Finance at the Threshold

Rethinking the Real and Financial Economies

Christopher Houghton Budd

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317135180
• Edition: 1
• Topic: Business
• Subtopic: Financial Risk Management
• Index: Business

Every banking crisis, whatever its particular circumstances, has two features in common with every previous one. Each has been preceded by a period of excessive monetary ease, and by ill thought out regulatory changes. For many the recent hiatus in inter-bank lending has been seen as a blip - enormous in size and global in scope, but, nonetheless, a blip. Finance at the Threshold offers a unique perspective from an English economic and monetary historian. In it the author asks: Why did the banks stop lending to one another, and why now? Was it merely a matter of over-loose credit due to the relaxation of traditional prudence, or did global finance find itself at its limits? Have government bail-outs saved the day or merely postponed the problem? Christopher Houghton Budd offers a radical view of the global financial crisis, spanning a wide gamut of current thinking. He argues that we need, above all, to overcome the left-right divide so much taken for granted today, and promote financial literacy to young people. His contribution to the Transformation and Innovation Series claims that global finance has brought us to the limits of what mechanistic economic explanations can capture. New ideas and above all new instruments are needed so that innovation can shift from its dexterous exploitation of inefficiencies and turn its attention instead to fresh initiative. Finance at the Threshold is essential reading for academics and practitioners concerned with financial and economic policy and needing to develop a sense of the history thus understanding the forward prospects for global finance.

PART I

Loose funds may sweep the world disorganising all steady business …

– J.M. Keynes

CHAPTER 1
Why Nobody Saw It Coming

This book offers a radical view of the global financial crisis. After describing its methodology, including its reasons for using Rudolf Steiner as a main reference, it provides first a chronology of the global financial crisis and, second, various explanations of it, before proceeding, third, to its technical details. It then identifies its own, one hopes unique, guiding intuitions, prompted in part by Steiner’s socio-economic analysis, in order to present its own theses. Their ‘political impossibility’ apart, the book culminates in outline policies capable of practical implementation. Its aim is to lead the reader into a new landscape – the world we in fact occupy but not as we currently conceive it. Spanning the wide gamut of current thinking, the book argues that we need above all to overcome the Left–Right divide, so much taken for granted today, and to promote financial literacy on the part of young people.

1.1 Themes

This introduction serves a number of purposes. The first is to introduce the main themes with which this book is concerned and which will serve as its base narrative. The second is to outline its methodology. Third, to provide a preliminary reference to associative economics, as the perspective adopted here is known. Fourth, to contextualise the use of Rudolf Steiner as a main reference. Fifth, a word is needed to explain what is meant by ‘innately English’, which is what the author claims to represent. Last, because it is a feature of associative economics to use plain English and avoid jargon and mystification as much as possible, certain terms will be new or have meanings other than are usual. Where these terms are deemed fundamental to the book’s treatment of the global financial crisis they are made clear at the outset. Less crucial terms are dealt with as they arise.

In the course of writing this book a number of themes kept presenting themselves, either in the research material or in the author’s mind. Although they are reiterated and elaborated as the book unfolds, it feels right to draw attention to them at the outset.

1.1.1 ‘CRISIS, WHAT CRISIS?’

The first of these is ‘Crisis, what crisis?’ Writing in the second half of 2009 on the topic of the global financial crisis did not prove easy. Was the crisis still happening? Or was it over? Indeed, had it ever existed? When in the spring and early summer of 2009, Goldman Sachs and other Wall Street firms posted their highest ever profits,1 what, one wondered, was the US government’s September 2008 $700 billion 2 bank bailout all about? And if what one writes in late 2009 is not to be published until some time in 2010, would it be worth the paper it was printed on? Presumably not if the crisis had passed, or if one’s analysis of it proved defective. But definitely if the crisis, as this book contends, was not really financial so much as epistemological; not really of a moment, but ongoing. Chronic rather than acute.

