By Sell on News, a global macro equities analyst. Originally published at Macrobusiness.
Lambert here. Note the use of the phrase “market state,” invented if not exactly defined by Phillip Bobbit in his The Shield of Achilles, and portrayed as a historical inevitability.
For the last couple of years, in the wake of the financial crisis, the banking and finance community has darkly warned about the dangers of over regulating the sector. “We mustn’t impede the free flow of capital”, it is claimed, “otherwise efficiency and productivity will be lost and the real economy will not recover.” The other camp claims that the finance sector must be reined in, re-regulated, otherwise crises will continue to happen. The dichotomy is entirely false. Finance is rules. You cannot increase or decrease the amount of rules in rules. You can only change their character. And you can decide who will set them.
And that is what this argument is really about. Power. Who has the power to set the rules of finance. For a quarter of a century, governments have progressively given up their power to set the rules and given it over to private players, who, to say the least, made up their own rules: forwards, futures, options, swaps, CFDs, CDSs, CDOs, securitisation … And my favourite, volatility derivatives, which can be translated as “we make the mess, then we make money from the mess.”
False dichotomies are the stuff of political rhetoric and make no mistake, the wresting of power from government by the private sector has been a political exercise, starting in the Reagan and Thatcher years. It has been spectacularly successful. Well, up until the point where its absurdities started to result in the system almost collapsing, that is. When the serpent began to eat its own tail.
The false dichotomy about regulation inevitably led to another false dichotomy. That the only choice facing us is between bad government and good markets. You can see how it works in the Economist article on LIBOR (the London Interbank Offered Rate that sets the interest rate for the world). Never let a chance to blame government go past, even when the traders have been caught cold rorting the system:
BOOSTERS of financial regulation are making hay from the widening scandal over allegations that LIBOR, a key interest rate, was rigged repeatedly for at least five years since 2005. Yet the trove of documents that have emerged also reveal the very flawed nature of regulation, in which government bureaucrats are asked to keep tabs on high-flying financial sorts. Transcripts of calls between officials at the Federal Reserve Bank of New York and traders at Barclays show that regulators didn’t really pick up on cues, even when they spelled out misbehaviour.
The same sort of bashing of government can be seen in Karen Horn’s article for Standpoint, one of many examples of the rear guard action being mounted against criticisms of the ideology of the market state. Horn announces that the “anti-capitalists are coming out of the closet”, eliding, as ever, democracy and markets. Underlying her critique is the neat use of dichotomies, bad government, good markets. Markets have pricing. Governments don’t:
Of course it is only through ignoring the pervasive evidence of government failure that they can have their cake and eat it: sure, spontaneous coordination in the marketplace is efficient and innovative, but let’s rein it in as we see fit. Rules are not enough; we are entitled to some enlightened ad hoc regulation. That will make the market process non-spontaneous? Oh well, it’s for our benefit, and some greater good.
This circular bashing of the state is typical of the quasi logic of the pro-market apologists. The market is defined as inherently better because it has pricing and supply and demand, whereas the state is defined as inherently inefficient because it doesn’t have those things. In other words, the market is the market, the state is the state, and therefore the state is not the market.
Such Manichean circularities are pursued, wittingly or unwittingly, to create the impression that, although markets may be bad at times, governments are always worse. Yet such a dichotomy of bad government v (mostly) good markets is not the choice that faces us at all, at least not in the financial markets. The choice is between good government and bad government. In the final analysis, as we are graphically seeing, governments have to set the rules. Traders rely on the basic legal structures that underpin transactions, even when they are based on assent rather than enforcement.
If they are allowed too much freedom to set their own rules, it eventually collapses and guess who has to pick up the pieces? Governments. The euro crisis, for example, has become so intractable, because there is no single government underlying the currency. If one needs reminding how political finance is, go no further than Europe.
It is at this point that 25 years of the political rhetoric of the de-regulation proponents has become so damaging. Francis Fukuyama alluded to this recently in the Financial Times. He commented that the Left has no answers, and that the best way forward is for the right to rethink:
If contemporary conservatives could get over their ideological aversion to the state, they would recognise that American government is both necessary and in great need of reform rather than abolition. Private sector companies haveundergone huge chang.es in recent decades, flattening managerial hierarchies, upgrading workforce skills and experimenting ceaselessly with new organisational forms. American government, by contrast, seems trapped in a late 19th-century bureaucratic model of rules and hierarchy.It needs to be smaller but also stronger and more effective. And this will not happen unless people see public service as a calling, rather than a despised occupation for people unable to make it in the private sector. In this regard, conservatives have an advantage because they can call people to public duty on the basis of the American nation rather than abstract ideals.
