It gets worse, then it gets worse, until it can't get any worse, and then it gets worse
Elsewhere on the internet, I am running into pushback on a key thesis regarding undifferentiated banker-bashing, inadvisability and general political pointlessness of. I'm gathering together ideas for a post on this, but a key part of the thesis is that we have to be aware of the potential for metastasis here. If you look at the oil[1], tobacco and defence industries (and ye gods, the nukemen), you see that there is a certain pattern of behaviour seen in industries after they give up on having any hope of getting anything approaching a fair hearing. If you chuck enough hostile and ill-informed criticism at an industry, then sooner or later it will retreat into its shell, develop its own private reality and stop listening to any criticism at all, internal or external. With pretty predictable results in terms of the possibility of ethical behaviour. Or to put it shorter; if you keep telling people that they're evil, dishonest, predatory locusts, sooner or later they're going to believe you.
As Douglas Adams said:
There is a theory that if the universe is ever understood, it will immediately disappear and be replaced by something much more incomprehensible. There is a theory that this has already happened
This thesis does invite the objection - how much worse could the banksters get? In my view, a lot worse. Just a top of the head list of ways in which the industry could act if it was a genuinely antisocial and evil actor, rather than an absurdly myopic and unusually greedy part of a complicated market economy system:
1. It should be noted that the only people actually providing debt relief to Greece are the banking system, through a voluntary exchange. There will be holdouts to this exchange, but they will be small. There is very little of the regulatory strong arm in the debt exchange (which was actually suggested by a bank) - there is just a general recognition on the part of the industry that their collective interest in maintaining a stable and prosperous Eurozone is greater than their individual interests in getting 100 cents in the Euro.
2. Similar, in the case of Hungary and Romania, where the "Vienna Accord" between private sector lenders stopped these small and volatile economies from experiencing catastrophic capital flight.
3. The UK could see the dawn of US-style foreclosure practices. These are, of course, the effect of the regulatory developments which pushed mortgage servicing out of the normal base of the banking industry and into specialist, largely unregulated subsidiaries. No UK bank would ever do this, because the brand on the mortgage foreclosures is the same as the name above the door, and, for the moment, they have an interest in maintaining the value of their good name.
4. In general, a *lot* more activity would migrate to the offshore, tax haven and unregulated sectors (hedge funds at the top end, payday lenders at the bottom). At the moment, there is effectively a social constraint on the size of the tax and regulatory avoidance industries. You can do business much more profitably if you operate in this way, in return-on-capital terms, but you can't do it at large scale, which limits the amount of capital you can earn that high percentage return on.
The reason why you can't do it at scale is that if you are too aggressive in pushing the envelope on regulation or tax, you will find it difficult to get counterparties and brokers. The reason for that is that there still survives in the industry a perception that tax and regulatory avoidance is (while often necessary) a slightly hinky thing to do, and that people who are too blatant and aggressive about doing it are likely to be hinky people, who might be just as willing to bilk you as they are the taxman. Despite what you read about clever accountants (one for the catechism of course ... and what type of schemes do clever accountants find? Complicated schemes), most people in the industry have a visceral horror of corporate finance bells-and-whistles as being "too clever" and likely to conceal a con game.
Obviously, if the industry turned inward, and the social stigma attached to those upstanding and necessary people in the tax structuring industry were to be lessened, then it would no longer be the case that the only people who did hinky deals were hinky people. And you would see a *hell* of a lot more such deals.
Of course, if you think that the financial industry created the asset bubble off its own bat, purely in order to earn short term bonuses and in the knowledge that it would burst and impose costs on someone else, then this isn't going to be very convincing. Which is why I think it's very important to explain that this wasn't what happened. There needs to be a space kept open for people like Andy Haldane to tell the industry what's wrong with it and to be listened to.
[1] Oil is an interesting one, as there is a continuum of standards of behaviour from BP to ExxonMobil ...
The reason ordinary people are pissed off, as I'm sure you realise, is that GS and their friends lobbied their own mates and associates in government (Summers and co) to deregulate the system, and when it all blew up they tried to (a) blame he failure of regulation on the pols and (b) held onto their enormous wealth whilst dumping the costs on the rest of us for decades to come. That offends against ordinary people's sense of decency and fairness.
ReplyDeleteNow sure, it is a bit rough on *you* that the anger expressed by ordinary people is undifferentiated. But you can't expect too much sophistication and you should be a lot madder at your colleagues who got you all a bad name than at the rubes who got screwed and are now understandably upset, imho.
Incidentally, the rubes do differentiate somewhat. I doubt that they're angry at Linda, the proverbial bank teller.
To be honest, it's not really the ordinary people that concern me; popular culture always switches from treating us as heroes to demons and I don't take it very seriously either way. What does scare and annoy me is that you get basically the same thing from precisely that class of people from whom I do expect a lot of sophistication, because I know they're perfectly capable of it.
ReplyDeleteThe thing is, not just me, but all of my mates in the industry bear much less responsibility for the bubble and crash than, say, Gordon Brown. And people can understand clearly why it's wrong to blame Gordon Brown for the crisis.
