Notes from After the Great Complacence: Financial Crisis and the Politics of Reform

In the pre-2007 period, central bankers, regulators and senior economists “repeated the same reassuring but ill-founded stories about the benefits of financial innovation and “the Great Moderation”. These stories mattered because they framed the purpose, intent, and tone if policies towards finance and they legitimated a gross failure of public regulation around securitisation and derivatives I the 2000s. This followed on from a more general undermining of public regulation of finance which began in the 1980s and flecked a collective belief that the (financial) market forces, left to their own devices, would allocate capital efficiently, improve the robustness of financial markets, and deliver socially optimal outcomes. The judgement that financial innovation was a beneficial process (and part of a new golden age) was the made on the basis of very little supporting evidence and argument.”

“The financial sector…imposed huge costs on the rest of the economy by requiring expensive bailouts and triggering recession… Worse still, the policy Estes failed in their public service duty of preventing capitalist business from privatising gains and socialising losses … None of this is unusual I benighted dictatorships or oligarchies, where the privatisation of gains and the socialisation of losses usually indicate the presence of an uncontrolled and predatory elite. But this drama is different … First, technocrats like Ben Bernancke and Mervyn King are implicated in the making of a catastrophe: if these public servants cannot be accused of venality, it is perhaps more alarming to find them trading opinion on the basis of their authority and expertise. Second, the drama of reactionary consequences and cuts is now being played out in democracies like the UK and US which have mass franchises,electoral competition and traditions of intervention for progressive redistribution. Yet, the post-crisis political drama (so far) doesn’t have a “never-again” ending; the moneymaking financial elites are not clearly subordinated and the technocrats and politicians cannot agree on how to change the management of finance so as to prevent further disaster.” P. 13

The process of financialization since the mid-1970s has been described as one which has given financial markets and motives great influence over corporations and households. This process can be measured in terms of the rise in debt or financial assets … The democratisation of finance required the narrative co-option of the masses into elite-led financial processes … Not about creating financialized capitalism but reinventing a different kind of financialized capitalism. When Tawney and Bukharin criticised financialized capitalism in the outward period, they focused on upper-middle class rentier claims to unearned income. Now finance has been democratised by the inclusion of the masses as consumers of savings and credit products; 70pc are homeowners in most capitalist countries except Germany, and everybody is credit-dependent in ways which provide feedstock for the wholesale financial markets. But wealth and income are increasingly unequally divided, partly because the major financial centres like London have turned into machines for the mass production of millionaires from amongst the working rich in investment banking and fund management.” P. 24

The calculations of the costs of the financial crisis “vary only between the very large and the nearly unfathomable… In the case of the United Kingdom, the IMF calculates the ‘direct,up-front financing’ cost to the taxpayer as £289billion, including here the costs of the Bank Recapitalization Fund, the Special Liquidity Scheme, and the cost of nationalising Northern Rock and Bradford and Bingley. But if we add all the other Bank of England and HM Treasury loans and guarantees to the banking system, the IMf calculates the potential cost as £1,183 billion. … In the United Kingdom, public debt rose from 36.5 pc of (GDP) in 2007 to 63.6pc in 2010 and the public sector deficit from £634 billion to £890 billion.”

But these costs were dwarfed by the indirect losses in output induced by the crisis. “Haldane’s truly spectacular result was the calculation that, in terms of foregone output, the net present value cost of the crisis was somewhere between one and five times annual world GDP in 2009. In money terms, this is an output loss Equis, to $60-200 trillion for the world economy and £1.8-7.4 trillion in the Uk.” P. 28-9

In terms of the socialisation of losses and the privatisation of gains “the cumulative result after nine years from 2001to 2009 (after allowing for all tax receipts) is that a huge (net) loss of more than £50 billion has been charged to the state by these five banks. Meanwhile, the cumulative private gains of employees are much larger at £242 billion, with shareholders seeing a positive cumulative return by 2009 five times as large as the loss charged to the state. In short, the private gains over nine years are more than five times as large as the huge loss charged to the state.” P 30

“Two (surmountable) difficulties stand in the way of effective reform. First, financial innovation, before 2007 and currently, is beyond any known technical mode of regulatory control because innovation takes the form of bricolage that creates complex lattice-works which are inherently fragile and ail I unpredictable ways with each new conjunctival change. Second, finance is presently beyond political control because criticism had not turned into a relevant and politically actionable story to create a different kind of finance. We hope that these arguments and their implications will contribute to a future where the will of experts is less important than parliamentary democracy, which is absolutely crucial to the restraint of unaccountable finance.”

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