What will eventually emerge is a recognition that government must set the basic rules of money. Even taking into account the fact that there are massive cross border flows of capital which are beyond the reach of any one government. The only question, I suspect, is if this will occur after yet another set of crises, or in advance, through an effort to improve the quality of government from within, as Fukuyama is urging. The reality is that, just as you cannot have a legal system without government setting the rules, you cannot have a financial system without government setting the rules.
Improving government will then require the asking of some basic questions about ethics, morality and what the financial system is for. Political questions, in other words. Questions about what is a good and bad society. Of course, while the finance sector enjoys such political reach through its various funding and lobbying campaigns, such a discussion will be hard to instigate. But in the end, as we are seeing with the dysfunctionality of the system, it is inevitable. The political debate contest over the role of governments and the markets has not been conclusively resolved. Political contests never are.
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“You cannot increase or decrease the amount of rules in rules. You can only change their character. And you can decide who will set them.”
you can also choose to enforce them or not…or am i thinking of “laws” there and not rules.
There’s not much need to regulate finance; just remove all government subsidies for it and tell the public “Caveat emptor!”
Let the government itself provide a free (up to normal household limits )risk-free fiat storage and transaction service that MAKES NO LOANS and pays NO INTEREST and then remove all privileges for the banks.
Credit creation and even honest lending of existing money is inherently risky. Why pretend it is? Let those who wish to do so do so at their own risk.
Correction: Why pretend it isn’t?
“up to normal household limits”
Why this limit?
Here is how the bankers’ game works:
http://aquinums-razor.blogspot.com/2011/11/here-is-how-bankers-game-works.html
mansoor h. khan
Why this limit? Mansoor H. Khan
Because without government deposit insurance and a lender of last resort, the banks themselves would likely use the risk-free fiat storage and transaction service. Let them pay for it then.
Rather, I think the government and its cronies shouldn’t have a monopoly on the money printing business period. And speaking of counterfeiting, the Secret Service gets really bent out of shape whenever anyone prints up a few 100 dollar bills in his basement, but banks are free to electronicly print up new money/credit all the time and dump it on the economy willy nilly with no one saying a word about it. It just goes to show that some people are more equal than others.
Certainly government should not have a monopoly on money creation for private debts. Nor should the banks or anyone else. Of course for government debts, taxes and fees, inexpensive fiat is the ONLY ethical money form.
Sorry i dont like to back to back post but:
“If contemporary conservatives could get over their ideological aversion to the state, they would recognise that American government is both necessary and in great need of reform rather than abolition”
does anyone really believe “conteporary conservatives have an aversion to the state”..the love the state,.they are the state, that is they LOVE the state, to serve thier purposes and only their purposes. protecting thier privelledge and power, forever. The Left does have answers (the historical left anyway) its just the the capitalist totality has spent vast amounts of resources, time, energy, lives, and money making sure the lefts solutions are never applied. never heard really, much less ever applied.or if in some rare case there is some danger of the left breaking through, crushing it, stamping it out.
crushing it, stamping it out with the full and absolute power of the state, of course
Yep. Conservatives, like liberals, love the State. They only differ in what they wish to jam down people’s throats.
r;
..it’s not about conservatives “getting over” the good done by government regulation..market fundamentalists are nothing but think tank exponents of indefensible economic positions, having already robbed the “bank”…
the article states perfectly the so noticeable U.S. media circuity on the subject..
and I ask, if this is not TRUE, why does media refuse to discuss what really happened..?
The market state only exists with rules. Without rules, its rocks and clubs.
Adam Smith may have been right about the natural human propensity to truck, barter and trade.
Trouble is, there’s also a natural human propensity to cheat, steal and loot.
Whether people do one or the other depends on what sort of institutions they have.
