Sunday, 20 September 2009

Disingenuous basterds*

Lord Adair Turner’s name always reminds me of Red Adair, the American bloke who used to put out oil well fires. Except the British Red hasn’t so much been putting out fires as fanning heated debate what with his recent comments in Prospect about the social utility of certain financial activities. Not to be outdone the Goldman Sachs CEO subsequently put on much the same sackcloth and ash suit (the same tailor perhaps?) when he wittered on about the socially useless nature of some investment banking products.

So there we are then the chair of Britain’s Financial Services Authority and the CEO of the world’s most prestigious investment bank now both think social justice matters and that some of the activities they have responsibility for are unjust or at least useless. Brilliant! Job’s a good’un cos I’m sure the global financial system is about to be changed dramatically for the better. Alternatively, both were spouting intellectually vacuous shite that by obscuring more than it reveals helps preserve the status quo.

First off let put Red in his place. Now if I had a turd needing polished he’s the very man I’d ask to do it, I mean the man is a legend at that kind of stuff, give or take the pension commission he chaired failing to anticipate what Eastern European migration might do to the UK demographic regime. That’s as maybe you might think, but just look at the magazine he used - using Prospect avoided the left/right tribal loyalties associated with the New Statesmen or the Spectator, making his message more likely to be heard.

This it certainly was judging by some of the mince it generated, like the shite spraffed by this bod - “His comments will also help counter accusations that financial regulators have been captured by the industry they are supposed to police”.

or this one - “Lord Turner describes himself as a “socially concerned liberal capitalist”. His friends call him a “public intellectual”. For some bankers in Britain and beyond he has become a dangerous foe: the man on a mission to cut the financial services industry down to size.”

Alternatively, Red is someone acutely aware of the medium and of public perception, but a tad less good at the message. I mean a public intellectual? You must be fucking joking. Compared with the Bank of England’s Paul Tucker and his deliberate invocation of the enlightenment when he discussed Redrawing the banking social contract, Red’s memory only stretches as far back as the early 90s New Labour guide to wanking on about social justice.

And it’s not even as if any banker need fear the rhetoric because the “social” is a rank rotten basis for arguing either for or against any financial arrangement largely because it's too vague to use. I mean think about it for a mo, given the existing legal industry and all its accumulated knowledge, training and expertise still takes years to reach decisions about criminal justice, how likely are we to get meaningful decisions about any other kind of justice? And that’s not even taking into account the fluid and contested nature of the "social”.

Besides, what with Alan Greenspan himself talking about how "innovation and deregulation have vastly expanded credit availability to virtually all income classes", it would have been a piece of piss once upon a time to argue sub-prime mortgages where socially just and useful (give or take the hard sales techniques used). Rather, invoking the “social” strikes me as no more than a recipe for doing nothing give or take establishing the kind of commission Red usually chairs.

But, it does serve the political purpose of sounding appropriately touchy feely at a time when millions of us feel as if we've had our wallets "touched". Even better it draws attention away from more substantive arguments that are both easier to prove and translate into actual policies (yes I know there’s probably already consultancies trying to sell advice on the social utility of this or that and all that kinda bollocks, but they’re bollocks).

Lets illustrate this with a quick example - so there's you, a financial
engineer whiz kid quietly nursing a pint when some bloke wonders over
and says "oi, bawheid that CDO squared doodly-dad you sold me is socially
unjust!” to which all you say is "mebbes aye, mebbes naw, but that’s nancy bollocks whereas what I sold you definitely creates wealth and tax revenues. So shut it bawjawz!”

Except, on balance complex financial products don’t create even medium-term wealth aside from the fees paid to whoever sells them. Rather, the real argument against gadzillions of pounds worth of financial instruments is that they impose
clear economic costs, misallocate finite resources and, by undermining investment in productive capacity, constrain economic growth.

You don’t need to take my word on this, here’s what John Kay said recently “The social rationale of financial markets is that they discover information and create liquidity. But the benefit to society of more informed guesses of what the MPC will announce in an hour's time is small. The benefit of creating liquidity at 11am, when the decision is uncertain, rather than at noon, when it is known, is also small”

He continued - “Foreign exchange dealing is necessary to enable businesses to export and import and to handle the capital flows that are the converse of trade surpluses and deficits. Some speculative trading in these markets does indeed improve information, smooth prices and aid liquidity. But the volume of dealing that is needed to serve these purposes does not need to be several hundred times the underlying volume of merchandise trade. That level of activity creates instability, not stability, in foreign exchange markets”.

So there you are then, much of what goes on is either trivial from the perspective of the economy as a whole – but incurs clear transaction costs i.e. misallocates scarce economics resources – and/or causes instability, which is a clear disincentive to invest (just think of the various arguments for inflation targeting and/or the perils of boom and bust economics, fer instance). That’s OK you might think given you can always buy a hedge against currency fluctuations. Except chances are it would be from the same institutions whose currency trading is making a significant contribution to the volatility you’re wanting to avoid in the first place i.e. it’s like buying home insurance off a burglar.

If that wasn’t bad enough, hedging is itself a risky business judging by the billions recently lost by the global airline industry, which is a shame because if they hadn’t lost that money they might be less inclined to cut services used by the public, make fewer staff redundant and buy more planes.

And it gets worse if we’re to believe the findings set out in a US Senate Permanent Subcommittee on Investigations report on “The Role of Market Speculation in rising oil and gas prices,” which found speculating on oil price futures significantly increased the cost of the oil we all buy to fuel our cars, heating and (in the US) air conditioning, money that we might otherwise have chosen to spend on other things.

I’m trying to think if “socially useless” quite captures the economic damage much of what passes for global finance actually does to the global economy. Nah, not in the fucking slightest.

As for policy prescriptions well Willem Buiter’s comments on CDOs, the things that helped feck AIG, provides one example; as these, for the most part (by volume and value) simply involve speculating on the likelihood of a company defaulting on its debt and can have a market value several times the underlying debt, restricting the trade in CDOs to businesses that actually have an interest in the underlying asset would limit their impact and the resultant volatility. Similarly, restricting the purchase of oil futures to actual users, producers, refiners etc., would lower the cost of living for all of us. Hmm, can’t see that happening, it’d be socially unfair to speculators for one thing.

* no even as if Inglourious Basterds is much cop either. Is it just me or does the first bit come across like an old Stella Artois advert?

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