13 Oct 2008

Why Brownism does not equal anti-capitalismo

These are Nick Hildyard’s thoughts on why neo-liberalism is not quite in retreat, written last week, these words need to be read in the context of resurgent Brownite triumpalism over the ‘nationalisation/bailout’ of the banks today…political and ideological struggle is necessary if we are to get the monster moving in the appropriate direction.

[T]here at least five reasons to be sceptical of claims that neoliberalism is in willing (or even unwilling) retreat.

First, no measures (beyond what has been necessary to rescue the banking sector from imminent collapse) and no regulatory reforms of any long-term significance have been taken by any of the major industrialised countries in the wake of the credit crunch.

Short-selling of shares in banks has been (temporarily) banned to protect banks from the very instruments they have been promoting as essential to “price discovery”, but no similar bans have been instituted to protect ordinary people from the shorting of shares in the companies they work for. Little action has been taken to assist the vast numbers of people who go hungry because of speculation in foodstuffs, nor to protect mortgage holders from having their homes taken away from them. And, while steps have (rightly) been taken to protect those with deposits in banks, those with no savings remain at the mercy of the market. Meanwhile, hedge funds remain unregulated, and no measures have been taken to ban the use of more complex derivatives. Indeed, on present form, whatever wider new regulations are eventually introduced to rein in the financial sector – and there will be some – they are likely to be carefully crafted to ensure that the recent nationalisations that governments have undertaken do not threaten broader structural change in US and European society.

Second, calls for regulation should not be taken as inevitable harbingers of change. De-regulation is certainly a hallmark of neoliberalism – but so is regulation. Indeed, the free market “reforms” of the past twenty years have always been accompanied by re-regulation, designed more often than not to “lock in” neoliberal policy changes (the EU’s Maastricht Treaty is a case in point, making it illegal under European Union rules for member governments to borrow more than a fixed percentage of their Gross National Product; the World Trade Organisation’s General Agreement on Trade in Services [GATS] is another). The prospects that the regulatory fallout from the credit crunch will “reverse” neoliberalism, without accompanying social organising, should not be taken as inevitable, the more so when the proposed reforms are intended to “save” the free market – and, even, unashamedly, to “make Wall Street more profitable.”

Third, while blind faith in free markets may now be under question, the emphasis amongst mainstream policy makers is on “blind”. Despite isolated calls to “learn from our mistakes and act pragmatically to regulate markets as they exist in fact, not theory”, the proposed reforms are underpinned by the belief that markets are the most efficient means of distributing resources within society – and that economic actors, from bankers to consumers, act rationally in all their economic transactions. All that is required to prevent future “market turmoil” is to provide more information and a little more policing to catch those who break the rules. Yet, as Jeremy Grantham comments in the Financial Times, if the current crisis has shown anything, it is that “Efficient Market Theory” is a “complete illusion”.

Economic actors do not act rationally. They follow crowds, take decisions to keep in with other colleagues (rather than because they have diligently assessed the risks for themselves), and are carried away by the sheer adrenalin rush of clinching a deal. Regulations that remain imprisoned by theories that bear no relation to reality are likely to lead to more of the same, rather than a change in direction.

Fourth, the financial services industry has powerful allies and, internationally, constitutes one of the best-organised political lobbies in existence. Regulation will undoubtedly follow the bail out of the banks in the USA and Europe – but it is likely to be the weaker precisely because the bailouts have been agreed in advance of the regulation. It is worth recalling that there were calls to regulate derivatives following the financial “blow up” of 1994 when many derivative contracts went sour after interest rates suddenly changed. For a while “everyone hated derivatives”558 but, after lobbying by the International Swaps and Derivatives Association and a recovery in the markets, regulatory pressure died away and the derivative bricoleurs went back to their old ways. Given that those being called in to advise on or draw up new regulations are often the very people who played a major role in creating or profiting from the derivatives and securitisations that lie behind the mess, the prospects for radical overhaul of the financial system would appear slim.559 Moreover, with the private sector now financing much that the State used to finance (from railways to many previously state-run industries) – and securitisation being one of the principal ways in which the banks raise the funds to do so – the bricoleurs have governments over something of a barrel: regulate us too hard and you will need to increase taxes to make up for what your new rules prevent us from raising on the capital markets. Absent public pressure on government for the State to take a more interventionist role in the economy, it will be a brave politician that resists such arguments.

Fifth, even if the proposed regulations were introduced, they are unlikely to contain the risks of future collapse in the absence of deeper structural changes within society more widely. Whatever new measures are introduced, the bricoleurs will seek a way around them – and engender new risks (and new profits) in the process. Moreover, the bricoleurs are currently better equipped to circumvent the rules than the regulators are to enforce them.

As The Economist dryly notes:

“Naive faith in regulators’ powers creates ruinous false security. Financiers know more than regulators and their voices carry more weight in a boom. Banks can exploit the regulations’ inevitable blind spots.”

Moreover, talk of international action to close the loopholes that regulatory arbitrage exploits frequently ignores the profound constraints that neoliberal-inspired international regulations have already placed on the ability of national governments to act. Moves such as banning options trading in key commodities, which India introduced during the commodities boom of mid-2008, will not be available to many countries if current proposals under the latest round of the World Trade Organisation’s negotiations on a General Agreement on Trade in Services (GATS) go through.562 Given international organising, such agreements could be undone – but this is not even remotely on the official agenda for reform of the financial services industry. The obituaries to neoliberalism have not, it would seem, yet reached the World Trade Organisation.

If neoliberalism is indeed to be laid to rest – and risk in the financial system not to trigger further meltdown – the challenge surely goes beyond formulating new rules for the financial sector, necessary as this undoubtedly is. Where risk is viewed at a distance and reduced to number crunching and complex mathematical models, the impacts of specific decisions on people and their lives and livelihoods are merely abstract. “Repopulating” risk assessment so that parties to a contract know through personal contact who will be affected by any given action and how brings a different view of risk – and builds a different moral economy to that which currently dominates finance, one based on a different calculus of what is acceptable and unacceptable. Greed and fear are not given as the drivers for market behaviour as they have been – unless markets are organised to allow them to become so: solidarity and prudence are equally possible moral underpinnings. Those who make deals do not have to behave as sociopaths once they cross the threshold of their workplace: rooting economic behaviour in different social institutions and relationships could produce very different outcomes. Bankers know this, which is one reason why new recruits must be “socialised” into abandoning behaviour towards others that would be required in the outside world. The elaborate rituals and initiation rites that accompany bank training programmes – and which have been well described by ex-bankers – testify to the “unnaturalness” of the “Greed-is-Good”, “Big Swinging Dick” culture of today’s investment banks.

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