The price of everything

Mixed reviews for new release

 

“It has become appallingly obvious that our technology has exceeded our humanity.

 

-       Albert Einstein.

 

(Davos, Canton of Graubünden, Switzerland – February 1.) With their customary flourish, western governments unveiled their widely anticipated new vapour-ware product yesterday, dubbed the mi-God.

Arriving with actually no new content or special features whatsoever despite months of hype, the twelve-foot thick tablet looks like a giant lead balloon and met with hesitant reviews from the twitterati.

 But the mi-God’s co-founder and visionary chief architect, Gordon Brown, called it a “revolutionary product” that would enable users, and bankers in particular, to carry on living and thriving in their imaginary worlds, free from the constraints of a normal economy, any kind of ethics, or a competitive open market.


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Sympathy for the devil ?

 

“The whole world is drinking poison to quench its thirst. It may feel like relief now, but the sickness will strike in 2012.”

 

-       Economist Andy Xie, referring to capital injections to stabilize the financial system.

 

Karl Marx held that capitalism would end through the revolutionary actions of communists. If capitalism does end as a result of a financial crisis that many presume to be over but which we believe is merely in abeyance, it will have come about simply by collapsing in upon its own self-interest. That may actually be a little unfair, not least in semantic terms; the OED defines capitalism as a system which favours the existence of capitalists – a term which it goes on to define as “one who has capital available for employment in financial or industrial enterprises”. There is, in turn, a tendency to conflate capitalism with free markets. And the irony, of course, is that we now have neither. Banks are bereft of capital, and the free market has in large part been suspended by government fiat (and governments aren’t exactly overflowing with capital either). So the government now controls the price of money (thus impoverishing savers), and despite its ownership of much of the banking system, seems powerless to stop the banks it owns from refusing to lend much of it out – but equally powerless to prevent the banks it owns from lending money to foreigners so that they can take over domestic businesses with the associated threat to domestic jobs. If we outsourced our government to al-Qaeda it could hardly make a bigger mess of things. The alleged unwillingness of capital-light banks to lend may also be missing a broader point: as per Japan’s experience during its own balance sheet recession, cutting the price of money to zero has little impact when few really want to borrow and many businesses and individuals are in a greater hurry to pay down their debts than to take on fresh ones.


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The tyranny of conventional thinking

 

“What you as the City of London have done for financial services, we as a government intend to do for the economy as a whole.”

 

-       Gordon Brown, Mansion House speech, June 2002.  

 

Bloomberg reported rather excitedly last week that Goldman Sachs has retained its appeal to MBA students despite the bad press the brokerage company bank has received over the past year. In a recent survey of 6,207 MBA candidates by Universum Group, the great vampiric squid and financial services firm kept its fourth place in a poll rating students’ ‘most attractive employers’ behind, somewhat depressingly, consultants McKinsey and Bain & Co. Google was ranked first as most preferred prospective employer. MBA students can hardly be blamed for following the money, but one can legitimately ask why the opinions of MBA students are apparently so important given that MBA groupthink is surely one of the less examined factors behind the global financial crisis in the first place.

US President Obama last week took a leaf out of the UK anti-banker playbook and ignited his own jihad against the “obscene” bonus culture. Robert Jenkins of the London Business School articulated the problem well in a letter to the Financial Times:


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Nothing as it seems

 

“1.40. The Mouse That Roared.

*** Wry comedy. A tiny country faces bankruptcy.”

 

-       Film listing in The Radio Times, Sunday 10 January 2009.

 

Whatever the dynamics of markets or current events, we tend to view the world through a prism of discrete annual cycles. So, simplistically, if 2008 was the year of crisis; and 2009 was the year of policy-driven recovery, what will 2010 bring for investors ?

Political uncertainty, for one, in the UK and elsewhere. The Labour administration shambles wearily on, unloved by much of the electorate and with the leadership unrespected if not discredited by its own senior figures. The government finances are sufficiently wrecked that the next election will be a poll that nobody sane would want to win. The threat of a hung parliament hangs over the year like a Damocles sword, but it may be that fears for a new government with no outright majority are overdone; an uneasy coalition recognising the gravity of the UK’s fiscal situation could still be a better outcome than another Labour administration in complete denial about the scale of the debt burden and the draconian spending cuts required.

Another grave problem surrounds the timing for the anticipated withdrawal of quantitative easing by the Bank of England – and others. Central bank Gilt purchases may be the last dike separating a flood of new issuance from the disinterested private sector vacuum awaiting it. And this is a problem with international dimensions. Having supposedly saved the markets and banking system through extraordinary levels of stimulus and monetary intervention, western governments now face the unenviable task of reversing it.


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Happy New Fear

 

“Tradition is what you resort to when you don’t have the time or the money to do it right.”

 

-       Kurt Herbert Alder.

 

Public sector strikes. Growing union militancy. Increasingly vicious and intractable terrorism. Governments losing their grip, both upon the economy and upon social stability. Currency crisis. Food shortages. Readers with an interest in time travel can revisit the turbulent decade of the 1970s via the BBC’s excellent ‘Rock’n’Roll Years’ documentaries (1974, for example, is here). Alternatively, simply stick around: history seems destined to repeat itself. As an enfeebled Labour administration lurches toward what seems likely to be electoral liquidation, there appears to be a disconcerting ignorance – or perhaps a simple refusal to believe – by much of the British public of the inevitable retrenchment in social services and welfare provision that lies ahead during 2010. The UK government has done itself few favours. While the MPs’ expenses scandal was largely an equal opportunities blunder, Iraq War II was a partisan and cynical exercise on the part of New Labour under Tony Blair that has done much to extinguish faith in the political process. What faith remains in British politicians will be sorely tested by the tough choices that lie ahead, for whoever is unlucky enough to have to take them. Chancellor Darling was allegedly prevented in his Pre-Budget Review by Gordon Brown from taking the pruning shears to Labour’s unruly spending projects; that merely forces the emergency Budget likely to follow this year’s general election to be even more draconian.


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