How can we rescue the world from the financiers?
The answer is, we need a huge overhaul of the incentive system. Regulation tends to be little more than a costly and cumbersome stopgap measure. Bonuses should be paid only after several years, not several months.
The question is, how can we protect democracy from financialisation? Of course, in South Africa it feels as though the ANC government is the biggest and most urgent threat to democracy. So it’s ironic that it’s probably thanks to ANCimposed regulations that our own financial sector isn’t as big a threat to our democracy as those in the US and parts of Europe.
It’s hard not to suspect that left to their own devices, our bankers and investment fund managers would have been up to their necks or rather, we would have been up to our necks in US subprime junk in 2007. Instead, we got a watered-down version as almost every listed company that could pumped money into the equivalent of international subprime junk. Just think Woolworths and Sasol.
Since the invention of money, financiers have enjoyed a special place in states. This was reasonable enough in pre-democracy days, when rulers were keen to stay onside with their funders though a few centuries ago English kings weren’t averse to putting their treasurers to death if they didn’t play ball.
The last attempt to curtail the animal spirits of the financial community was made all the way back in the 1930s, when, in the wake of the Wall Street crash and amid the Great Depression, then US president Franklin D Roosevelt signed the Glass-Steagall Act into law. It separated commercial banking from investment banking, a relationship regarded as one of the primary drivers behind the intensity of the 1929 crash.
The act was repealed in 1999 under president Bill Clinton, who was persuaded by financiers of the day that it would be healthier for the economy, and less risky, if banks were allowed to diversify. This was nine years into the West believing following the collapse of the Soviet Union that “history had ended” and that Western-style democracy, underpinned by individualist capitalism, would reign supreme to eternity.
Well, that thought didn’t last long. And so much for risk reduction. You wouldn’t have to be too imaginative to draw a straight line from the repeal of the Glass-Steagall Act to the 2008 global financial crisis and from there to the election of Donald Trump in 2016.
A recent report by consulting firm McKinsey discusses some of the grim features of the unrelenting financialisation that has dominated the US economy in the past 25 years that is, since the repeal of Glass-Steagall. Inevitably the implications are not limited to the US economy; that country’s dominance means it has consequences for us all.
In the decades after the collapse of the Berlin Wall, US financiers became enormously powerful. Deemed the ultimate arbiters of value creation, they were allowed to impose “market discipline” on corporate executives in the real economy. It’s no coincidence that since early 2000, US corporate profits as a share of GDP have almost doubled and are at historic highs.
This isn’t because the US has suddenly become remarkably more productive; that’ sa tiny part of the story and is largely due to IT. Globalisation, and the fact that the Soviet Union’s presumed socialism no longer represented a propaganda threat to the American way of life, meant financierdominated corporate US could ride roughshod over workers.
Money was diverted from wages and productive capacity-building to dividends and share repurchases. This made eminent sense on an individual investment basis, where time horizons were measured in months, not years. Here was individualistic capitalism at its most efficient. Equity markets soared, financiers and corporate executives became even richer. Fund management clients were entranced by promises of comfortable retirement in years to come while their fund managers have been made wealthier today by just making the promise. The playbook was copied across much of the globe.
The financiers and executives became richer, but not so much those who inhabited the real economy, which dragged along at a pedestrian pace.
Remarkably, the solution to the destruction wreaked by the financial community ahead of 2008 was to pump trillions more dollars into the system, making the financial community even wealthier and doing nothing to repair the damage in the real economy. McKinsey says global assets now represent a precarious 600% of global GDP.
What happened to Silicon Valley Bank and Credit Suisse may be the early signs of a meltdown. If so, and if President Joe Biden’s Roosevelt-style policies are not embraced, that line from the repeal of GlassSteagall could extend to a second term for Trump. That is unlikely to be good for US or global democracy.