Finance After Armageddon E-Book

Michael E. Lewitt

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Global Finance Executive Select
• Sprache: Englisch

Seitenzahl: 81

Veröffentlichungsjahr: 2010

Beschreibung

This chapter from The Death of Capital is a call for change that discusses projects and initiatives to rejuvenate the economy and provide a basis for sustained growth. We have developed a regulatory system that does exactly the opposite of what it should be doing-favors speculation over production; obscurity over transparency. This chapter addreses hot-button topics including: * How to Improve Capital Adequacy * Executive Compensation Reform * Modern Monetary Policy and Regulation * Enhancing Financial Transparency * Solutions for Credit Default Swaps, Derivative, and Structured Investment Vehicles

Leseprobe

Contents

Cover

Title Page

Copyright

Chapter 8: Finance after Armageddon

Obama Goes to Wall Street

Principles of Reform

Impose a Tax on Speculation

End Balkanized Regulation

Too Big to Fail

Improving Capital Adequacy

Reforming Monetary Policy

Enhancing Systemic Transparency

Copyright © 2010 by Michael E. Lewitt

Disclaimer. This content is excerpted from The Death of Capital: How Creative Policy Can Restore Stability, by Michael E. Lewitt (978-0-470-46650-6, 2010), with permission from the publisher John Wiley & Sons. You may not make any other use, or authorize others to make any other use of this excerpt, in any print or non-print format, including electronic or multimedia.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

This chapter from The Death of Capital is a call for change that discusses projects and initiatives to rejuvenate the economy and provide a basis for sustained growth. We have developed a regulatory system that does exactly the opposite of what it should be doing-favors speculation over production; obscurity over transparency. This chapter addreses hot-button topics including:

• How to Improve Capital Adequacy • Executive Compensation Reform • Modern Monetary Policy and Regulation • Enhancing Financial Transparency • Solutions for Credit Default Swaps, Derivative, and Structured Investment Vehicles

Derived from Lewitt, Michael E. The Death of Capital: How Creative Policy Can Restore Stability. Hoboken, NJ: John Wiley & Sons, 2010. 978-0-470-46650-6; 304 pp.

978-1-118-00650-4 978-1-118-00651-1

CHAPTER 8

Finance after Armageddon

For many men and women who spent most of their professional lives on Wall Street, the year 2008 must have felt like Armageddon. Not only did they lose their jobs, but many of them lost the wealth and financial security they had spent decades accumulating. Regulators and others in the seats of government surely felt as though they were facing the end-of-days when confronted with the death of capital. The global financial system was virtually paralyzed in September and October of 2009, and unimaginable measures had to be taken to resuscitate it.

Accordingly, it does not seem farfetched to treat the question of where we go from here as a question of fixing finance after the survival of a near-extinction-level event. Anybody who believes that the system can continue without drastic reform after the events of 2008 is probably beyond convincing, or stands to profit too much personally from maintaining the status quo. Each succeeding financial crisis of the last three decades has been more severe than the last because the underlying imbalances that caused it were left unaddressed. As a result, these imbalances have grown larger, distorted the economy in more profound ways, and become less susceptible to correction without causing severe instability. After each of the previous crises, serious financial reform was sloughed off and the reins on risk-taking were further loosened in the name of free markets. For example, conduct that increased systemic instability, such as the creation of off-balance-sheet entities to conceal debt, continued to receive favorable treatment under bank capital rules even after the abuse of these entities by Enron Corp. caused a crisis of confidence in 2001 that inflicted untold damage on the markets. Increasing tolerance for behavior that escalated systemic risk created a system characterized by extreme moral hazard in which gains are privatized in the hands of a small elite while losses are socialized among the effectively disenfranchised and overburdened American taxpayer. Ronald Reagan’s trickle-down economics became socialism for the rich and capitalism for the poor (if it was ever anything else).