I don't actually agree (cf the last couple of months posts) that deregulation really made that much difference to the bubble, but that is at least an actual debate worth having, whereas the question of whether bankers are human locusts who should be thrown in jail isn't. And, of course, the question of what kind of regulatory changes might make sense as part of an anti-bubble policy is not going to be helped by being motivated by a desire to punish bankers, any more than a similar discussion of what to do about the riots would be by a desire to punish kids. It might be that the right thing to do is to build youth centres and to run a Canadian-style profitable cartel.
The factual premises that everyone - even to some extent you - are starting from are that bankers have, in general held on to their wealth, that there has been no change in the regulation of the sector, and that there is a causal or financial connection between the bank bailouts and the cuts in public services. None is true.
I've held on to most of my wealth, but that's because I've always been very conservative in my investments (paying down mortgage debt and nothing else) and I've been lucky enough to stay in employment. Over 200,000 people in my industry have lost their jobs, two thirds of them in Europe. Many of them have also lost most of their retirement savings too. The general sentiment among people of my acquaintance seems to be "fuck 'em", which does not seem to me to be much of a basis for a long term trend toward Swedish style egalitarianism.
Also, the costs that have been dumped on us for decades to come are related to the popping of the asset bubble (this is clearly visible in the UK where the bank bailouts are only a few billion and close to breakeven when the revenue on bonus tax is taken into account, but it's also true even in Ireland as the increase in debt has to be set against the NAMA asset). You can only blame them on my industry if you are going to say that the whole asset bubble was created by the banking industry, and I think I've posted enough material explaining why I think it wasn't that I deserve to not have the contrary simply assumed as a premis.
(Shorter: Socialists, of all people ought to be aware of the pitfalls of the "you shouldn't object to dumb criticism because some people superficially like you did really awful things" argument).
ReplyDeleteMaybe I've not been paying close enough attention to you recently, but do you contend that the mass issuing of home loans to people who couldn't pay and the reselling of the loans etc is basically just froth? Is the revolving door (Rubin, Summers) no part of the story? And haven't those guys (and similar) stayed rich?
ReplyDeleteSummers' door really didn't revolve. He was an academic, on the Council of Economic Advisors, then the World Bank, then the Treasury Secretary, then President of Harvard. He got his part-time job consulting to a hedge fund in 2006, by which time the housing bust had already begun.
ReplyDeleteRubin, obviously, is much more of a revolving door, but I think it's really indicative of the underlying problem that people always assume that Larry Summers was a financial sector guy, just because he's a neoliberal. He was a wild and breathless cheerleader for financial deregulation, but this was because he wanted to be, not because somebody paid him.
With regard to the substantive question, I need to revise the "Bezzle" giant post again before I post it publicly, apparently. Basically, the asset price bubble and the way in which it was financed was a single event - it doesn't make sense to ask which hand it was that washed the other. Obviously there is a sense in which it couldn't have happened if people didn't make mortgage loans, but there is a sense in which World War 2 couldn't have happened if people didn't refine iron ore.
The really surprising thing is, that the key stylised fact that appears in every account of the crisis - that there was a "catastrophic decline in lending standards" (what kind of a decline? a catastrophic decline) - isn't true! I've got links to three studies on the Global Bezzle post showing the same thing - what happened was that the same lending standards got hit by a massive wall of demand. Which in turn was caused by interest rate policy.
The trouble is that any loan will look good in a rising market and good loans go bad in a falling market[1]. If you want to maximise home ownership - and although this is often a bad idea, it was a very popular policy - then you're going to end up telling the financial industry to come up with products that get them into homes, and that's what they will do, without any ill intention at all. The "Pick-A-Pay" mortgage, one of the most disastrous products of the boom, was invented by Herb and Marion Sandler, who were smart or lucky enough to sell out to Wachovia at the top, and so they go down in history as "doyens of the progressive left, funders of ProPublica, all around good eggs". Which they are, even though they made more of the actual loans than nearly anyone else.
[1] Actually I think that there is something to Mike Konczal's view that the prepayment fee model is intrinsically unethical, but this is a local issue to the USA ex Texas.
Are you saying it was common practice to have pension assets invested in one's own bank's shares? I used to work with a guy who worked for Enron who suffered very badly because of that,and I'd assumed it had been outlawed or limited in some way.
ReplyDeleteNo - more that most investment banks closed their DB schemes a while ago, and so for plenty of people (particularly Lehman and Bear Stearns, where there was practically a cult of employee ownership) the employee stock option plan basically was their pension fund.
ReplyDeleteThat opening statement could be taken by your hypothetical ungenerous reader as 'slightly shabby economy you got here, shame if anything were to happen to it...' but I'll be generous here, mainly because I specifically blame Kirsty Allsopp, and want her to spend a month in the fucking stocks.
ReplyDeleteOn the point about tax havens: I suppose that means the kind of operators to which Private Eye devotes lots of space -- and admittedly, there's a Foucault's Pendulum-style attraction to reading about it -- are basically minnows. Something like Apple's tax shuffle for iTunes in Europe, where it runs out of a Luxembourg entity and pays 15% VAT, might be less baroque than a Fayed-style game of money-shuffling from one Caribbean holding company to another, but it books a fuckload more money.
