Friday, September 19, 2008

A curious thing happened on the way to the bank

Within the last week, the Federal Reserve has engaged with the meltdown in US financial markets to a degree earlier events indicated they would not. AIG joins Fannie & Freddie as newly minted government owned assets, while Lehman Bros, Bears & Merrill Lynch were not quite so lucky. The hard reality is that the former could not be allowed to fail in the final weeks of a presidential campaign, while the latter were ripe for either buyout or breakup, which could be politically afforded.

An old adage frequently bandied about concerning the then Country Party of Black Jack & Co, was capitalists when profitable, socialists with loss. The same seems to be very much the flavour of the response to this mess from most western style democracies. Allowing the markets to unravel would have appalling consequences - appalling for workers & wage earners, appalling for the distress it would undoubtedly cause. Though I doubt that most governments are driven by concern about outcomes for the average punter, rather the political consequences of even a mild recession and the response from the economic and social elites.

US authorities are putting together a plan to effectively bankroll bad debt similiar to the L&S failures of the Reagan years. Markets as they always do, rallied, gaining 400 points and loud cheers from the New York Stock exchange floor. Quite what will be in the package is the focus of much rumour mongering, but there seems to be a universal expectation that the markets will be saved from themselves.

What I find most astonishing is the number of pundits, politicians and opinion givers who are insisting that the markets' problems are not caused by poor modelling, greed, incompetence and lack of regulation but on the contrary, had the markets' been able to run unfettered, none of this would have happened. Chicago School stuff of wet dreams. The astonishing arrogance and hubris of this type of contemptible rubbish is not only insulting to one's intelligence; it is so remarkably arrogant at a time when it would be vaguely within rights to expect these types to be displaying a small amount of humility in the face of the multi-trillion dollar mess they've got us all into.

Bailing, yet again, these greedy vain fools is not my preferred option, and in an ideal world, I would leave them entirely to their own devices. Given that banks of all hues are being very loath to place funds into central banks, which means there's no money for anyone to borrow, the ability of the market to regulate itself would very swiftly display itself for the myth it is. But it is not a perfect world, and the people who would suffer most if these bastards were left to sink would of course be us.

But not a cent of government revenue should be going anywhere near any of these firms without the clear insistence that a new regulatory environment will be put in place. And yet it would appear that this is not the case.

Gordon Brown's government passes emergency changes to financial regulatory laws within the last 24 hours to allow Lloyds to swallow HBOS; regulations that focus on ensuring competition. This raises the question of how governments will respond to market demands, and so far it would seem to be rather craven.

It in turn raises another interesting point - will large corporations such as Barclays, Lloyds - those that by prudent planning or sheer bloody good luck have remained above the rising flood waters of panic and insolvency - will they by dint of their size, power, position and last remaining option be able to demand and receive concessions from regulatory and governmental authorities which will be of immediate benefit in ensuring they take over whoever they are eyeing off, but also allow them to demand concessions that will greatly enhance their profitability in the future? Will the corporate saviours of the market be exploiting the panic no doubt gripping governments in North America and Europe to gain more advantage?

Will they in fact be using the shock doctrine?

The other issue of concern is that we now seem to have a very entrenched expectation that when they do fawk it up, someone else will clean up afterward. And the bigger you are, the less anyone will want you to fall. Nor is it simply about the immediate problems and consequences of these corporate failures - given the level of ownership of infrastructure, particularly in the area of transport, a failing corporation will be cutting back on maintenance, expansion and upgrades, which will have impacts throughout the economies of the world. But why should they worry? Someone will obviously take care of the mess. The slogan of 21st century masters of the universe is "the profit is mine, but the loss is yours."

Re-regulation of the markets is urgently required, a duty our governments cannot shirk, and no one with an ounce of intelligence or integrity can argue otherwise. Yet again the markets have proved they cannot regulate themselves, nor be trusted. The one small glimmer that is emerging from this mess is its impact upon the US presidential elections. McCain is doing a wonderful version of a headless chook, leaving to Obama to appear competent by saying very little. A delightful irony is the greed of the masters of the universe contributing in some small way to the end of small government/ free market regimes in the US and Canada.