In Paul Craig Robert’s latest essay he mentions that according to a May 18 Rob Urie CounerPunch article, the executive Director for Financial Stability at the Bank of England, Andrew Haldane (the UK’s version of Bernanke and the Federal Reserve), said the 2008 financial crisis will in the end cost the world economy between $60 trillion and $200 trillion in lost GDP.
A recent speech by Haldane likens our current financial system to an arms race, creating ever-more systemic instability. Haldane describes three kinds of ‘arms races’ in banking and the financial markets (as explained by writer/investigator Nicholas Shaxson):
“….he said these arms races (I prefer to call them races to the bottom) are prevalent throughout human behaviour then adds:
“Finance is plainly no exception. In fact the very structure of finance means that these arms race type behaviours is even more prevalent than in other aspects of human behaviour.”
“The arm’s race from the past relates to banks’ Return on Equity (ROE). This was:
“an arms race, not just a case of keeping up with the Joneses, but of keeping up with the Goldmans. If Goldman posted a ROE of 20 percent, everyone else felt they needed to leapfrog ahead. The simple way that leapfrogging was achieved was by taking on leverage. The result of this arms race on returns on equity was that everyone converged to a high ROE and therefore high leverage and therefore a high risk equilibrium, which sowed the seeds of crisis of the last 3-4 years.
. . .
(drawing on) Philippon and Reshev, important work on returns in finance and non-finance: for investment and universal banking this was a period that isn’t even close to any historical precedent, not even the 1920s.”
“Strong stuff, and there is a similar dynamic going on with top bankers’ pay – with the difference that whereas ROE fell off a cliff in the crisis; bankers’ pay hasn’t. Haldane and others have analysed this dynamic before (see this newspaper article and longer paper, for example), but it helps make his overall case here.
“The next arms race, from the present, concerns high frequency trading. And here he produced some astonishing statistics:
“Those traders now dominate mainstream financial markets, accounting for between a half and three quarters of volumes transacted for example in the world’s major equity markets. One reason they dominate is that they submit huge volumes of quotes in the market, most of which are never exercised: the firms cancel them before they are ever exercised. For every order executed, 60 are cancelled.”
“My emphasis added. This is about stuffing the bandwidth full so that others can’t trade, and aggressively taking advantage of those fleeting moments of superiority. The Flash Crash of May 2010 is one example, but there have been hundreds of mini-crashes since then, he said. Here is another case of an arm’s race producing a public bad.
“The third race is less intuitive, and concerns a flight to safety. In essence, investors in banks all want to have their claims secured against solid collateral, because of their fears about banks’ eventual solvency. But there is only so much collateral to go around.
“It, too, is an arms race: it too comes with a cost. It results in banks’ balance sheets being progressively more encumbered. They are signing away those assets to an increasing number of investors: those assets cannot be signed away indefinitely.”
“I think Haldane’s arguments need to be complemented with further discussions of arms’ races. Financial actors deliberately encourage arms’ races between jurisdictions. “Don’t tax or regulate us too much or we’ll fly off to London / Geneva / Singapore / Hong Kong / New York” the bankers cry, and regulators as a result fail to put in place those capital requirements or other regulatory devices to make the system safer. More on this kind of ‘competition’ here.
“So we have the regulators failing to regulate, leading to unhealthy arms races; and the bankers growing ever more powerful, and using an arms’ race between jurisdictions to tie the regulators’ hands, making them yet more powerful, and . . . so on. A circular race to the bottom. Where will it ever stop? We now have regulatory fatigue, and a public ground down by the sheer weight of awfulness spewing endlessly out of the financial sector.
“This is the trap the world has fallen into. We are in a downwards spiral. Who is going to break this dynamic?”
In the Paul Craig Roberts essay mentioned at the beginning, Western civilization’s very survival has been put into question over our deregulated financial market. It’s clear in my mind where this phony world of paper is going. Unfortunately we are all being taken down the drain with it:
It is ironic that the outcome of financial deregulation in the US is the opposite of what its free market advocates promised. In place of highly competitive financial firms that live or die by their wits alone without government intervention, we have unprecedented financial concentration. Massive banks, “too big to fail,” now send their multi-trillion dollar losses to Washington to be paid by heavily indebted US taxpayers whose real incomes have not risen in 20 years. The banksters take home fortunes in annual bonuses for their success in socializing the “free market” banks’ losses and privatizing profits to the point of not even paying income taxes.
In the US free market economists unleashed avarice and permitted it to run amuck. Will the disastrous consequences discredit capitalism to the extent that the Soviet collapse discredited socialism?
Will Western civilization itself survive the financial tsunami that deregulated Wall Street has produced?
Ironic, isn’t it, that the United States, the home of the “indispensable people,” stands before us as the likely candidate whose government will be responsible for the collapse of the West.