Financial Markets as Drug Pushers

The self-delusion of us human beings really knows no bounds. For the longest time, we believed that markets were tough task masters, deniers of dreams for all except those who could afford them. What a bunch of outdated thinking that was. Instead, under the guise of all sorts of fine concepts, from “securitization” to “disintermediation,” financial firms acted more or less as drug pushers whose victims were innocent or all-too-willing consumers.

Rating agencies as discipliners? Central banks? Bank supervisory authorities? Loan officers? Credit card issuers? Did any of them act in any self-disciplining fashion? No. Hardly any stood up for the cause of financial discipline.

Take investment banks. They were all too willing to distribute low-interest debt issued by weak EU countries like Greece. Prior to that, these banks had conveniently cut back their credit-risk departments, no doubt a measure to boost price/equity ratios. As mere distributors of these debt issues, they felt they carried little risk on their own balance sheets and hence saw no need to worry about credit analysis. Anyway, the ratings agencies had given everybody a clean bill of health.

Only now do the investment banks find that maybe it wasn’t such a good idea for all those bonds to have been issued and distributed in the first place. What was sold off as AAA-rated sovereign bond issues is near junk now. Still, why worry, the bankers say. We made the fees owed to us. If the finance ministry of our client country really wanted to issue more debt, who are we to stand in their way? We are enablers of dreams, not discipliners to force people to see reality.

The same holds true for central banks. Remember when the much-revered Jean-Claude Trichet, in his exit interview from his presidency of the European Central Bank, lauded himself for having done a good job at keeping inflation low over the past decade or so? Given global economic integration and the resulting cost pressures, especially on labor, it stands to reason, with all due respect, that a gang of monkeys would have done just as good a job as the central bankers on the inflation-fighting front.

While they stared firmly at a nearly non-existent threat, they all followed blindly the cancerous doctrine that had been pushed onto a hapless globe by the true masterminds of destruction: Milton Friedman and Alan Greenspan. Under their disastrous influence, all bets for rationality were off since the early 1980s. They peddled the belief that the financial markets were all-knowing and “self-policing.”

In reality, the markets were nothing but hyper-selfish. Their activities are, in fact, all-too-revealingly described by that fitting neologism of “financial market players.” Why did so many, including central bankers elsewhere, go along with this ideology? Because anybody who went along for the ride made money. This is the classic case of the end justifying the means.

In a brazen hijacking effort of the financial markets, short-term profit was the validator for long-term conceptual soundness. Their original function, to transmit financial resources to worthy, bankable and profitable causes in the real economy, did not even take second place any longer.

For all their misplaced inflation-fighting prowess, central bankers completely missed the far more critical task of cross-border bank supervision. What, that is our job now? Central bankers are asking this question in amazement — as if they had never heard about the task of protecting the safety and soundness of their nations’ financial systems (i.e., the original task of central banks when they were introduced).

But it would be too easy to keep blasting the various financial institutions. The fact of the matter is that the rest of us went along for the ride. We can’t really plead too much ignorance. Whether we admit it or not, we deliberately deluded ourselves into believing that the markets wouldn’t let us get away with more debt if we couldn’t really handle it.

If we got that next loan, we deemed ourselves “safe.” In the process, without proper consumer credit supervision, that too being a central-banking task, too many of us, whether we live in the United States, Europe or China, went merrily about digging a deeper hole.

Soon enough, the “Age of Recrimination” will break out, between countries and within. The battle of Germans versus Greeks was but a foretaste of what is to come, with the United States and Europe at each others’ throats in the offing soon. Next in line? Emerging market populations protesting that they are deeply disillusioned that their ride into prosperity may be interrupted by the collective irresponsibility of the “advanced” countries.

And what about the battles over self-righteousness inside countries? They are bound to be pretty bloody as well. Sure, there are those who can claim with some justification that they were more prudent than most consumers by not taking on more debt. And yet, those same thrifty folks all too often are heavy consumers of public services like Medicare, pretending not to realize that it too digs a deep hole of debt.

The politicians, for their part, acted like investment bankers, seeing themselves as enablers of dreams. They steadily incurred more IOUs on behalf of the public whom they did not dare tell the fiscal truth for fear of not getting reelected. And, as with the bankers, we citizens — in an act of brazen self-pickpocketing — believed the politicians when they said that all would be fine and dandy.

This collective ignorance is made even more dangerous in the age of globalization. If sanity had prevailed, or if it now prevails, the world would have a globally integrated regulatory regime. That is the only way to keep limits on the risks recklessly embraced by the Goldman Sachses of this world, acting for no other purpose than their short-term financial self-interest, the globe and the future be darned.

The troubling part in all this is the consequences this has on future thinking about the idea of markets themselves, not just financial markets. If the latter have been drug pushers, not discipliners, then this suggests a major rupture in the understanding and acceptance of market institutions globally. Markets have surely been complicit, if not causal, in letting things go. In hindsight, despite all the advertising, in finance they focused on nothing else than collecting their transaction margins (and bonuses).

That their obsequiousness would trigger massive write-offs later on did not faze the folks inside the industry much. That, after all, only has an impact on general folks’ assets and pensions. We can’t worry about those poor louts, right? As long as we have managed to pay off our villas in the Provence, in Tuscany, in Aspen and elsewhere, we can always retreat there during any nuclear financial winter. So much for the circular logic of this particular species of humans.

Under that logic, everything in financial markets — contrary to the lofty pronouncements about synergies — turns into a zero-sum game. Either I win (and you lose), or the other way around. That crass reality is bound to have major effects, yet unfathomed, about future thinking on financial markets, if not the market economy in general.