Financialization and the Financial Crisis
Eric Pineault is the designated hitter on the topic of financialization but I thought I might make a small contribution to get the discussion rolling.
I’ve been reading Galbraith’s The Predator State — see a review here — and it got me to thinking just how little our federal government — and governments elsewhere — has done to radically change our financial system in a way that would minimize the chances of a re-occurence of the current crisis.Â Â If anything, the policy response thus far seems designed to dial us back to the summer of 2008 and beyond, to unstuck the securitization markets so that everyone can go back to not caring about debt.
What do I mean? Consider the federal government’s –Â and the private sector’s — major credit crisis policy initiatives:
1.Â Since last spring, the central bank accepts a wide range of collateral in exchange for short-term liquidity (PRAs), including Asset-Backed Commercial PaperÂ (ABCP) and other esoteric derivative instruments.Â These efforts all, effectively, legitimize these financial products and the underlying philosophy behind them;
2.Â The government has introduced two major programs aimed at restarting the securitization markets, namely backstopping the ABCP restructuring and the $12 billion Canadian Secured Credit Facility (CSCF) for the auto leasing sector.
3.Â Canada’s august accounting body has put in place accounting changes that allow banks to defer painful writedowns of their bad debts;
4. The $125 billion insured mortgage purchase program (IMPP) has been set up with no quid-pro quo from the banks — no demand that they limit dividend payments, no demand that executives take a pay cut, nothing. Oh, I know. It’s “not a bailout” but an enlightened investment on the part of the federal government that insured the mortgages anyway (if it’s such a good idea, why don’t we do it all the time?).Â Sure, but that view evades the crucial point, which is that the federal government stepped in because it had to.Â Moreover, the policy has major benefits for the banking sector — swapping mortgages for government debt also makes their risk-adjusted capital ratios look much better (some good news here in that the banks are starting to rely much less on IMPP).
Now I’m not necessarily saying that any of these policy responses is wrongheaded. I’m not sure I would have done anything different.Â What I would do different, however, is try to frame them — or at least begin the process of framing them — in a longer-term discussion about how to avoid this mess in the future.Â That means, giving serious thought to restructuring at least three major areas of policy:
1. Taxation policy: As Galbraith rightly points out, the broad policy approach in the last 20 or 30 years has been to shift taxation away from investment income — capital gains and dividends (hello TFSA) — towards consumption (hello GST — although clearly, Harper has played somewhat against trend in lowering the GST).Â Â One of the consequences has been an explosion in dividend payouts, share buybacks and a decline in investment spending (see any of Jim Stanford’s pieces a year or two ago on the lack of investment spending by Canada’s business class) which has driven stock market prices up (and now down).Â The other resulting consequence has been a boom in investment culture — the idea that everyone can get rich by just putting their money and faith in the stock market — see point 3 below;
2. Banking: Is it wise to even have securitization markets — unheard of just 20 years ago — and if we want them, how should we regulate them to ensure they don’t go kaboom in the future?Â Not a word on this has been ushered thus far by the government despite the fact that this is clearly the locus of the current crisis;
3. Income policy and social responsibility: Partly as a consequence of the points made in (1) above, there’s been a broad shift towards putting the individual at the centre of his or her own economic future (retirement) rather than thinking about the issue from a collective perspective (income security programs).Â A related effect has been the tendency for our economic elites to push the largely pointless and ineffectiveÂ “economic or financial literacy” agenda.