1.1.2 AN EPISTEMOLOGICAL CHALLENGE

If colossal government intervention to prop up the balance sheets of banks and car makers (and in Australia, more intriguingly, school buildings) in fact did nothing to address the epistemological challenge, would it not therefore be reasonable to expect the ‘crisis’ to continue, albeit in metamorphosed form?

Of course, ‘crisis’ is not a word one rushes to use in the world of finance, lest it exhibits that most typical of financial characteristics – recursive causality – and indeed makes critical what might, if less dramatically described, have remained only a ‘blip’. Great care has been taken in the literature to define the term. There is, for example, a distinction made between a banking crisis, which is about a loss of liquidity and often prompts government intervention (though conventionally this ought not be for a single bank unless it threatens to bring the system into collapse), and a financial crisis, which entails a breakdown of the payments system. In Anna Schwartz’s well-known definition (1986: 11), ‘a financial crisis is fuelled by fears that the means of payment will be unobtainable at any price … [Its essence] is that it is short-lived .…’ By this definition, however, it is not clear that the global financial crisis is properly named on either count, since it has more to do with banks’ fear of non-return of loans.

One of the reasons for the careful definition is to ensure that such an event can be quarantined in the country of its origin. In a study made at the end of the 1990s, topical then because of the collapse of the Thai Baht, the demise of Asian ‘tigers’ and so on, Williamson and Mahar (1998) surveyed 33 countries which had experienced crises since they had been financially liberalised. Two-thirds of these crises were attributed by the authors to financial liberalisation. In these terms, Long Term Capital Management (LTCM) in 1998 was not a crisis, but Argentina in 2001 was. Neither, however, was global in scale or scope. To speak of a ‘global financial crisis’, therefore, marks something of a threshold in our understanding of economic and monetary evolution. If it does warrant the title, matters are immediately made more complex because one has also to ask whether such an event can happen more than once. In October 2008, Bank of England deputy governor, Charlie Bean, warned that the pain is just beginning, calling the situation the ‘largest financial crisis of its kind in human history’. Whatever its ‘status’ in the annals of human experience, one certainly needs to ask whether it will, indeed can, be a historically ‘overnight’ affair or ought to be seen more realistically as a protracted occurrence both beginning before and continuing after its more obvious expression.

1.1.3 THE FUTURE OF FINANCE

Accordingly, the book has been written for those who are concerned where the future of finance might lie. Professionally, the readers held in mind when writing it were those in such policy and practical areas as are covered by the wide-ranging categories of finance, investment and accountancy, business transformation, sustainability and social responsibility. Especially included were academics linked to financial districts (e.g. The City, Wall Street), policy analysts and central bankers and their advisors. But there is another group of readers, those, namely younger people, who are seeking fresh perspectives and wanting a less bewildering sense of history and thus of the forward prospects of global finance than many economists seem able currently to provide.

The book’s main thesis is that current developments – not only the so-called global financial crisis – are far more readily understandable and even predictable than many commentators would have one believe. When Queen Elizabeth asked on her November 2008 visit to London School of Economics, ‘Why did nobody see it coming?’, she may have been being polite to her hosts or even exercising extreme constitutional caution. For there are many who were not in the least surprised – witness Dirk Bezemer’s 8 September 2009 letter to The Financial Times (see 2.3.8: Dirk Bezemer).

1.1.4 PREDICTABILITY

Predictability is the bedrock of economics. It cannot be treated lightly therefore. Either we can or we cannot foresee economic events. It is not just a matter of the psychology of addiction, the well-known difficulty of leaving the gaming table when ‘on a roll’, herdism in markets and any other number of relatively banal explanations of human behaviour. Nor does it help much to remind ourselves that mortgages issued at more than three times income entail well-known risks. Or that real estate values bid up by speculation beyond their cash-rentability would normally be discounted by the prudent. If we know this but ignore it, was greed the reason for dispensing with conventional practice, as many claim, or has some event of a fundamental nature taken place in our times, and maybe still is taking place? The prospect should at least be entertained, because, if so, getting the genie back in the bottle by returning to time-tested prudent practice may not be so easy.

