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The whole world is drinking poison to quench its thirst It may feel like relief now but the sickness will strike in 2012
February 2, 2010
"The whole world is drinking poison to quench its thirst. It may feel like relief now, but the sickness will strike in 2012."
- Economist Andy Xie, referring to capital injections to stabilize the financial system.
Karl Marx held that capitalism would end through the revolutionary actions of communists. If capitalism does end as a result of a financial crisis that many presume to be over but which we believe is merely in abeyance, it will have come about simply by collapsing in upon its own self-interest. That may actually be a little unfair, not least in semantic terms; the OED defines capitalism as a system which favours the existence of capitalists – a term which it goes on to define as "one who has capital available for employment in financial or industrial enterprises". There is, in turn, a tendency to conflate capitalism with free markets. And the irony, of course, is that we now have neither. Banks are bereft of capital, and the free market has in large part been suspended by government fiat (and governments aren't exactly overflowing with capital either). So the government now controls the price of money (thus impoverishing savers), and despite its ownership of much of the banking system, seems powerless to stop the banks it owns from refusing to lend much of it out – but equally powerless to prevent the banks it owns from lending money to foreigners so that they can take over domestic businesses with the associated threat to domestic jobs. If we outsourced our government to al-Qaeda it could hardly make a bigger mess of things. The alleged unwillingness of capital-light banks to lend may also be missing a broader point: as per Japan's experience during its own balance sheet recession, cutting the price of money to zero has little impact when few really want to borrow and many businesses and individuals are in a greater hurry to pay down their debts than to take on fresh ones.
Either way, if capitalism is dead, or at least gravely ill, it was mauled by a motley combination of bankers – admittedly already in the frame – and politicians – still trying to scuttle away from the public gaze. The bankers overdosed on credit and poured toxic assets into the wider economy; the politicians managed to ensure that any control and regulatory infrastructure was unfit for purpose. While taxpayers watch mystified as this crazy waltz continues to ever more discordant music, bankers display their tin ear to criticism of practices that in less "developed" markets might lead to the death penalty. There is a reason why Bonus Season 2010 may come to be seen by future historians as the last straw for finance as we know it; because every other business on the planet only exists by providing value to its customers. Banking seems to be unique in that its practitioners expect to be well compensated irrespective of the services – if any – provided to its customers, and irrespective, for that matter, of the ultimate source of their own capital. As California Congressman Phil Angelides nicely suggested of Goldman Sachs at last week's Financial
3 Windsor Court
Clarence Drive
Harrogate, HG1 2PE
01423 523311
Lion House
72-75 Red Lion Street
London, WC1R 4FP
020 7400 1860
www.pfpg.co.uk
- Economist Andy Xie, referring to capital injections to stabilize the financial system.
Karl Marx held that capitalism would end through the revolutionary actions of communists. If capitalism does end as a result of a financial crisis that many presume to be over but which we believe is merely in abeyance, it will have come about simply by collapsing in upon its own self-interest. That may actually be a little unfair, not least in semantic terms; the OED defines capitalism as a system which favours the existence of capitalists – a term which it goes on to define as "one who has capital available for employment in financial or industrial enterprises". There is, in turn, a tendency to conflate capitalism with free markets. And the irony, of course, is that we now have neither. Banks are bereft of capital, and the free market has in large part been suspended by government fiat (and governments aren't exactly overflowing with capital either). So the government now controls the price of money (thus impoverishing savers), and despite its ownership of much of the banking system, seems powerless to stop the banks it owns from refusing to lend much of it out – but equally powerless to prevent the banks it owns from lending money to foreigners so that they can take over domestic businesses with the associated threat to domestic jobs. If we outsourced our government to al-Qaeda it could hardly make a bigger mess of things. The alleged unwillingness of capital-light banks to lend may also be missing a broader point: as per Japan's experience during its own balance sheet recession, cutting the price of money to zero has little impact when few really want to borrow and many businesses and individuals are in a greater hurry to pay down their debts than to take on fresh ones.
Either way, if capitalism is dead, or at least gravely ill, it was mauled by a motley combination of bankers – admittedly already in the frame – and politicians – still trying to scuttle away from the public gaze. The bankers overdosed on credit and poured toxic assets into the wider economy; the politicians managed to ensure that any control and regulatory infrastructure was unfit for purpose. While taxpayers watch mystified as this crazy waltz continues to ever more discordant music, bankers display their tin ear to criticism of practices that in less "developed" markets might lead to the death penalty. There is a reason why Bonus Season 2010 may come to be seen by future historians as the last straw for finance as we know it; because every other business on the planet only exists by providing value to its customers. Banking seems to be unique in that its practitioners expect to be well compensated irrespective of the services – if any – provided to its customers, and irrespective, for that matter, of the ultimate source of their own capital. As California Congressman Phil Angelides nicely suggested of Goldman Sachs at last week's Financial
3 Windsor Court
Clarence Drive
Harrogate, HG1 2PE
01423 523311
Lion House
72-75 Red Lion Street
London, WC1R 4FP
020 7400 1860
www.pfpg.co.uk
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