Wednesday, January 25, 2017

Free-market capitalism's assault on economics, politics, and society

Unfettered free-market capitalism has distorted price signals, rules of the game in democracies, and shifted social frames of references for the worse. In simple terms, it has distorted economics, politics and the society. 

1. It is now widely accepted that while there are pockets of market failures in an economy, the markets in the aggregate are efficient and reflect the interests of the society at large. Accordingly, a rising stock market, for example, reflects promising aggregate economic prospects.   

But consider the recent gyrations in global equity markets during the US Presidential elections and its aftermath. The same markets which were initially spooked at the prospect of a Trump White House, rebounded with vengeance on the realisation that the new President's pledge to reduce corporate tax, ramp up public spending on infrastructure, and indulge in protectionism would all boost the incumbents in corporate America. If someone landed up straight from Mars and saw the post-election US equity market rally, they cannot but not get the impression that the markets are rejoicing at an expected result.

Never mind the contradiction in the prospect of reduced tax revenues and increased public spending at a time when national debt is touching record high. Never mind that protectionism, apart from "cosseting the losers", would increase prices and lower the real incomes for the vast majority of Americans. And never mind, the uncertainty associated with a capricious President Trump, including the potential for unleashing very destabilising geo-political forces. Though political and economic uncertainty has become the norm for the US, in a convergence with the developing countries, markets seem non-plussed. 

Clearly the health of Wall Street is no longer a credible touchstone for that of Main Street. 

2. The Economist, the conscience keeper of free market capitalism, commenting on the effusive response of stock markets and investors to the rise of protectionism and industrial policy that will "cosset losers" (instead of "pick winners") under right-wing leaders in UK and US, lets this slip
Imagine the reaction of investors if left-wing leaders were in charge. If President Bernie Sanders were berating American companies on Twitter, or Jeremy Corbyn was pledging unquantified British government support to manufacturers, markets would be plunging.
This is profound. It simply means that equity markets and investors are biased against non-right wing governments. So much so that right-wing governments can adopt completely non-right policies and still get support from investors and the market. Quite simply, the remorseless march of free market capitalism has dramatically shrunk the space available for political action. 

Consider the example of policies to address widening inequality or excessive financialization. Any meaningful effort to address widening inequality has to, perforce, involve redistribution, in some form or the other. But markets will recoil at even the mention of the R-word. Similarly, any reasonable attempt at addressing financial market imbalances will have to involve greater regulation, which would immediately arouse adverse market reaction.  

Democratic politics has become the captive of financial markets and the space for political action has receded dramatically. 

3. Finally, markets have distorted our social frames of reference. Consider the reams of stories that have been circulating around the global activities of Goldman Sachs. The tenacious and indefatigable  Matt Taibi captures these pretty undisputed facts,
Goldman has been implicated in the trafficking of toxic mortgages, a sprawling state corruption case in Malaysia, the manipulation of world commodity prices and a heinous episode involving Greece in which the bank helped to mask the country's ballooning debt while simultaneously working with JPMorgan Chase to create an index for betting against Greece's economy.
One can add the disgraceful duping of Libya and many more. None of these appear to have had any effect on Teflon Goldman Sachs. After promising to "drain the swamp", the "vampire squid now occupies the White House"! The lack of social indignation in the US is stunning. 

This takes us to the point about actions of Wall Street institutions in the lead up the sub-prime crisis. Goldman again led the pack, with the dumping of its toxic portfolio of failing mortgage investments as collateralized securities on its unsuspecting clients. In simple terms, Goldman was betting against its clients. And this had the knowledge of everyone in its Firmwide Risk Committee. The Levin-Coburn report of the Senate Permanent Subcommittee on Investigations clearly documents these transactions by Goldman. After its investigations, instead of pressing criminal charges on the Goldman leadership, the Justice Department and the Securities and Exchanges Commission (SEC) agreed for a financial settlement.

In a world of twenty or thirty years back, Goldman's actions would have seen unambiguously as criminal transgression, shaken up the public conscience, and triggered mass outrage. The Justice Department would have been been forced into pressing criminal charges against Goldman executives. Instead, the public reaction is easily deflated with a financial settlement. Never mind that the executives do not shell out even a penny and shareholders took the tab. Heads I win, tails you lose.

Today, eight years after the sub-prime crisis, not one top executive of a big financial institution has been indicted on criminal charges, leave alone gone to jail. Instead shareholders of these institutions have paid hundreds of billions of dollars in fines, while the same executives have risen further and fattened their purses.

The moral hazard has become entrenched among financial market executives that leave aside risk taking, even unethical and fraudulent practices have only has an upside - make money if the it pays off, or let shareholders take the hit if the transaction is exposed. Criminal indictment, leave aside prison terms, are off the table. And all this hardly elicits any more social indignation. Settlements, financed with somebody else's money, are the new normal for a financial market executive as well as for the society at large.

Now that the social frames of reference on financial sector misdemeanours has shifted dramatically, it may be interesting to get a social pulse about what constitutes a financial crime? 

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