"The credibility of the Anglo-Saxon model of transactions-oriented financial capitalism" has been severely shaken by the great credit crunch of 2007, writes Martin Wolf, the well-regarded economics commentator at the Financial Times. By "Anglo-Saxon" he means that variety of capitalism which is generally practiced in the English-speaking countries of the world.
For Wolf, this is the cause of much disappointment. In his most recent column, he offers seven reasons why he thinks the current market troubles are an epochal event ranking with the Asian financial crisis of 1997 and the tech stock crash of 2000. But he takes no joy in his analysis. Quite the contrary, one gets the sense that he feels betrayed.
- "A mixture of crony capitalism and gross incompetence has been on display in the core financial markets of New York and London."
- "...these events have called into question the workability of securitized lending, at least in its current form. The argument for this change -- one, I admit, I accepted -- was that it would shift the risk of term-transformation (borrowing short to lend long) out of the fragile banking system on to the shoulders of those best able to bear it. What happened, instead, was the shifting of the risk on to the shoulders of those least able to understand it."
(I cannot resist quoting here a passage from my review, published in Salon in 2003, of Frank Partnoy's devastating analysis of modern financial innovation, "Infectious Greed: How Deceit and Risk Corrupted the Financial Markets":
What does it all add up to? In a worst-case scenario: quite a bit of trouble. In the long run, "risk" is being sold off by people who know best how to evaluate it to people who don't know what they're in for.
And I even mentioned collateralized mortgage obligations. Anyway, back to Wolf.)
Here's the best part:
Fourth, do you remember the lecturing by U.S. officials, not least to the Japanese, about the importance of letting asset prices reach equilibrium and transparency enter markets as soon as possible? That, however, was in a far-off country. Now we see Hank Paulson, U.S. Treasury secretary, trying to organize a cartel of holders of toxic securitized assets in the "superSIV." More importantly, we see the U.S. Treasury intervene directly in the rate-setting process on mortgages, in an attempt to shore up the housing market. Either, or both, of these ideas might be good ones (though I strongly doubt it). But they are at odds with what the U.S. has historically recommended to other countries in a similar plight. Not for a long time will people listen to U.S. officials lecture on the virtues of free financial markets with a straight face.
Wolf says this like it's a bad thing. As if the U.S., by its inexcusable actions, has undermined the case for free financial markets. When one could just as easily make a quite different argument. The events of the past year have demonstrated precisely what can and will happen when you don't have well-regulated markets. Left essentially to themselves, the best and brightest of Wall Street proved that they were unable to properly price or manage risk, and instead, through their incessant striving for higher yields created massive incentives for all kinds of irresponsible behavior, from the borrower who lied about their income to the bank that repackaged loans into fancy new securities to the agencies that rated those securities. It's not wrong for government to step in and try to patch things up before the wheels completely fly off the bus. What was wrong was not enforcing any speed limits in the first place.