Chief among those institutions is[insert drum roll for suspense]…government.
somebody’s making this stuff up. nobody reall thinks this nonsense do they? I mean stuff people like Ms. Horn makes up. Why does she make this stuff up?
what is Fukuyama doing these days. Wasn’t he the dude who said it was the end of history? that sounds like the end of rules. However he seems to be making sense here.
Would these people make this nonsense up if they had something to do? I read the other day that Machinists can make $100,000/year after about 10 years of experience. In Balitmore! You could have a sailboat and a house. Who could want more than that? But there rules when your in your boat. Mostly, don’t run into anybody else’s boat.
If you had something to do, each day — Monday through Friday you make Machinists stuff and then Saturday and Sunday, you go out on your boat and get drunk (when you’re done and at the dock!) — you won’t have time to sit around and let the devil mess with your thoughts.
idle hands are the devils workshop, and idle minds are his laboratory. Lots of idle minds out there. Not only don’t these minds know what money is, they don’t know what rules are either.
They think you can shrink government to the size of a dot. Sure, all 1009 of them shrinking it together, it’s almost a government on its own, the way they all shrink it at once. They should do something else with their time because thinking isn’t working out so well for them.
sorry to see LBR go. she (I guess it was a she) she was mostly a total lunatic. but she was a bright lunatic.
Dear craazyman;
LBR is gone? As in shuffled off this mortal coil? That is the only sane reason I can think of for her disappearance.
As one who spent two years and a bit at the institution of ‘higher learning’ she says she served and slaved for, I can attest that she is or was no crazier than any of the other academics inhabiting said member of the ‘Poison Ivy League.’
“Come back Little Sheba, come back.”
I do hope the coda is not: “The rest is silence.”
I agree – we need some clarification on where LBR “went” …
too funny, “crazy”…
we have a sailboat and a house..neither is ostentatious..on Puget Sound..but will retire in Europe, as cost of healthPROFIT, U.S., is more expensive than apt, food,
transportation there…
and we set up to retire here-paid off home when we saw what was going to happen to economy, 2003..
love your sense of parody…but nothing will “change” (bushbama) till $$$$ is not defined by Supreme criminals as $peech…(we all know it’s property)
Those who bash the philosophical basis of government as in the case of the writer at the quoted Economist article never allow us to see what government that it is that they really would like to have in place. Because government we will have no matter. As Mr. Lambert points out it is the nature and quality of government that is the issue. So called free marketeers always talk loudly and at great length about a limited government without saying exactly what that entails. For a simple reason: it’s been much talked about at length by political writers since the times of the Renaissance in Florence, Italy and has been, at least supposedly, thrashed about a great deal so of course, perhaps the writer implies we need not worry or pretty little heads about the subject.
J. G. A Pocock, in a remarkable book entitled ‘The Machiavellian Moment’ points to Leonardo Bruni from Arezzo as the first noteworthy writer who wrestled with the nature of civic duty, law writing and government.
Most of the writers quoted in the article above who are busy trashing government would do well to look at Bruni’s writings. Pocock-p 87- has this to say about the subject of civic virtue:
“But though Florentine thinkers might many times turn away from the image of the citizen as fully political being, this level of analysis could not be neglected. One might easily find oneself admitting that political engagement was necessary to virtue, and when engagement was to seen to have been lost or to have become subject to another’s manipulation, something had to be said of what had happened and why.”
According to the writer at the Economist we may just blame naughty, simple minded and petulant bureaucrats for our current financial mess without looking at one of the key factors now causing the vehicle known as representative democracy to traverse headlong into the bottom of the proverbial abyss at the far side of the cliff of economic catastrophe that is our lot. We should be looking to such writers as the Economist is wont to keep scribbling as the primary source of shaming us into feeling guilt for caring about the nature of government; this then I suppose, keeps the political arena free of messy democratic involvement of the intellectually unwashed masses who, when they do awake from their current desire to alpha wave the whole mess to oblivion, might decide to stop their subscription to the likes of the Economist.
Had enough of the results of the madness of unregulated financial markets? Please check out the ideas of the Conservative economist Martin Hutchinson (“Alchemists of Loss”) for the SEC regulations necessary for a transparent stable financial market that will not crater again due to Wall Street banksters/hucksters. (Bring back Glass Steagall, outlaw derivatives no one understands while setting up an exchange for the others, outlaw “naked shorting” of equities, require buyers of credit default swaps have a direct insurance need as the counterparty, treat CDS’s like insurance and require reserves to be set aside like every other insurance firm, require banks to continue to have a financial interest in any MBS or CDO products they sell).