For those who still believe that capital can be a force for good in the world if wisely managed and regulated, it is time for serious discussion about what can be changed within the limitations of a highly flawed political system or, as argued earlier in this book, a financial-political complex that exercises power over all aspects of our society. The time is long overdue for a serious call to arms to reform a system that has the capability of doing so much good but has inflicted so much harm by being repeatedly diverted into wasting its resources on leverage and speculation.

Despite the profound crisis that capitalism experienced in 2008, serious discussion of reform was quickly sidelined by powerful lobbying interests. After markets hit their nadir in March 2009, a veneer of stability returned to the financial world. But below the surface, serious instabilities continued to boil. The enormous mountains of debt that were incurred to triage the global economy continued to weigh down sovereign balance sheets and limit governments’ ability to deal with future challenges before they lurch into new crises. The weakened condition of the global system renders reform more urgent than ever.

For this reason, regulatory reform must be addressed within the context of what economic instability really means, and what it can lead to. This will require a much greater focus on the long-term consequences of failing to act rather than concerning ourselves exclusively with addressing short-term emergencies. The failure of a single institution is, in the long run, a relatively minor event. The system and its constituent parts will find a way to survive. But the long-term consequences of rescuing every poorly managed firm are extremely negative because of the moral hazard they create in a system that has grown accustomed to seeing risk socialized and profit privatized.

In order to be able to think long-term, one must learn to think in terms of the arc of history. Modern markets and media have shortened our attention spans to the point where historical consciousness has been all but obliterated, and it requires a special effort to focus on anything beyond the immediate moment. Despite the urgent necessity to remember the past and learn from it, people today have forgotten to think historically. As the social and literary critic Frederic Jameson has written, people need “to think the present historically in an age that has forgotten to think historically in the first place.”1 This is particularly imperative at junctures when it feels like the center cannot hold, periods in which prior assumptions fail us and new answers are needed.

And what better place to start thinking about the consequences of Armageddon than to return to the gates of the place where barbarism last reigned when humanity failed us? In 1969, Theodor Adorno called for an uncompromising standard for education that should be applied more widely to all areas of human endeavor:

The premier demand upon all education is that Auschwitz not happen again. Its priority before any other requirement is such that I believe I need not and should not justify it. I cannot understand why it has been given so little concern until now. To justify it would be monstrous in the face of the monstrosity that took place. Yet the fact that one is so barely conscious of this demand and the questions that it raises shows that the monstrosity has not penetrated people’s minds deeply, itself a symptom of the continuing potential for its recurrence as far as peoples’ conscious and unconscious is concerned. Every debate about the ideals of education is trivial and inconsequential compared to this single ideal: never again Auschwitz. It was the barbarism all education strives against.2

Some readers may view it as alarmist to compare the obligation to prevent genocide from reoccurring to the obligation to maintain stable financial markets. In fact, other than being long overdue, such a connection is absolutely necessary. It is blindness to such comparisons that leads to barbarism, and the conditions that led to the monstrosities that occurred in Germany 70 years ago are no less present in our world today. Just ask the people of the former Yugoslavia or the modern Middle East. If we fail to imagine the worst, we will be unprepared to deal with the worst when it descends upon us. If nothing else, the 2008 financial crisis surely taught us that.

Adorno also wrote in the same essay quoted above: “[a]mong the insights of Freud that truly extend even into culture and sociology, one of the most profound seems to be that civilization itself produces anti-civilization and increasingly enforces it.” Thirty years after Adorno’s warning, insufficient attention is being paid to the fact that without functioning financial markets that are capable of raising capital for productive uses and creating opportunity for the disenfranchised, the world is far more likely to spin into anarchy. The economic grievances that led to Nazism’s vicious rise to power in the 1930s are echoed in similar inequalities around the world today. Having exported economic disaster to all corners of the world, the dominant Western powers need to reorder their priorities as they heal their economies in order to create a more equitable and stable global order.

As the tools of finance become more sophisticated, the obligation to regulate them prudentially increases exponentially. With great power comes great responsibility. In Modernity and the Holocaust (1991), the sociologist Zygmunt Bauman argued that two of modernity’s signal achievements made the holocaust possible: technology and bureaucracy.3