28th May 2014 by Shaun Richards
Yesterday saw a new phase in the credit crunch era as both the head of the International Monetary Fund and the Governor of the Bank of England talked about the new buzz phrase which is “inclusive capitalism”. It has the advantage of sounding good so let us investigate how Christine Lagarde explained the concept. The latter word of the two came into being more recently than you might think.
The term “capitalism” is only used for the first time in 1854 by an Englishman, the novelist William Thackeray—and he simply meant private ownership of money.
Then the inclusive part of the phrase was added in.
to make it truly the engine for shared prosperity?
If so, what would the attributes of inclusive capitalism be? Trust, opportunity, rewards for all within a market economy—allowing everyone’s talents to flourish. Certainly, that is the vision.
At this stage this is a bit like asking people to vote for apple pie! It sounds and reads well but what has actually changed since Mademoiselle Lagarde stood up and started speaking?
Also the trust issue is an awkward one for Christine Lagarde. After all she was one of the Euro area finance ministers who proclaimed that the bailout of Greece was a “shock and awe” moment when in fact it spiralled the Greek economy into an economic depression. I doubt she will ever get trust again from the Greeks. She was also one of those involved in breaking the “no bailout” rules in the Euro area.
Dealing with inequality
In an attempt to engage with what I call the Piketty issue Christine told her audience this.
In the US, the share of income taken home by the top one percent more than doubled since the 1980s, returning to where it was on the eve of the Great Depression. In the UK, France, and Germany, the share of private capital in national income is now back to levels last seen almost a century ago.
The 85 richest people in the world, who could fit into a single London double-decker, control as much wealth as the poorest half of the global population– that is 3.5 billion people.
I wonder what the audience which included Prince Charles, President Clinton, Lady Lynn de Rothschild and Fiona Woolf, Lord Mayor of the City of London made of that? A talking shop seems likely here as some of them were no doubt mulling the fact that the weather at the ECB Forum in Sintra was much nicer. Still it passed some time for those who will be off to attend the Bilderburg conference which is apparently taking place this weekend.
Integrity in the financial system
Many of you might be thinking that this section will be rather short! However it would appear that Christine Lagarde is living in some sort of an alternative universe.
Thankfully, the crisis has prompted a major course correction—with the understanding that the true role of the financial sector is to serve, not to rule, the economy.
No-one seems to have told the UK banks that do they?! Anyway we get some more glad handing and praise.
The good news is that the international community has made progress on the reform agenda.
I wonder if Christine Lagarde was able to say this with a straight face? As back when she was finance minister of France she argued against increases in bank capital for example. There has been a road to Damascus moment as she now argues for higher bank capital.
So my position on Christine Lagarde remains the same which is that putting a woman at the head of the IMF was a positive move only spoilt by the fact that there were plenty of better female candidates for the job.
As someone praised by Christine Lagarde in her speech it was no surprise to see Mark Carney talk on similar themes yesterday. Although it did remind me of what he told us last October at the 125th anniversary of the Financial Times.
By 2050, UK banks’ assets could exceed nine times GDP,………, if organised properly, a vibrant financial sector brings substantial benefits.
As I pointed out back then Mark Carney was cheerleading for the UK banking sector. Now he is telling a different story.
The big drivers of globalisation and technology are magnifying market distributions. Moreover, returns in a globalised world are amplifying the rewards of the superstar and, though few of them would be inclined to admit it, the lucky. Now is the time to be famous or fortunate.
Is he describing himself as he is a famous “rock star” central banker?
What role do central banks have here?
This issue is addressed in the following way.
First, our core macroeconomic objectives promote social welfare. Second, we can help to create an environment in which financial market participants are encouraged to think of their roles as part of a broader system.
Fine words except only a paragraph or two along we get what has actually happened in the credit crunch era.
Extraordinary monetary stimulus – both conventional, through low short-term interest rates, and unconventional, through large scale purchases of assets – raised a range of asset prices, benefiting their owners, and lowered yields, benefiting borrowers at the expense of savers.
Here we have the silver bullet for Mark Carney and Christine Lagarde’s Dracula which is that it is deeds by which we should be judged and not words. The policies adopted by central banks and the IMF have substantially contributed to the problems they are now complaining about! Perhaps they hoped that the unwary would not spot this as they shuffle the blame from outside their front doors.
We go onto full-scale hypocrisy alert here.
First, ending Too-Big-To-Fail
In the UK the biggest banks have got bigger and even worse the mergers which created this such as Lloyds with the Bank of Scotland and the Co-operative Bank with the Britannia weakened them. To most people the UK banking system looks as oligopolistic as it did before credit crunch and claimed solution of mergers made banks even bigger. Some new entrants have joined – a welcome development – but an opportunity to really encourage them has been missed. Also we keep getting bad news from our major banks especially from the Royal Bank of Scotland suggesting that the bad news is still being fed out like it is on a notched rope.
The second issue sadly ignores the fact that the Bank of England behaved like the three wise monkeys when reports of market fixing reached it.
Second, creating fair and effective markets
Why should we believe it will behave any differently next time? Also the whole concept is flawed at a time when central banks are interfering in so many markets right now. What would be the price of UK government bonds if the Bank of England announced it was no longer going to hold £375 billion of them? Perhaps the moot point on that issue is to be found in Japan where the Bank of Japan is raising that particular issue daily as it buys more and more Japanese government debt.
This feels like a double pronged attack from the IMF and the Governor of the Bank of England. The sentiments expressed are extremely welcome but the catch is that their actions have pushed events in a different direction. There is in fact a confession to this in Mark Carney’s conclusion to his speech.
Authorities are working feverishly to end too-big-to-fail.
So they are working in 2014 to try to end a problem that could not have been more decisively highlighted in 2007/08. Not exactly keeping up with current events are they? The language is also very emotive “working feverishly” which rather contrasts with the reality of 6 years or so of not very much. After all if there had been any real gains they would have rushed to tell us about them. All we seem to get are more and more highly paid regulators which as a first order consequence increases the inequality these two regulators are complaining about. Back in 1988 it looks as though Leonard Cohen was indeed looking to the future.
Everybody knows the fight was fixed
The poor stay poor, the rich get rich
That’s how it goes