In recent weeks, observers of left and right have been expressing great consternation over the increasing penetration of American capitalism by foreign sovereign wealth funds, which in a few notable instances, have ridden to the rescue of American financial institutions enfeebled by various exotic forms of speculation, which, for that matter, ought to be distinguished from responsible investing. A partial tally, given by Andrew Leonard in a piece in Salon, reads as follows:
# Citigroup: $7.5 billion from Abu Dhabi Investment Authority and $6.88 billion from Government Investment Corp. of Singapore.# Morgan Stanley: $5 billion from China Investment Corp.
# Merrill-Lynch: $5 billion from Singapore's Temasek Holdings, $6.5 from Kuwait Investment Authority, $2 billion from Korean Investment Corp.
# Bear Stearns: $1 billion from China Investment Corp.
# UBS: $10 billion from the Government Investment Corp. of Singapore.
Leonard discusses the successive bouts of hand-wringing and whining that have accompanied this emerging trend, most poignantly the distraught complaint that ill winds are sweeping away the momentous economic transformations inaugurated by Reagan and Thatcher, and observes that
Perhaps it would be more accurate to say freer markets lost the day. The root of Wall Street's woes leads back directly to their own strategic missteps, greed, speculation-run-amok, and lack of appropriate supervision. The brightest minds in finance had exactly what they wanted, a playground where the monitors were looking the other way, and they blew it. When the China Investment Corp. pumps in $5 billion to Morgan Stanley, we are not witnessing the triumph of state capitalism, but rather, the embarrassing, humiliating failure of Reagan-Thatcher style unregulated capitalism. So now the U.S. buys Chinese toys at Wal-Mart, and China uses the resulting cash to buy American banks. Hey, anything's fair in love and war and free markets.
There is, in all probability, something in that paragraph to offend many constituencies of any conservative coalition; I propose, instead, to prescind from questions of that nature to focus on some of the broader questions, the meta-questions, inherent in this turnabout. First, there is the necessary, though oft-neglected, consideration that markets do not really self-regulate; a certain degree of self-regulation occurs within any given rule-set, and this is really all theories of spontaneous organization have ever demonstrated or will ever demonstrate. Instantiate a crummy rule-set, and the self-regulation that occurs within its structures will be crummy - and you might end up with something like a tech stock bubble, or a mortgage bubble.
Second, another necessary consideration that is often neglected is the fact that information is always imperfect, unevenly distributed, and polluted by nonrational factors. Chief among these nonrational factors would be what former Fed chairman Greenspan referred to as "irrational exuberance", a condition that obtains when wild fantasies of gain outrun the actual evidence and fundamental indicators, such as we apprehend them. The history of political economy is replete with such boom-bust cycles, a fact which, in itself, ought to dispel many illusions.
Third, the very architecture of the financial system itself, with the Federal Reserve at the apex, compounds the informational refractions, as Wall Streeter Noah Millman observes:
...in “fiat” currencies, price signals are much harder to interpret. That, in turn, raises the return hurdle to investment, because investors must be compensated for that fundamental uncertainty. And it makes the job of the central banker much more difficult. Unsurprisingly, the power central bankers have to add and withdraw liquidity from the system, and hence weaken or strengthen the currency, in itself makes it that much harder for them to determine what monetary stance is appropriate in a given situation.
Interestingly, this is one of the principal arguments of certain schools of libertarian thought, not to mention many Austrian-school economists, against the notion of central banking: it is an argument with a clear analogue in Hayek's critique of the informational hurdles to central planning. However, I've not come to write a disquisition on free banking (whatever that is) and Ron Paul, so I'll move on.
Fourth, the American economy has been undergoing a momentous transition over the course of the past several decades. While it is formally correct to state that a dynamic economy is, by definition, always changing, such generic rubrics often simply equivocate, thus concealing broader trends. One can rearrange the economic chairs without renovating the architecture of the room; and what has been transpiring is the conversion of the American economy from one based on production to one based on consumption, and not just ordinary consumerism of the sort that has characterized the American Dream since the 1950s, but consumption far in excess of actual productivity, necessitating vast infusions of credit, now called liquidity.
Fifth, and finally for now, globalization has exacerbated the strains of the latter problem, as the processes of outsourcing, insourcing, arbitrage, and the mythos of the new economy both facilitate and legitimate the conversion of the American economy into something more ethereal than that of a nation that actually produces stuff. This process, which is manifest in a variety of forms, from deindustrialization and the absurd notion that all Americans can become cogs in a new economy of abstract symbolic manipulations, to immigration, creates a structural imbalance. It must be understood, for example, that while the sales of imported goods contribute to objective GDP, via their importers and retailers, their actual production contributes to the GDP of the producing country; in the broadest sense, the level on which these trends are unfolding, this example, multiplied millions of times over, and varying somewhat with each iteration, necessitates a stabilizer, if the perpetual motion machine of the consumption economy is to continue running.
