The current, and still escalating, crisis of the western world’s “casino capitalism” caught vast numbers of people– including policy makers and most other members of the political elite– completely by surprise.
One of the main elements of this surprise has been that, though these people generally thought they understood the basics of how the present western economic system works, it turned out that the basement of the house of capitalism contained not the stable foundational pillars of an understandable and predictable financial system but a wild casino party made up of high-rolling risk-takers, many of whom seemed intent on sawing down the few remaining pillars that held up the house of the real, bricks-and-mortar economy.
Also, who really understood how all these alphabet-soup, jargon-y type things like “CDOs”, “CDSs”, and even “BISTROs” really worked?
It turned out that just a few people, on either side of the Atlantic, realized there was a problem in the financial basement, and understood something of its dimensions. Our own great Paul Krugman, for one… Nouriel Roubini… And I’ve just discovered the voice of another important individual, one who started “blowing the whistle” on the craziness of casino capitalism some years ago.
Meet Gillian Tett, columnist and capital markets editor at the Financial Times
I just heard her contribution to this panel discussion of how the western MSM covered (or failed to cover) the very risky derivatives markets during the years they were gathering steam.
She makes some good points there, many based on her earlier academic training as a social anthropologist. One excellent point– relevant to gaining understanding of many issues, in addition to complex financial markets– is that it’s important to listen for “social silence”, what people don’t want to talk about, as well as “social noise” (what they do want to.)
Tett recounts how, even within the FT, she was originally, some years ago, viewed as something of an eccentric for arguing that the derivatives markets were a topic that deserved real consideration and coverage, and how hard it was for her to persuade her bosses there to assign her to covering these markets full-time…
She also talks about how hard it has been for people to deal with the “psychological shock” of the current crisis and how, for many people generally proud of their grasp of political and economic affairs, it has been quite hard to realize that they don’t even really understand what it is that this whole miasma of financial derivatives with weird and tricky names is even really about. (My short answer to this is, in many cases, they’re “about” nothing real or tangible at all. Just like tulip bulb futures, back in the day… But the problem with this whole derivatives market is that it has been able to gnaw away at the financial pillars of the real, brick-and-mortar economy, precisely because the big, real banks who constitute those pillars have gotten so deeply involved in the whole derivatives-trading business… )
Back in May, Tett wrote an excellent description of the whole problem in this lengthy FT feature article. Deep down in it, when considering the possibilities for “reform” of the derivatives markets– i.e., some form of effective regulation of them– she writes:
It is an open bet whether any of these ideas for reform will fly. After all, when [financial] products become simpler and more transparent, the margins typically fall. Bankers, in other words, have a strong motive to retain complexity and opacity…
There you have a big part of the problem, in a nutshell. “Bankers”– or rather, those predatory, arrogant individuals who make up a sizeable portion of the population of today’s bankers– “have a strong motive to retain complexity and opacity.” Exactly. That is what the rest of us need to understand.
Look, if these sad testosterone-driven guys– and they are, overwhelmingly, guys– want to go into dank basements somewhere and set up complex games of poker in which they compete against each other, as far as the rest of us are concerned, good luck to them. (Though I must say I strongly approve of, and try to stick closely to, the traditional Quaker testimony against gambling… It is a pastime that, history has proven, can quickly become addictive and extremely destructive to individuals and their families.)
But if that’s all these guys were doing– playing poker, or gambling on this or that possible turn of events in the real world… then, good luck to them.
The problem came when banks that supply essential financial services to the real-world economy of businesses and households got drawn into the casino-players’ gambling and started placing their own assets majorly at risk.
Back in 1933, it was precisely that risk– or rather, the fact that the banks had already, previously put their assets at risk in such games and in many cases lost them through unwise gambles– that moved the US Congress to pass the Glass-Steagall Act, which erected a wall of separation between real-world banks and the far more risky financial trading operations.
Each kind of institution was them subjected to a different form of regulation. In the case of the financial trading houses, regulation was much looser– but they also did not have the central government back-up that the newly created FDIC provided to the regular banks.
Glass-Steagall was repealed in 1999, through the Gramm-Leach-Bliley Act, which was spearheaded by the dreadful Phil Gramm and signed into law by Bill Clinton.
As part of President-elect Obama’s policy response to the current, possibly even more far-reaching financial/economic crisis a new, perhaps even tighter version of Glass-Steagall urgently needs to be passed.
That would prevent the crazed, gambling-addicted boys in the basement from being able to continue gnawing away at the foundational financial pillars of the real-world economy. (And maybe most of those gambling-addicted boys should be sent into a form of rehab that would involve doing some real work in the real world.)
But here’s what all of us interested in policy affairs need to understand: As Gillian Tett said, “The bankers have a strong motive to retain complexity and opacity.” The rest of us certainly do not, because it was in the dank miasma of that opacity that the whole house of the western economic world almost came tumbling down.
In other words, the interests of many of the individuals who currently call themselves bankers are not in line with those of society as a whole, and indeed are directly antithetical to our interests. It is only those bankers who give credible, well-understood promises to provide real, direct help to the real-life economy of tangible goods and services who should receive any help at all from the taxpayers’ dime. And then, only under strictly controlled conditions.
The rest of those casino addicts? Prosecute them for all crimes they have committed and send them, where necessary, into rehab.