Financial system: no empty cockpit
September 17 saw the publication of two books that challenge our image of the (financial) system. In the first, Joris Luyendijk challenges the idea that the financial system is under control again after the banking crisis of 2007/2008. Using the metaphor of an airplane, he warns that its ‘cockpit’ is still empty and that the next breakdown of the financial system could cause a real crash of the global economy. “If money is to society what blood is to the body then the financial sector is the heart; pump too much or too little and the body suffers, interrupt the pumping altogether -even for a brief period- and the body may never recover.” In a different book Koen Haegens argues that there is no such thing as a ‘market economy’, a set of markets that dominates our economic system. Markets and market relations are only a thin veneer on top of an economic reality that is far richer and more diverse than economists and politicians make us believe, not least in the financial system.
Both books are based on journalistic endeavours to shake Adam Smith’s ‘invisible hand’ which ‘guides’ the financial system in THE financial centre of the world, the City of London. Luyendijk did so for The Guardian; Haegens is economic editor of Dutfch weekly De Groene Amsterdammer.
Luyendijk’s analysis of what is wrong echoes Dani Rodrik’s description of an “inescapable trilemma of the world economy” “that democracy, national sovereignty and global economic integration are mutually incompatible: we can never have all three simultaneously and in full”. Luyendijk writes: “The fact is that megabanks and huge financial institutions operate globally while politics and regulation are organised at best in continents or blocks. Financial institutions play off countries and blocks of countries against each other shamelessly. This raises the question whether globalisation is even compatible with national democracy. This is the empty cockpit.” His solution is that “ordinary citizens wrest power back from global finance through peaceful means” despite justified “cynicism about the current crop of mainstream political leaders” who are clearly not “planning to take on the power of global finance”. His lengthy series of appearances in public following the publication of his book in Dutch, German and English seems to be his personal wrestling match with global finance.
Haegens offers a more detailed recipe: “We should stop thinking about politics as a contest between markets and governments. Markets need governments; governments are often the most principled advocates of the free market”. In THE financial centre of the world, the City of London, he found the very visible hands of government intervention everywhere. Efficient markets are all created by governments. Efficiency requires regulation, standardisation and rule of law to enforce contracts, not unfettered freedom. “Markets are political, so democratically elected politicians may, no should interfere.”
Governments should not hesitate to visibly and accountably occupy their empty seat in the cockpit of the financial system. The banks that were rescued from bankruptcy because they were ‘too big to fail’ should not be reprivatised unless they appoint democratically accountable representatives to their Boards. Rodrik’s analysis implies that we need a global financial system for our present level of global wealth. We can work around the absence of a global government. Global financial actors should be required to offer seats in their Boards to representatives of the main countries where they operate, if necessary rotating (like in the UN Security Council), or representing other countries too, as is the case with the IMF and World Bank.
As soon as governments occupy their cockpit seat, they will find out that the other seat is not empty at all. It is occupied by an automatic pilot, a robot of their own making. It consists of countless regulations that were once meant to level the playing field and set the rules of the market game. They will discover that cheating has become part of the game. Crucial systems have become disconnected from the automatic pilot. Some actors have learned to turn its routines to their advantage and the playing field is now overwhelmingly skewed in their favour. A whole class of fiscal, legal and audit experts has emerged to assist them in doing so.
In our new research article ‘The licence to create money‘ we explore the alternatives to what is currently at the heart of the financial system, money creation. Advocates of monetary reform claim that better control of money creation could eliminate a major source of economic crises, This claim is taken very seriously by none less than the Bank of England, at the heart of The City. We argue that the cockpit of the financial system has three seats, not two: government, the market mechanism and experts. Neither of them can be trusted to be alone in the cockpit. Politicians should stop bickering in the pantry, seeking to entertain the passengers, and get on with their job of influencing the flight course by assuming their responsibility for creating cockpit seats and allocating them to responsible and accountable pilots. Terms such as the ‘market economy’ and ‘There Is No Alternative’ are ‘performative language’: words performing as self-fulfilling prophesies. Such concepts set the rules of a game where cheating is part of the rules, a show that hides the reality of too many actors trying to evade rules (against corruption, cartels etc.) that bind others. Politicians should be aware of the responsibilities implied in their role. They are in a position to make their words come true. The language they use becomes our reality. When they talk in unison about a ‘market economy’, we behave as if one exists and, at least, stage a performance of behaving in accordance with some ‘market mechanism’. When politicians bicker about whether markets or governments should be in control, we will overlook the possibility of any other alternative.