1.1.5 A SINGLE WORLD ECONOMY

Simply stated, this book’s thesis is that humanity has crossed a threshold into a single world economy but one comprising more than one polity and to be shared rather than fought over or ‘colonised’ by the most powerful. A single global economy that we simply have to learn to conceive and conduct as if it were a global commonwealth. As Keynes (1919: 11) famously said at Versailles:

The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages; or he could decide to couple the security of his fortunes with the good faith of the townspeople of any substantial municipality in any continent that fancy or information might recommend …

1.1.6 CHOIR OF CULTURES

Such an economy entails a severalty of all the world’s peoples*3 now brought together in one economy such that no one of them can control, ransom or fight over it. It will be (already is?) an economy that depends on each people identifying its global comparative advantage, meaning what it can especially, even uniquely, bring to humanity’s table. More than this, the huge diversity of the world’s peoples will act, as does individual diversity, as a kind of perpetually functioning difference in levels on which forward movement of economic life depends (or will come to depend). Put poetically, the concomitant of a single global economy will be a choir of cultures, each able to sound its own note but able also to include the tones of all the others.

The case is made that this circumstance has obtained ever since World War 1 and that overlooking (or avoiding) it has been the cardinal feature of humanity’s economic affairs ever since. We have overlain this basic fact with all manner of theoretical and geopolitical constructs that would have us continue to believe that economic life is not all-of-a-piece and so can continue to be understood by ideas that are essentially atomistic. A part can never become the whole, however. It can only ask what is its contribution to the entirety. One cannot speak any longer of a national or a nation’s economy (e.g. the British economy). One can only ask what is the role of Britain (or any country) in the world economy. Nor can the answer be to take it over, reign supreme or beggar one’s neighbours. In a world economy we are our own neighbours.

1.1.7 DENATIONALISED ECONOMIC LIFE

Unexpectedly, perhaps, the globalisation of finance has itself brought us to this point. While it may have been thought of as a way to give preference to an essentially Anglo-Saxon* economic modality over all others, its real effect is to denationalise economic life, emphasising the one-worldness of modern economic history. The global financial crisis is in principle not that at all, therefore. It is primarily an epistemological crisis. Once we understand that, overcoming it is immediately in our gift. It is no longer unpredictable or undoable. Indeed, it moves from being a crisis to an event, one moreover that entails conceiving modern economic life as a partnership, not a quest for supremacy. This shift in our mindset, but also in our behaviour – learning to walk a different talk – is where we should put our focus. Then we will step into a vital, if to-date little-credited stream of history; one that issues from the future, where in reality we already are, rather than from the past, where we fancy economic events always have their origin. Then, instead of looking perplexedly at economic history as if it were a fait accompli of which we are the victims, we will regard it as something ever-becoming of which we are the authors.

1.1.8 ASSOCIATIVE ECONOMICS AND RUDOLF STEINER

The thesis of a single global economy as represented here belongs to the nomenclature of associative economics and is borrowed from Rudolf Steiner, but its elaboration is the author’s own. Moreover, it is one that pretends to be quintessentially English. A particular eye has been put to a particular lens. While this will entail divergence from conventional perspectives, there is no intention to diverge from the events they seek to explain. On the contrary, the aim is a convergence of phenomena and explanation of them.

1.1.9 INNATELY ENGLISH

Written in an accessible style and designed to treat the global financial crisis in a manner that will continue to be of relevance and interest even after its current intense topicality has evaporated, the book takes an approach that aims to be innately English – that is to say, not English-speaking generally and not American, but standing in the stream of English economic history with its central concern being, to quote Hartley Withers (1909: 294), to act as the City of London’s ‘monetary physician [whose patient] cannot afford, under any circumstances, to be sick’.

