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Per una disintossicazione finanziaria globale



All complex economies need a strong financial sector. Finance, unlike traditional banking that slowly accumulates capital, can be thought of as a capability for making capital - and hence enabling the launch of major projects. Financial assets are basically debt, but debt with the special feature that it promises to make great profits. This ingredient of finance rests in turn on the need to "financialise" non-financial economic sectors. Because finance is about debt it needs grist - bits and pieces of the "real" economy - for its mill.


The larger economies are among the most dependent on their financial sectors. The value of financial assets in (for example) the United States, Japan and Britain by the time the global crisis erupted in 2008 was 450% to GDP (see "Mapping global capital markets", McKinsey Global Institute Report, January 2008). The European Union average is 350% to GDP, while Germany and France - at 250% - are at an even lower level, in a way that bears on their economies' comparative performance in the recession.


From the 1980s, the grist that finance requires was provided by the "bundling" of large numbers of corporate debt, but also of millions of small individual credit-card loans, automobile loans, and residential mortgages.


By 2000, the complexity of what was getting bundled had intensified - via derivatives on interest rates on long chains of corporate debt, credit default swaps (CDS), and other mechanisms. In fact CDSs had become the ultimate power-tool, a "made-in-America" product whose quantitative value jumped from $1 trillion in 2001 to $62 trillion in 2006 (more than the combined GDP of all the world's countries, $54 trillion). This rampaging innovation was the system's demiurge: when these swaps were called in during 2008, amid rising alarm among investors that something was wrong, the result was an all-consuming financial crisis (see "Too big to save: the end of financial capitalism", 1 April 2009).


By September 2008, finance had run out of grist and was reduced to scraping the bottom of the barrel - taxpayers' bailouts and (in the US) over 15 million sub-prime mortgages to modest and low-income households (most of which have or will wind up in foreclosures long after many investors had made their profits).


The relentless finance-mill found a respite in taxpayers' bailouts. But it is still in trouble. The major economies face a critical choice: do they really want to rescue a system with such a high level of financialisation - especially when there are other ways for the average firm and household to secure credit?


A neat package


Small, local banks and credit unions can in great part meet the credit-function needs of complex economies. After all, most firms and households in major states (such as Germany, the United States and Japan) do not need high finance. The proposal of the New Economics Foundation is excellent in this respect: namely to use Britain's existing post-office network and infrastructure as a platform for the credit function (see Delivering the Post Bank, New Economics Foundation, July 2009).


In the US, there are over 7,000 small banks with capitalisation under $1 billion (and half of these under $500 million). These small institutions need to service local firms and local households; that is what they are about. It is not that the owners or directors of these banks are particularly enlightened or nice as people, but that they have a systemic requirement to service their market. Many of these small banks have lost market-share in consumer credit, as the global banks aggressively sought consumer accounts that could (through diverse types of flat charges, in part illegal) generate very high profit-rates. The big banks' policies hurt consumers and local banks alike.


The time has come to definancialise major economies to a reasonable level. This would be an act of strength not weakness; for Britain to reduce its financial sector to the levels of Germany and France would represent a great advance in its overall position. It won't be easy, but the proposal of Adair Turner (of Britain's Financial Services Authority [FSA]) to tax financial transactions is the little tool that could begin the process (see Gillian Tett, "Could ‘Tobin tax' reshape financial sector DNA?", 27 August 2009).


If it were implemented, quite a few banks would (at least for a while) leave London. That would be good, for a smaller core of high-finance institutions may well suffice if that economy had a lower level of financialisation than Britain has now. True, there would also be accompanying losses. But the landscape of losses that this financial debacle has produced is so much deeper, and far more widely wired into all economic sectors, than any loss of financial pre-eminence. It is time for policy-makers too to show boldness and imagination.