Monday, 20 April 2009

Plus ca change… Finance Capitalists (still) rool ok?

by Duncan Lindo

A month or so ago the world seemed about to change: bankers were bad, Sir Fred was in hiding, AIG was being punished and a rethink of financialised capitalism seemed possible. Today the bad banker headlines are fading, banks’ results are improving and there’s talk of repaying TARP funds. In fact finance capitalists seem to be winning the struggle by some margin. Three news stories of recent weeks show that so far there has been no fundamental questioning whatsoever of financialised capitalism; indeed is anything the crisis is being used to usher in ever more market-friendly measures.

A review of fair value accounting led to a relaxation of the rules, resulting in less mark-to-market, but no fundamental questioning of the idea that market prices in financial markets are efficient and result in correct allocation of resources – despite the crisis. In a previous blog we explored how expansion of mark to market expands the “everything-for-sale” attitude with it’s short-termist outcomes and ever more power to the financial elites.

The so-called CDS big bang cedes some power from banks to other investment firms such as PIMCO. But let’s be clear here, PIMCO or any other investment firm are just as much interested in trading revenues as the banks. This is not a big bang it’s only a small shift. Are these really the hedgers / investors that the literature makes so central to the ability of derivatives to spread risks? I don’t think so. The contract changes all work in the direction of further standardisation in preparation for central clearing. This flies in the face of returning CDS to be a hedging tool. Credit transfer products such as CDS have become steadily more standardised over the last 20 years inviting ever increasing trading volumes for those who spend the day buying and selling. But a true hedger requires the opposite - a bespoke contract which they will hold until maturity. As explored previously “counterparty risk” is a red herring being used to usher in ever more trading / market friendly conditions.

These two stories trends are manifesting themselves in a slight upturn in the latest banks’ results. Banks have taken advantage of the relaxation of fair value accounting to report better numbers and are also reporting better trading revenues on wider bid-ask spreads. Strange world where large spreads are due to the low level of liquidity that is caused by the financial crunch which was caused by…..banks!

When the vast majority of economists are trained to believe markets work we shouldn’t be surprised that when markets fail (again) the response is to look past the facts and attempt to implement markets yet harder and faster. How long will it take for the realisation to sink in that something more fundamental needs to change? Well don’t hold your breath! It takes a long time to turn a tanker even as it hits a storm, what’s more there are powerful forces trying to ensure the route through the storm is to keep in the same direction but go even faster!

PS: Should we be surprised that the finance capitalists are winning the day when two of their number are holding the most relevant posts in the White House? As Stiglitz puts it: “America has had a revolving door. People go from Wall Street to Treasury and back to Wall Street. Even if there is no quid pro quo, that is not the issue. The issue is the mindset.”

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