Regulate the market

Sep 22, 2013 Features / Columnists, Ravi Dev

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Last week was the fifth anniversary of the collapse of the US investment firm Lehman Brothers, which at the time everyone thought would have resulted in a massive shakeup of the neo-liberal go-go market fundamentalism. The degutting of the regulation of financial markets was an integral component of the neo-con world-view that swept the developed world since the 1980s. But amazingly, as we look around, not much has changed since then – apart from the crisis spreading to Europe.
The neo-cons had not just pushed for a “night-watchman” state that would shrink the government’s role in the economy, but one that rejected governments taking any responsibility for alleviating the condition of the poorer elements of society.
On the other hand, the loosening of the regulatory framework over the financial sector that had been painstakingly installed after centuries of struggle were all jettisoned on the altar of “small government”. This retreat from social responsibility resulted in the most dramatic transfer of wealth to a small segment of every country that adopted the new dispensation (the “1%”, did not raise many eyebrows. The bottom 99% would be satisfied with the spills that “trickled down” and dream of sitting one day at the top table). It fitted in perfectly with the ethos of the age.
That ethos was articulated a half-century ago by the influential thinker Ayn Rand, summarised in her novel “Atlas Shrugged”, which still sells 150 thousand copies annually. Basically, Rand derided altruism (“breeds immorality and evil”) and trumpeted selfishness (“the highest virtue”). “If you saw Atlas, the giant who holds the world on his shoulders, if you saw that he stood, blood running down his chest, his knees buckling, his arms trembling but still trying to hold the world aloft with the last of his strength, and the greater his effort the heavier the world bore down on his shoulders — what would you tell him to do?”
“To shrug,” wasn’t the pithy answer.
She lionized the human ego, rejected God as an artifice for the expiration of human failures, extolled the separation of state and the economy, and promoted governmental deregulation. Rand inspired a devoted band of followers including Alan Greenspan. He was given the opportunity, following the crucial neo-con takeover years, as Chairman of US Federal Reserve-1987-2006, to put their theory into practice. And it seemed to work.
By the nineties after Clinton completed the gutting of substantive financial regulating by allowing regular banks to join the securities investment frenzy, the bullish stock market silenced all but a few, who were derided as Jeremiahs – until the house of cards came crashing down by 2007.
Basically, the flaw with the neo-con model went to the very core of their central premise – the exaltation of selfishness. They miscalculated the power of its corollary – greed, which had been kept in check, however tenuously, by the old regulatory framework. A chastened Greenspan now admits the “flaw” in his model: self-regulation in an arena of greed unbound is, performatively, a recipe for disaster.
In practical terms, the model raises what is known in economics and related fields as the issue of “moral hazard”. It identifies the ever-present dilemma posed when people who are insured become more inclined to take risks, since they believe that they are protected. Where does one then draw the line?
Business and entrepreneurial behaviour is at the bottom, a matter of taking risks, and society is willing to have those who take risks receive the rewards – if, on the whole the entire society benefits. And this last point was the motive behind governmental regulation.
For instance, early on when the corporation was invented as a “legal body” to encourage investments without threatening personal assets, there were laws enacted to ensure that the facility was not flagrantly abused. Closer home to the present crisis, banks were heavily regulated to ensure that depositors’ money was secure, because the state had given them a virtual and literal power to create money.

They were forced to be conservative but steady. However, in the deregulatory orgy of the nineties, many other institutions were allowed to solicit funds from the public and deploy them in highly speculative ventures.
The low-interest policy of Greenspan encouraged borrowing which grew into mind-boggling proportions with the governmental sub-prime policy.

Banks wanted a piece of the action; the law was changed and they were allowed to enter the world of high-flying investments – including the newly discovered Philosopher’s Stone – derivatives.  If not directly, then through various and sundry financial affiliates – some created specifically for this purpose.
In Guyana, we have blithely gone along with the liberalisation mantra. What has saved us up to now (apart from the Clico and Hand in Hand debacles) is the undeveloped state of our local financial industry.  The government should re-look at the regulatory framework to discourage moral hazard scenarios.

 

 

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