As somebody said – if you don’t get into politics, politics will get into you ….
Bottom line, there will be “government” of some sort, the questions are for whom is it working and who is running the show. Those are the questions that politics decides the answers to – one will be deeply affected whether one chooses to participate or not ….
Good to see people coming to similar conclusions.. from the above post..
“”””Improving government will then require the asking of some basic questions about ethics, morality and what the financial system is for. Political questions, in other words. Questions about what is a good and bad society. Of course, while the finance sector enjoys such political reach through its various funding and lobbying campaigns, such a discussion will be hard to instigate. But in the end, as we are seeing with the dysfunctionality of the system, it is inevitable. The political debate contest over the role of governments and the markets has not been conclusively resolved. Political contests never are.””””
and from Stiglitz’ book Freefall..
“”It has become a cliche to observe that the Chinese characters for crisis reflect “danger” and “opportunity”. We have seen the danger. The question is, Will we seize the opportunity to restore our sense of balance between the market and the state, between individualism and the community, between man and nature, between means and ends? We now have the opportunity to create a new financial system that will do what human beings need a financial system to do; to create a new economic system that will create meaningful jobs, decent work for all who want it, one in which the divide between the haves and have-nots is narrowing, rather than widening, and, most importantly of all, to create a new society in which each individual is able to fulfill his aspirations and live up to his potential, in which we have created citizens who live up to shared ideals and values, in which we have created a community that treats our planet with the respect that in the long run it will surely demand. These are the opportunities. The real danger now is that we will not seize them.””
Insightful. It is true that government – the law, really – must set some rules. There is no choice in this. It’s like a law of nature.
So. False dichotomy? Yes. But then there are dangers either way: government has its excesses just as industry and finance have theirs.
Forget for a minute what money is at present. It can be readily conceded that as far as that goes you are correct: it is power. Raw power.
Rather, what should money be? Something more like justice, methinks. You might find these posts interesting:
http://strikelawyer.wordpress.com/2010/12/08/money/
http://strikelawyer.wordpress.com/2010/12/11/money-ii/
http://strikelawyer.wordpress.com/2010/12/11/money-iii/
The Justice Department’s MF Global Scandal Dates to 1932
http://www.bloomberg.com/news/2012-07-27/the-justice-department-s-mf-global-scandal-dates-to-1932.html
same old, same old
Libor Scandal Is No Match for Its Medieval Precedent
http://www.bloomberg.com/news/2012-07-27/libor-scandal-is-no-match-for-its-medieval-precedent.html
O.K. Fukayama is a quasi-Straussian right-wing pseudo-philosopher and think-tank hack. The fact that Lambert feels a need to take his clap-trap “seriously” indicates that he is caught up in similar moralistic clap-trap. As opposed to real functional analysis. Talk about ceding ground on the slippery slope…
Oops! It wasn’t exactly Lambert. But still, the drift is the same.
Right….
It would all be OK….
The RAPE and DESTRUCTION of the planet….
If we just stuck to the rules.
BS BS BS BS BS BS
…”Matewan”=history of struggle:
http://www.amazon.com/Matewan-Chris-Cooper/dp/B000068QP0/ref=sr_1_1?s=movies-tv&ie=UTF8&qid=1343663492&sr=1-1&keywords=matewan+dvd
also..it cost millions of lives to implement controls, now deregulated..those who don’t know their history..should view BBC Video documentaries deemed unsuitable for american audience:
http://www.amazon.com/Adam-Curtis-Trilogy-Nightmares-Century/dp/1615774513/ref=sr_1_2?s=movies-tv&ie=UTF8&qid=1343659104&sr=1-2&keywords=adam+curtis+trilogy
“Disc 1. The POWER of NIGHTMARES. Instead of dreams of a better world, today’s politicians only promise to protect us from nightmares. The most frightening is the threat of an international terror network. The nightmare is an illusion — a myth that has spread unquestioned through politics and international media — a fantasy that restored the power and authority of politicians in a disillusioned age. 3 hrs. Disc 2. The CENTURY of the SELF. The triumph of the self is thought to be the ultimate expression of democracy, of power to the people. Bur are we really in charge? This series reveals the untold and controversial story of the growth of the mass-consumer society in the UK and US. How was the all-consuming self created, by whom, and in whose interests? Among the main characters are Sigmund Freud and his nephew Edward Bernays, who first used psychological techniques in advertising. Curtis quotes a Wall Street banker: “People must be trained to desire, to want new things.” 4 hrs. Disc 3. The Trap explores how a simplistic model of human beings as self-seeking, almost robotic, creatures led to today’s dysfunctional idea of freedom. The baleful influence of win-lose game theory on economics and international relations, of free market theory on society, over-the-counter drugs, bureaucracies and schools. The rhetoric of freedom used to justify violence and “shock therapy” in Eastern Europe and in Iraq, with horrific consequences. One of the most intelligent films of all time.”
