Balneus

Australian Lefty on Politics, Governance, Science and Info Management

Great edition of The Economist this week

Posted by Dave Bath on 2008-03-22


It’s a bumper issue of The Economist (2008-03-22) for pithy comments, with a special supplement on the financial crisis.  Buy it.

Yet, like Wile E. Coyote running over the edge of a cliff, financial services kept on going.  A service industry that, in effect, exists to help people write, trade and manage financial claims on future cashflows raced ahead of the real economy, even as the ground beneath it fell away.

It seems part of the problem is that, in my own phrase (and I’m proud of it): "liability was treated as the new asset".

And who has been the loser?

More pertinent quotes over the fold (bolding is mine).

Their (bankers and fund managers) gambling has been fed by the knowledge that, if disaster struck, someone else – borrowers, investors, taxpayers – would end up bearing at least some of the losses.

Time and again, The Economist points out how the financial system’s architecture is still inherently "pro-cyclical", and call for not only regulation, but smarter regulation.

Yet over the past decade this entangled system also plainly fed on itself.  As balance sheets grew, you could borrow more against them, buy more assets and admire your good sense as their value rose.  By 2007 financial services were making 40% of America’s corporate profits – while employing only 5% of its private-sector workers.  Meanwhile, financial sector debt, only a tenth of the size of non-financial-sector debt in 1980, is now half as big.

The worst excesses in the securitisation mess are encrusted precisely where regulation sought to protect banks and investors from the dangers of untrammelled credit growth.  That is because regulations offer not just protection, but also clever ways to make money by getting around them.

It’s not only the profiteering pirates that cop criticism:

But recently central banks have in effect conspired with the banks’ urge to earn fees and use leverage.  The resulting glut of liquidity and financial firm’s thirst for yield led eventually to the ill-starred boom in American subprime mortgages.

Unlike all the economic commentators who’ve been saying "boom times", "buy, buy, buy", The Economist is really saying "I told you so".  Well before the crisis arose, the signs were there for all to see, and we lefties had to at least acknowledge the honesty of the free-market-loving The Economist that said (2007-04-21!!!):

But it is in the nature of capitalism to test new ideas to destruction and to use new instruments as the basis of speculative excess.

Yes.  So when will those market bulls be held responsible for spreading bull, and dumping the world in it?  When will we make politicians decouple essential goods and services from such guaranteed disasters – or force a top-to-bottom re-engineering of the financial system to ensure stability, rather than be what The Economist politely, yet damningly, calls "pro-cyclical".


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