The classic example here is the fact that Richard Branson now has a banking licence, after god knows how many years of the City trying to keep him out, and it wasn't because we just couldn't handle his sheer bearded exuberance.
ReplyDelete(and the "shame if anything happened to it" bit was intentional - I really have felt like giving up on left wing politics and going full Liddle on a number of occasions over the last three months, and so I suspect a lot of people in similar situations to mine actually have done. I am not sure that everyone who I know and have been friends with realises quite how they are coming over with the "you're all a bunch of cunts, so you ought to realise that when we call you a cunt, we don't mean that you personally are a cunt, just that you're a cunt, mate, you cunt" thing.)
ReplyDeleteRe decline in lending standards .... Well you would know statistical stuff that I wouldn't. But I'm struck by the fact that when I got my first mortgage in 1985 you could get 3x 1st income plus 1 x 2nd, whereas more recently mortgages of 5x joint were on offer. That looks to me like an increased willingness to lend to people less able to pay (allowing some ceteris paribus clauses of course).
ReplyDeleteSocialists, of all people ought to be aware of the pitfalls of the "you shouldn't object to dumb criticism because some people superficially like you did really awful things" argument
ReplyDeleteOw ow ow ow ow. And the Captain's
"you can't expect too much sophistication and you should be a lot madder at your colleagues who got you all a bad name"
transfers across nicely too.
I could say that part of the problem is that, deep down, lots of people (including some quite sophisticated people) just don't like the idea of making money by turning money into more money & think it's bound to lead to trouble - and hey, look at the trouble. But deep down, lots of people probably just don't like the idea of working people trying to decide things for themselves instead of listening to the parson and the squire, or modern equivalent - and look at all that totalitarian bleakness / picket-line thuggery / loony leftism / etc.
(That's "transfers across" in the sense that it's the kind of thing people used to say in the seeming belief that it was helpful and appropriate, although it actually came over as idiotic and infuriating.)
ReplyDeletewhen I got my first mortgage in 1985 you could get 3x 1st income plus 1 x 2nd, whereas more recently mortgages of 5x joint were on offer
ReplyDeleteyebbut, interest rates in 1985 were 13%! Housing financing has got a lot cheaper.
I should actually qualify my blanket statement above about lending standards - there is some evidence that lending standards in 2007/8 did deteriorate. In general, the lending in that year probably made the financial sector component of the bust much worse, and caused a lot of avoidable aggro for which people should be punished.
ReplyDeleteBut the reason we're in a recession is that we've had a huge lump of housing wealth wiped out, and of course that can't be attributed to the 07/08 vintages - prices were falling then, not rising. The loans that built up the bubble were basically good. I need to do an article about the Sandlers, because as far as I can see they are genuinely good people, who made the best decisions possible in the circumstances, and who still contributed a huge amount of damage to the system.
Despite what you read about clever accountants (one for the catechism of course ... and what type of schemes do clever accountants find? Complicated schemes),
ReplyDeleteAnd on what do these schemes rely? Loopholes in the law. I will note, for the record, that there's no easy way of predicting what clients will go for hinky schemes or not. (Certainly, when the JPUT trick to avoid SDLT came along, everyone bolted for it, be they dodgy PE house or large insurance company.)
It is remarkably dependent on the temperament of the FD/tax director at the client, although, of course, what kind of FD/tax director a client ends up with is not purely coincidental.
What I will say, taking Vodafone as an example[1], is that there is genuinely a culture of tax compliance in UK large corporates at the moment - although they will often use every trick in the book, at the end of the day, they do so within the framework of the law, which is, generally thankfully, not what the government says it is.
[1] It's worth noting that this has acquired so much interest precisely because it's so unusually large - I've seen hinky schemes in my past many times, and it was literally an order or two of magnitude larger than most tax disputes - the whole thing arose from what was the insanely overpriced Mannesmann takeover (a P/E of over 100? We'll not see those days again.
most investment banks closed their DB schemes a while ago, and so for plenty of people (particularly Lehman and Bear Stearns, where there was practically a cult of employee ownership) the employee stock option plan basically was their pension fund.
ReplyDeleteI hate it when that happens. I've worked for employers that look after their staff systematically, in an anonymous, bureaucratic, damn all this red tape! kind of way, and for employers who hand out pay rises and bonuses with a cheery smile. The second kind are better if you're very young, very bright, very pushy and/or very lucky. For most of us the first kind are greatly to be preferred.
CC: not just lower interest rates, but also higher female workforce participation rates (and lags in perception) due to later sprogging and quicker return to work.
ReplyDeleteIn 1985, if yerself and yer good ladywife are applying for a mortgage aged mid-twenties - no matter how well-salaried you both are right now - the bank assumes that you're going to sprog up in the next couple of years, and then she's going to take five years off altogether and then go back to work in a lower-paid position.
By 2005, those assumptions were largely slain. Which is on balance a good thing.