The Crisis of Finance Capitalism and the Exhaustion of Neoliberalism
In the five years since the Global Financial Crisis, no policies have been developed to effectively ensure against another systemic failure of banking and insurance systems.
It has now been five years since the beginnings of the Global Financial Crisis (GFC). What has been learned - if anything - by international agencies about the nature of the crisis and how to manage macroeconomic policy? In the wake of the crisis, ongoing problems of the Eurozone, slow and fragile growth in the United States and a slowdown of emerging economies, governments around the world have been reviewing the risks to insure economies against the systematic failure of banking and insurance systems.
The GFC drew attention to market volatility, to knock-on effects of "too big to fail" entities, the dangers of high levels of public debt and the risks associated with the massive growth and expansiveness of the finance sector vis-a-vis the real productive economy. Suddenly the role of the state and other extra-state agencies is back on the policy agenda as governments explore the scope of new regulatory tools designed to restructure banks, introduce new capital reserve levels and monitor professional standards. Greater thought has been given to the threats that the finance sector pose to the economy as a whole, and European governments in particular have sought to deal with these problems by pursuing austerity measures designed to cut levels of unsustainable public debt.
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The systematic collapse of global financial institutions is in part a result of a number of interrelated problems that indicate the many dimensions of the crisis of finance capitalism and the exhaustion of the neoliberal model of development:
- The failure, and subsequent recapitalization, nationalization or bailout of major banks leading to an era of "austerity politics" in Europe;
- The massive growth of the world derivatives market and consequent over-expansion of national banking systems in relation to the "productive economy";
- The growth of unsustainable sovereign and national debt levels resulting in sequestration and quantitative easing policies in the United States;
- The attempted regulation of tax evasion strategies by multinational companies;
- The tax evasion by wealthy individuals in a system of international tax-havens and trusts;
- The excessive bonuses and preferential shares given to CEOs even in the face of poor performance;
- The way that the EU (acting with the CEB and IMF) has exercised considerable fiscal and economic pressure on democratically elected governments to change policies;
- The rapid growth of new information technologies that produces a new global complexity of high-frequency trading (HFT) at a speed that eludes national and regional agencies to effectively track or regulate;
- The decline of trust and misalignment of incentives at the very heart of the financial culture of equity markets;
- The fraudulent and criminal culture at the highest levels of the finance industry including the deliberate manipulation of the Libor exchange rate, with few criminal convictions except for ponzi-schemers and insider-traders.
The heart of Anglophone finance capitalism is built on the twin pillars of Wall Street and the City of London, and the globalization of finance markets has increased this connectivity. In both these poles, the culture of the finance sector has come under increasing scrutiny.
The final report of the "Kay Review of Equity Markets and Long-Term Decision-Making" (July 2012) concluded that "short-termism is a problem in UK equity markets and that the principal causes are the decline of trust and the misalignment of incentives throughout the equity investment chain" (p. 9). The Kay Review identifies "the systematic nature of the problems" and aims to restore trust and confidence in the investment chain through a variety of measures including "the application of fiduciary standards of care" and "diminish[ing] the current role of trading and transactional cultures." Overall, the review focuses on defeating the short-termism of equity market traders and to reintroduce a concept of good stewardship of financial resources based on transparent and trustworthy financial intermediation. The review is damning of the change in culture that has occurred since the 1970s that has benefitted traders at the expense of users.
The financial system has been transformed since the 1970s by globalisation, deregulation, and reregulation. These developments changed the culture of UK financial institutions and the identity and behaviour of the leading participants. A culture which had emphasised trust relationships was replaced by one which gave primacy to trading. The trading culture has influenced the behaviour of market users - companies and savers - as well as market intermediaries. In the long run, the outcome has benefitted market participants more than market users (p. 88).
John Kay has been a longtime critic of investment banking, which has been ruthless in dumping risk on hapless consumers. He suggests - as one commentator summarizes it in an interview with Kay - "there is an endemic culture in financial services that makes it incapable of learning from other disciplines," particularly from the study of complex systems that provides sophisticated analysis and understanding of how systems work and the damage that monocultures can inflict on the whole ecosystem. Kay is an advocate of what he calls "narrow banking,"the purpose of which is to protect the nonfinancial economy from financial instability:
A much needed restructuring of the financial services industry would establish a retail sector focused on the needs of consumers, rather than on the promotion of products and the remuneration of producers. We could look forward to an industry in which new technologies are used, not just to reduce costs, but to deliver better services. We should establish a market in which customer satisfaction is the measure of success. That would be an outcome very different from our recent experience. But it is an outcome we can - and must - achieve (p. 5).
Perhaps even more significant is Kay's (2009) comment, quoting Simon Johnson's (2009) The Quiet Coup. "The financial services industry is now the most powerful political force in Britain and the US." He goes on to say: READ MORE