recovery from the Eurozone crisis is austerity and structural reforms in the peripheries, plus some recapitalization of banks. Do you think this is the right way to go?

I really don’t know what the solution is. Perhaps austerity is politically sustainable for the two decades that are claimed to be required for fiscal “consolidation” in debtor countries, perhaps not. In any case it will have to be accompanied by some form of, very likely hidden, transfer payments from the North, which also may or may not be politically sustainable, in this case with Northern electorates. “Structural reforms”, in the language of ruling economists, are not much more than union-breaking and the creation of tax-free economic development zones. But nobody tells us what the sectors are where growth is to take place, in countries squeezed between high-technology competition like Germany and low-wage competition like Thailand. Structural development policies that go beyond supply-siderism are not only expensive but are likely not to work when imposed from above or from the outside on a traditional social structure; see Southern Italy where fifty years of Cassa di Mezzogiorno were by and large an unqualified disaster. There is no reason to believe that Brussels or Berlin will in a decade be more successful in Greece than Rome was in Sicily for half a century.

What do you think would address the trade and debt imbalances between Northern and Southern Europe? Do you think it can be done within the European monetary union or does it require a fundamental change or dismantling of that union?

The problem is: there will be no such dismantling. The middle classes in the Mediterranean consider EMU as the lesser evil compared to a return to national currencies, because their savings are denominated in Euros and full membership in the European Union harbors vague promises of individual mobility and collective support, however meager. In the North, the common currency ensures export industries against competitive devaluation and guarantees a favorable external exchange rate. This is why German industry, including industrial trade unions, are strongly in favor of “European solidarity,” meaning that Mediterranean countries must by all means be prevented from getting out of the monetary trap in which they have moved themselves when joining the common currency. Some sort of competitiveness tax to be paid out of public budgets or in the form of some sort of “Eurobonds” is accepted as the price for unlimited access to Southern markets, especially if it is paid by taxpayers at large and not by industry itself. Here I see an unholy alliance between Southern middle classes and state elites on the one hand, and Northern export industries on the other. It will, however, be an unhappy alliance as Southern countries will inevitably be disappointed by the benefits they will receive from the North, while Northern electorates will resent such benefits regardless how small they may be, at a time when they themselves have to accept spending cuts of all sorts. Like in Italy, the South will hate the North and vice versa. Northern clichés of lazy Southerners will be complemented by Southern clichés of Northern, in particular German, imperialism. Europe will grow together at the price of rising nationalist resentment.

The hegemony of the demand for austerity is striking. It is offered as the solution to the Eurozone crisis, as well as to the American situation – the US Congress even created a supercommittee to find savings. It seems odd to have such agreement around austerity in the midst of a potential double dip recession. Why is there such agreement on this point and what do you think of the demand for austerity?

There seems to be no way to close the gap between public expenditures and public revenue by higher taxes, in no country. This being so, what remains to reassure creditors are spending cuts. Financial liberalization has made it easy for owners of significant wealth to move abroad; right now the London real estate market, in places like Chelsea, Kensington, Hampstead and Belgravia, is booming from rich Greek families putting their money in new homes. Tax increases are resented even by the middle classes who would more than the rich benefit from a functioning welfare state; one reason seems to be that for a long time higher public revenues will have to pay for goods already consumed. Those who would have to pay increased taxes because they cannot move their money or themselves out of their country may even prefer continuing public deficits to fiscal consolidation as long as austerity is firmly institutionalized and creditors can as a result be sure to get their money back. This is because, rather than having their savings confiscated, they could keep them and lend them to the state, drawing interest on them and eventually passing them on to their children. As I said, this presupposes a “credible commitment” of public policy to giving priority to servicing the public debt over keeping the political promises inherent in social citizenship. In practice this means a suspension of democracy to the extent that it is linked to social citizenship.

How optimistic/pessimistic are you about the ability of national democratic procedures to provide solutions to the current economic crises in Europe and in the US? What do you think of the recent proliferation of technocratic governments in Greece and Italy? Does the current crisis expose some basic tensions between capitalism and democracy? If so, how exactly?

I have written about these tensions, caused by ultimately incompatible demands for “market justice” and “social justice” having to be balanced against each other. Democracy is more than democratic procedures; it also expresses itself through social movements and general strikes. Even so, in present circumstances it lacks power and the capacity for collective action on the relevant battlefield, which has become the international monetary system. Today, states and their governments are facing two sovereigns at the same time: their peoples, organized nationally, and “the markets,” organized on a global scale. The latter clearly prevail over the former: see the replacement “from above” of the elected political leaders of Greece and Italy by representatives of the “economic reason” vested in the international money industry, shifting the political economy from social to market justice as the latter is deprived of its democratic empowerment.

What has perhaps not been said clearly enough is how the postwar settlement between the two kinds of justice came to be revised after the end of the “Golden Age.” When postwar growth ended in the late 1960s, the functional needs of capital accumulation began gradually to push aside the social needs whose institutionalized recognition had been the condition for workers being prepared to live with capitalism. More and more “capital controls,” in a broad sense, were removed while one promise after the other that had been made to buy labor in after 1945 was withdrawn. Such promises included a steady increase in living standards, progressive de-commodification of labor through an expanding welfare state, politically guaranteed full employment, “industrial democracy,” an encompassing regime of collective bargaining and trade union rights, a broad public sector providing citizens with social services as well as with stable employment, equal access to education and social advancement, a moderate and certainly not growing level of social and economic inequality, and the like. All of these disappeared or were “reformed,” often beyond recognition. The almost four decades since the end of postwar prosperity were a long series of defeats for labor, and of successful attempts on the part of capital gradually to re-establish its hegemony, with market justice pushing social justice to the sidelines of the political economy. It was not the logic of democratic claim-making or social citizenship or even democratic political opportunism that undercut the postwar social compact, but the historical reassertion of the logic of capital accumulation that had for a limited period been contained and overruled by democratic politics – just as the fiscal crisis of today was not caused by ordinary people demanding more than they were entitled to, but by the winners of the market first refusing to pay for their social license to enrich themselves, and later blackmailing governments to save them from the fallout of their own recklessness.