Let's step back for a moment. Some political economists a century ago discussed the recurrent boom-bust cycles that had bedeviled the Nineteenth Century; among their conclusions was that the operation of economic 'laws', in connection with the vast increases of productivity made possible by industry, resulted in systemic imbalances: production could easily outpace demand in a marketplace with minimal protections for workers, and when this happened, the works would enter a bust phase. The Keynesian settlement was the upshot of these reflections, themselves rooted in something fundamental, even though the Keynesian solution may have been suboptimal in some respects. But that settlement is kaput, along with the various pieces of the social contract that accompanied it, killed, ultimately, by the great unraveling precipitated by the oil shocks of the Seventies and the political aftermath. Essentially, globalization in its current manifestation was both the replacement for the failed Keynesian order, and the solution to the causes of its failure. Or so it was thought.
Globalization, for its part, simply forced a transition from one set of systemic compromises to another, bequeathing the perpetual accounts imbalance to the nation. Trade imbalances, however, would normally counsel a period of belt-tightening and reflection, perhaps fundamental reform; that, of course, would entail pain, both for the consumer and for those who benefit from the status quo. Another means of redressing the imbalance had to be found, and one was near to hand: we could enjoy a looser monetary policy, flooding the markets with liquidity, and buoying up with debt an economy that would otherwise have to undergo significant contraction. Essentially and systemically, the decision was made to veil with liquidity and increased consumer spending on its basis (Keynesians would call this velocity of money) the foundational transformation - a hollowing-out, in reality - of the American economy, the great and gradual leveling-down of American prospects to a low, low global mean. All illusions must eventually desert us, stripped away by merciless reality. All bubbles deflate. And all debt pyramids collapse, at least in part. And that is how a nation debases its currency when it cannot possibly export enough in response to the decline in value, in order to compensate for its imbalances; and that, in turn, is how creditor nations come to possess large shares of some of the 'crown jewels' of American High Capitalism. When you default or even simply totter, the lender gets at least a portion of your stuff. The difficulties this engenders may not derive from specific management-related decisions, but from the fact of the integration itself, which is a diminution of sovereignty and flexibility in policy formulation. But that is simply capitalism, globalist-style, in action.
Comments (6)
That certain large industries will come suddenly upon hard times is inevitable. There is blame enough to go around, but lets not fool ourselves into thinking this kind of thing can't happen even with more costly and onerous regulations.
What is your problem with globalization? That there was someone there with the money to bail them out, to the tune of a couple of percent of their overall capitalization? Would you prefer more recession and less liquidity?
Posted by Sam | January 24, 2008 2:36 PM
Of course there will always be business cycles, but there is no necessity of the positive phase of the cycle yielding to negative phases in the manner we have seen, characterized by vast, speculative malinvestment. That requires a combination of lousy, loose monetary policy, the wrong types of deregulation, the absence of regulation upon exotic and arcane financial instruments - some of which cannot actually be priced accurately by markets themselves - and, as a little garnish for the cocktail (because, if we have deregulation in one place that is ill advised, we may as well have regulation in some other place that is also ill advised), regulatory pressure to end the borrowing differentials between ethnic groups. (Steve Sailer has written about this aspect of the subprime fiasco.)
Globalization is the overarching policy trajectory into which most of these discrete policies fit; my problems with it are discussed in this entry. Generally speaking, globalization constrains a nation's capacity for self-governance, and exacerbates a structural tendency of modern politics generally, and liberalism particularly, to order the affairs of men by means of instrumental reason, reason in the service of the passions. This latter is accomplished by exalting the roles, as shapers of the social order, of those institutions which most profoundly reflect the ethos of instrumental reason and its utilitarian calculus, namely, corporations and the managerial apparatus of the modern Western technocratic state.
Posted by Maximos | January 24, 2008 3:00 PM
Just a tiny correction, the article is in Salon, not Slate.
Posted by Step2 | January 24, 2008 5:00 PM
I appreciate the correction, Step2.
Posted by Maximos | January 24, 2008 6:01 PM
Interesting post, that one. I'll hold off on commenting until I'm sure I've digested it.
But let me ask: What is your working definition of globalization?
Posted by Sam | January 25, 2008 9:34 AM
A rough definition of globalization, one sufficient to get started, would be that globalization is a process of transnational economic integration, undertaken on the basis of a variety of motivations (ranging from theories of utility-maximization to the cruder desires to escape regulation, social contracts, etc.), but expressive of a systemic logic (capitalism first created integrated national markets, now...) expressed politically (elaborate legal regimes, intrinsically contestable within the framework of politics, international harmonization, etc.).
Posted by Maximos | January 25, 2008 11:40 PM