A little more irony on the monetarist versus (??) non-monetarist approaches.
While all of the articles written, on NC and elsewhere, were self-serving anti-neoclassical efforts aimed to show the obvious failure of “targeting” the money supply quantity by utilizing the push-on-the-interest-rate-string policy mechanism, NONE addressed the matter of direct control of the money supply via issuance of the currency, while putting the bankers back to banking.
These are the reforms in The Chicago Plan, The 1939 Program and the Kucinich Bill.
http://kucinich.house.gov/uploadedfiles/need_act_final_112th.pdf
The Kucinich Bill proposes ‘public-money-administration’ determination of the money supply quantity and a mechanism for assuring it is “in the bank’ when NEEDed.
Naturally, once your policy tool becomes “issuance” , the other non-policy tool of setting interest rates is superfluous and of no consequence, and therefrom, not subject to manipulation.
This is all shorthand for showing that with passage of the Kucinich monetary reform Bill, there can be NO INTEREST RATE MANIPULATION CRISIS.
Interest rates will be zero-based and will flow based on the amount paid on term deposits.
No chance of LIBOR Redux with the Kucinichh Bill.
When are progressives going to get smart and realize that layers of regulation are unnecessary and not your friend.
Your friend is PREVENTION.
Because money IS power.
And right now the bankers have it.
For the Money System Common.
To me, one of the most fascinating things about American history is the interpenetration of the market and the state.
For example, between 1870 and 1910 the legal foundations for the evolution and protection of Big Capital was set by the National State through a series of important legal decisions by the Federal Judiciary.
The federal courts, during the period, of time endowed national corporations with a set of protected rights and then created the infrastructure for a national economy (For example, in “Santa Clara V. Southern Pacific Railroad (1886) corporations were conceptualized as being protected by the 14th amendment and came to be regarded as persons in their own right).
Between approximately 1875 and the late 1890s emerging national corporations like Singer and McCormick and the large meat packers developed national strategies for selling their products partially based on Federal judiciary decisions like (Minnesota v. Barber (1890) which allowed a national market to have priority over local control.
The Progressive Community had tended to focus on the creation and evolution of Big Capital but they leave out the role of Big State, especially the Federal judiciary, as an active agent for the evolving corporate giants of the late 19th century.
For those who see our present problems as only linked to Big Capital, it is time to take a careful historical look at the evolution of Big State– which historically has been a handmaiden to Big Capital– and not a force for liberation from Big Capital.
People don’t buy life insurance, they are sold life insurance. People don’t decide who to vote for, they are told who to vote for. For the voters keep in mind that the republinos want no federal (taxpayer) money paying for anything except the military and their own salaries and benefits and let everyone else fend for themselves. republino senator kyle from Arizona when referring to unemployment benefits said something to the effect that “we” don’t want individuals dependent on the government. Ironic since kyle has gotten virtually all of his own net worth growth from the taxpayers as a senator on the dole.
The market state aka the “market government” now uses the world’s nominal governments as its agent to pass and enforce its rules.
In a true market, both buyers and sellers meet to exchange wares that have already been made. These wares could have been made in slave workshops. There’s nothing inevitably democratic or just or equitable about a “market economy.”
John Henry once noted that in ancient Egypt after the priest class had secured power, it pretended that Egypt still consisted of cummunal tribes as it had years before. The fiction was handy for using the villages’ leaders to collect tribute for them.