Right now it is democracy itself that is about to be rescinded – at the national level, which is where it came to be located under democratic capitalism, without replacement at the supranational level, where it should today move but nobody knows how. Increasingly democracy is turning into an empty shell, a formal ritual, not just in the United States but also in Europe. In the camp of the Indignados at the Puerta del Sol in July 2011, I saw a hand-painted sign saying: Como se puede hablar de democracia si no se puede cambiar el sistema económico en las urnas? (How can one speak of democracy if one cannot change the economic system at the ballot box?)

What are your views of the nascent protests (Occupy Wall Street, Indignados) developing in response to the introduction of austerity packages in Europe and the US? Are these movements a continuation of or a break with the anti-globalization movements of the past? Are they likely to fundamentally change public perceptions and government policy or will they have only a small lasting impact?

I know too little about such movements. I am looking for signs of an impending cultural break with possessive individualism, competitive greed, hedonistic consumerism. This is a tall order indeed, but I feel nothing less would do. Beyond “protest” or calls for “reform,” what would be interesting to see are actual changes in people’s ways of life, some kind of separatism and recapturing of local autonomy, with people cutting themselves loose from the capitalist mainstream and becoming less dependent on it, materially and mentally: a way of life where time matters more than money, ideal goods more than material ones, and social bonds more than individual property. That may not be available without a measure of neo-romanticism or even insurrectionism. What one might hope for is a sort of cultural change that, unlike 1968 and its aftermath, would not lend itself to being transformed into a “new spirit of capitalism,” as described by Chiapello and Boltanski. At the intellectual level, I find the growing literature on low-growth, no-growth and de-growth capitalism (or perhaps post-capitalism?) intriguing and I wish one could find good reasons for believing that working for this politically would not necessarily be futile.

What, finally, do you think the appropriate political response is to both these crises and their aftermath?

What is “appropriate,” and in what sense? What I see coming in Europe seems far from “appropriate” to me but it will probably come anyway. Clearly, the United States and the UK will continue to depend economically on an overblown international financial system that happens to reside mainly on their territories, and that they regulate in their national interest rather than the interest of all. The question is: is there anything on the horizon that could break the trend of the past three decades toward an ever more unstable, unpredictable, uncontrollable – in other words, ever more capitalist – global capitalism, with an ever more unequal distribution in the historically rich countries of wealth and risks and opportunities and life chances? I see nothing.

A victory for the regulators?

12 Dec

One view of what happened at last week’s European Council summit is that we saw a struggle between neoliberal Anglo-Saxon capitalism and Europe’s alternative of a more regulated and people-friendly capitalism. David Cameron’s defence of the City of London’s banksters was in line with long-standing attempts to block European efforts at expanding the regulation of financial markets. That he failed, and that Sarkozy and Merkel struck a deal without Britain, is welcomed in this view as one step closer towards tackling the scourge of casino capitalism that has brought the Eurozone, and much of the global economy, to its knees.

There is lots wrong with this view of last week’s acrimonious summit negotiations. For a start, Cameron’s motivations were as much about avoiding a national referendum – and thus keeping his own Conservative –Liberal Democrat coalition alive – as they were about the City of London. The City itself is deeply divided over the issue of financial regulation: some would prefer to keep clear of European harmonization efforts and to go it alone (for a list of all the financial market reforms in the EU pipeline, see here). Others in the City say very clearly that a common European regulatory regime of which the City of London is a part would be better than a split. We should also have no illusions about the motivations of European financial regulators: the political push behind this regulation, led by the European Commissioner for internal market and services, the Frenchman Michel Barnier, comes from the French and the Germans and is driven by competition between national capitals. The goal is to weaken the City of London as a financial center as much as it is to reform European finance. Why side with one over the other in this struggle if not out of German, French or Euro-chauvinism?

Another major problem is to paint Sarkozy, Merkel and others national leaders as great representatives of a more social Europe. Regulatory change is about social and class power. Regulators, especially powerful ones, have huge amounts of discretion. The ends to which that discretionary power is put depends upon the wider social context of the regulation. Where Sarkozy and Merkel stand in this regard should tell us something about the promise of progressive financial market regulation. The development of their own economies has so far been in a decidedly anti-social direction and the recently agreed deal in Brussels cements this trend. This agreement enshrines in law the mistaken idea that fiscal expansion is the cause of the Eurozone’s crisis. In doing so, it gives Europe´s leaders a legal basis with which to pursue their austerity measures. Most of those measures are directly aimed at dismantling social protection in Europe: inter alia, rising retirement ages, cutting pensions, cutting public sector jobs, raising the cost of travel on public transport. These measures ignore the real basis of the Eurozone crisis: the stark unevenness of the national economies which make up the Eurozone. As Martin Wolf recently argued, the best predictor of the crisis in Europe was not government spending but balance of payments accounts.

Sarkozy and Merkel launch vicious attacks on the social conditions of the populations of peripheral Eurozone states, and strong arm their own populations into a decade of austerity measures, all in the name of a starkly lop-sided reading of the current crisis. And at the same time they portray themselves as progressive regulators, seeking to contain the untrammeled power of financial markets. Judged by developments so far, there is little reason to celebrate last week’s agreement as a victory for regulators over markets.

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