1.1.10 THE CITY OF LONDON

Citing the City of London is a metaphor for standing at the centre of both the British economy and that of the earth as a whole. Here two important worlds coincide. For it is fanciful to equate Britain’s economy with manufacturing, important as that has been and in certain respects still is. Britain was far more, and far more consistently, the entrepôt port of the world than its workshop. Especially the entrepôt of finance. ‘Greenwich Meantime’ says it all. London is located midway between the beginning and end of the world’s day. The most crucial policies will continue to be those that maintain London – in the eyes of the world – as the deepest, broadest and most effective pool of world liquidity. Losing that status is the greatest risk run by advocates of abandoning sterling in favour of either the euro or the US dollar. Not for nothing, perhaps, is the former ‘pool of London’ now the locus of global financial markets. Indeed, if, as suggested by Elisabeth Gilbert in her novel, Eat, Pray, Love (2006), important cities can be summed up in one evocative word, such as ‘success’ for Los Angeles and ‘achieve’ for New York, then perhaps London’s synonym is ‘liquidity’.

1.1.11 AT THE THRESHOLD – BETWEEN THE REAL AND THE FINANCIAL ECONOMIES

Maintaining the patient’s health remains paramount, but this means that the monetary well-being of the world is a function of Britain’s. And vice versa. In the realm of finance, Britain and the global economy live in a symbiotic, even osmotic, relationship. Quite where the one stops and the other begins is not easy to tell. Likewise, how can one tell where the ‘real economy’* stops and the ‘financial economy’* begins? It is by no means easy to occupy that most crucial of all monetary places – the threshold between two distinguishable yet not actually separable realities. This is the problem that this book explores.

1.1.12 NEW FINANCIAL INSTRUMENTS

At least, it is written from that place. It considers the global financial crisis as something paradigmatic, arguing that global finance has brought us to the limits of what mechanistic economic explanations can capture. New ideas and above all new instruments are needed, so that financial innovation can turn its attention to new, more fertile ground. We have become accustomed to linking such innovation with its dexterous (to date!) exploitation of the inefficiencies consequent on the discrepant relationship between state and economy and between national and global economics. But it is in the nature of such activities to cause the world to shrink, resulting in a reduced field of endeavour for innovation.4 Innovation thus turns to the invention of what one might call surreal products, such as high-frequency trading and the like. Once the condition of a single global economy has been achieved, however, such innovation necessarily rebounds on itself, at which point we need to give thought to the one place that new value can really come from – not from capital doing business on its own account, as it were, but from the uncollateralised capitalisation of fresh initiative, especially on the part of young people.5

1.1.13 INVESTING IN YOUTH

This culminating focus on young people has three grounds: (a) that today’s youth needs the orientation of a clear financial paradigm, (b) that they are less hide-bound and more able to grasp new thinking, and (c) that the time and energy needed to adjust to the new circumstances humanity now faces are generational. We need to be brought up differently, both as to the way we think about finance and the way we behave in regard to it. In short, we need to equip future generations with an understanding of finance, both technically and in its deeper aspect, that previous generations lacked.

1.2 Methodology

In finance, methodology – that is to say, the way one organises one’s thinking, orders one’s thoughts and ideas – is especially crucial because in finance thoughts are as things. Finance occupies an invisible realm in which what we ‘see’ are the ideas by which we comprehend (or try to comprehend) processes and events that have no ‘hard’, that is, physical existence.

In fact, we do not so much see as imagine or make an image to ourselves. From this point we then have to choose between two paths. We can either deepen our imagination to ensure that our images correspond with reality, or we can assume our initial images are correct and force reali...

Table of contents

• Cover
• Half Title
• Dedication
• Title Page
• Copyright Page
• Table of Contents
• List of Figures
• Acknowledgements
• Foreword
• Prologue
• PART I
• PART II
• PART III
• PART IV
• Bibliography
• Index