Back in September 2002, I wrote a cover story for Euromoney called ‘The End of Unfettered Capitalism’. I interviewed various wise sages of finance (Joseph Stiglitz, George Soros, er…Ann Pettifor) who opined to me of the end of neo-liberalism and the need for a new economic model.
Back then, in the aftermath of Enron and the bursting of the internet bubble, the financial press was full of soul-searching and chest-beating articles, usually by John Plender, wondering where free market capitalism had gone wrong and where it was heading.
My article was the culmination of two years of quiet guerilla warfare against free market finance, which I had waged since becoming a financial journalist after university. I secretly hated the free market, which I blamed for frustrating my desire to be a Sixties-style creative hippy. So I spent most of my time writing articles trying to find chinks in the armour of international finance, as an exercise in self-liberation…
It was quite fun to do this, while working at Euromoney – perhaps the arch-organ of international capital. And it was pretty easy to do, in 2000-2002, while financial markets were imploding.
But then, you know what happened? Firstly, I started to find proper outlets for my frustrated hippy creativity, so I became less of an emotional malcontent (one wonders how much radical criticism emerges as much from the emotional maladjustment of the critic as from the political maladjustment of their society); and secondly, I started to realize that actually private financial markets worked quite well, and the people who criticized them – people like Ann Pettifor, for example, or John Pilger, or Noreena Hertz – were by no means experts about the financial systems they criticized.
As I started to write about emerging markets, I realized that different economic systems, such as centrally-controlled economies of the Soviet Union, tended to produce far more authoritatian and centrally-controlled societies, in which small castes ran the country, as the KGB still runs Russia. So if you believe in personal autonomy and decentralized societies, as I do, free market capitalism and private lending markets are a much better alternative to centrally-controlled markets.
Anyway, despite my plucky slingshot at the giant of international capital, somehow it stayed on its feet. Actually, the world financial system was remarkably little changed by the events of 2001-2002, though the Sarbanes-Oxley act which the US passed in the wake of Enron did have the effect of dramatically shifting capital markets activity from the New York Stock Exchange to the London Stock Exchange.
If anything, international finance probably become more deregulated after 2002, because new forms of finance which regulators didn’t really understand started to grow very rapidly – particularly forms of securitization like collateralized debt obligations and credit derivatives. The last seven years have been, indisputably, the years of ‘structured credit’, where banks have taken loans and bonds, sliced them up, and sold off the risk through credit derivatives.
Regulators have watched and wondered at all this alchemy. That’s part of the problem of where we are now – the ingenuity of young bankers has outstripped the capability of regulators, or even the banks’ own senior management, to understand it. Finance’s young turks have brought their whole system to its knees.
The question now is, if this crisis is as serious and epoch-making as experts tell us, is this the end of unfettered capitalism? Are we headed for a fundamentally different model to the neo-liberal model of finance which has, more or less, stayed dominant for the last 30 years?
Clearly, at the moment markets are moving in the direction of more state control of the banking system. Northern Rock and Bear Stearns are one small step. But as Martin Wolf wrote in the Financial Times last week, we could conceivably be heading for a much wider nationalization of the banking system, comparable to what occured in the 1930s, when there was a systemic collapse of private banks, and the state was forced to re-capitalize the entire banking system, and to take the lead role in lending. That, in essence, was the beginning of Keynesianism.
At the same time, we’re also the seeing the global rise of state-controlled banks from former emerging markets (we should probably start calling the likes of Russia and China ‘former emerging markets’ and the likes of the US and UK ‘formerly developed markets’). The biggest bank in the world, by market capitalizaion, is now ICBC, the Chinese bank, closely followed by China Life Insurance, China Construction Bank and Bank of China.
They could soon by joined by the US Federal Reserve, if it continues its policy of buying banks’ mortgage-backed securities, and taking their risk exposures onto its own balance sheet. Its rapidly becoming, in effect, the biggest bank in the world.
So state-controlled banking, and state-controlled economies, is on the rise. On the other hand, the state-controlled banks and the state-controlled economies of the former emerging markets are actually moving towards a more free-market model.
Sberbank, for example, which is the biggest bank in Russia, attracted around $10 billion in private shareholder capital last year, and is waiting to try and attract more this year. Chinese banks have also attracted billions in private capital. So the rise of these banks hardly symbolizes a turning away from private debt or equity markets.
Still, it seems that in the short term, we are heading towards a period where states are required to be much more interventionist in the markets, and to take a more leading role in credit markets and in banking. This will bring with it all sorts of new risks – the risks of a confusion of public and private interests, the risks of states bailing out greedy or stupid private banks, the risk that we return to a cosy and cliquey form of banking where political connections count more than credit-worthiness.
But, like in 2002, it could all be less serious and less fundamental than it now appears. The next three months will be decisive. If another big US bank goes under, the question is, who will buy it, and can they honour their debts? If not, then another bank could go under, and another, and we could have a systemic crisis on our hands.
