The lengthy period of apparent tranquility fondly known by some as “the great moderation” was never soundly based. As with selling naked volatility, it was only a matter of time before the bill for the apparent benefits was delivered.
The secret, such as it was, lay in the persistent pursuit of asymmetric monetary policies and a radically deregulated financial sector. Unshackled and cosseted in this fashion, all notions of prudence were progressively cast off as so much antiquated baggage. Not only by the financial institutions themselves, but also by pretty much everybody else.
How anyone imagined it wouldn’t end in tears still surprises me, but then I no doubt have my own blind spots. Certainly, my sense of timing was terrible; things ran on for much longer than I’d ever have thought possible.
Nevertheless, end they finally did. The battle between the deflationary undertow inherent in such high levels of debt and official efforts to stop it from gaining the upper hand has been well joined for almost three years. Still early days though, I think. Top of the fourth perhaps; or in cricketing terms, late in the second day.
Plenty of time, in any case, for a fullblooded debate over how best to restructure and regulate our various financial systems so they serve something closer to their intended function.
Lord knows there’s no shortage of voices already, many of them marvellous, but not many take as their starting point the view that credit in and of itself isn’t a good thing and that unless it represents the temporary transfer of real savings, it’s likely to do much more harm than good. Nor do many see our current systems as profoundly flawed at their very core. Happily, such views, while still rare, aren’t quite the outlier they once were.
Adair Turner, Chairman of the Financial Services Authority in the UK, noted recently that the combination of asset-based borrowing and relatively illiquid and thinly capitalised financial institutions meeting that demand ” . . . creates the potential for self-reinforcing cycles, which are not just one potential cause but the essential cause of macro volatility, both in the upswing and in the downswing: and which could arise as much in a system of multiple small banks as in one of large Too Big to Fail banks.” [emphasis his]
He too sees these problems as intrinsic to fiat based fractional reserve banking. Though still a distinct minority view, there now seems at least a slight hope that the conversation may broaden and deepen sufficiently to bring about truly fundamental change, although I fear we may first need to experience a fresh and still more serious phase of the crisis.
At any rate, there’s no shortage of topics.
As for me, I’m semi-retired after spending much of my life in the financial markets. Now on a cattle property in semi-outback Queensland, I read, write, trade a little and do enough outdoors work to keep me relatively sane and healthy. All in all, not a bad balance. Let’s hope this blogging business doesn’t upset it too much.