Sunday, 23 October 2011

Occupy What?

23rd October 2011
The Malta Independent on Sunday

It had to happen! The untold misery brought about by the recession caused by the financial turmoil that started in 2007/2008 and is still rambling on, inevitably motivated the anti-globalisation crowd, often rowdy, violent and detestable, to morph into a much more convincing and civilised ‘Occupy Wall Street’ movement. This has been exported internationally, with the ‘Wall Street’ bit in the title being adopted by different nations to parallel home symbols of financial excess.

While the ‘Wall Street’ brand is a powerful representation of capital markets which people can easily connect with, it is rather a misplaced target. It is the financial markets rather than the capital markets that have brought the world’s economy to its knees, and the financial markets are not traded on Wall Street but are mostly traded on the invisible inter-bank electronic markets.

What the protestors are probably promoting is not the physical occupation of New York’s Wall Street, London’s City, or Malta’s Castille, but really their banner is notionally ‘Occupy us’; give us a job; restore our human dignity; don’t let us pay for the excesses of greedy bankers who are still enjoying their multi-million dollar bonuses from transactions that eventually brought about the crisis; spread the adjustment pain more equitably; don’t let the banks, in spite of the damage they caused, to remain masters of the universe abusing their too big to fail status.

That something is wrong with the world financial order is best glimpsed from two odd facts.

Is it not strange that we are caught in a situation where the poor of the world are financing the excesses of the rich? China, India, Russia, Brazil, Indonesia and the like, with balance of payments surpluses, are the major holders of US Treasury securities, mortgage bonds and such like US securities. Logic would indicate that Third World countries where poverty is still prevalent and where the average per capita GDP is a mere fraction of the average US per capita GDP, would better employ their surpluses to develop their own economies rather than buy US debt.

However, logic does not always prevail. There is a limit to how fast emerging economies can develop without igniting damaging inflation. Economies have a limited absorption capacity for new investments particularly as one has to bear in mind that such investment is generally concentrated in major cities, forcing fragile population shifts from rural areas to urban city centres. There is a limit to how fast cities can grow to accommodate such shifts without creating social problems which would challenge the stability of the political structures.

Take China. Having millions over millions of rural undernourished peasants spread in the wilderness of greater China does not offer much challenge to the stability of China’s central command. However, having a few concentrated millions forced to live in inhuman conditions in city centres with dashed expectations of a much better life, can be a formidable challenge to the political stability of the regime. China thus can ill afford to have annual growth rates below eight per cent p.a, but will be hard put to push growth rates above 10 per cent p.a. without stoking property bubbles and inflation fires.

China is unable to allow its surpluses to seep into much higher consumption rates by its population because, inflation apart, this will of itself widen the income gap between the top echelons of society and the rest. This cannot sit too comfortably with stability for a communist regime. China is thus forced to park its surplus in US Treasuries and has become the US biggest creditor, to the extent that China loudly complains when the US, benignly or otherwise, neglects to protect the exchange value of its dollar.

The other odd symptom of the troubles plaguing the financial system is the remuneration realities in the financial sector and the rest of the economy. When a structural engineer designing bridges that add wealth and efficiency to the economy is paid less than 10 per cent of the remuneration package of a yuppie financial engineer who puts together financial products with strange names like MBS, CDO or CDS that few understand and which add little value to anyone but the bank designing them and selling them, then something must be wrong somewhere. So wrong that we have seen traditional economic powerhouses, like the US and UK with traditionally strong manufacturing bases, lose their productive strength through migration of their industries to cheaper locations resulting in dangerous concentration of their economies on the financial sector. In the end, the modern day poorly regulated financial sector produces nothing but short-term profits at the expense of long-term damage when the bubble bursts.

There is never an easy solution to problems that have accumulated over several years and when strong petrified imbalances have to be addressed through painful reversal of well-ingrained policies with many vested interests defending the status quo. And no one has yet come up with a feasible true solution to the current crisis.

We have been fire-fighting the crisis and in the process shifting the problem from one sector to the other rather than addressing issues at their true sources. We have seen governments coming to the rescue of financial institutions, exposing taxpayers money to risks without commensurate return; governments sinking to their ears in debt and having no room left to stimulate economies in distress in terms of classic Keynesian teachings. Government debt has in many instances reached unsustainable proportions raising doubt on their ability to service and repay their debts. This has shifted the problem back to the banks that hold on their balance sheets plenty of such sovereign debt, traditionally considered gilt-edged but now increasingly doubtful.

Where do we go from here, is the obvious question. World leaders seem unable to embrace the problem. The US is in political paralysis with the President and Congress unable to agree on a sensible economic policy. With elections due in 12 months’ time no party is in the mood to compromise and the election result is perceived as the ultimate resolution. In the EU there are too many leaders but no one is in overall charge. Emerging economies have a problem switching their economic model from export-led to one based on internal development and increased consumption. Supranational organisations like the IMF and the World Bank do not seem to have either the resources or the moral authority to knock heads around to orchestrate an international consensus for a co-ordinated approach towards a real solution. G-20s, G-8s or G-n’s over-promise but consistently under-deliver.

In the absence of some political strong and co-ordinated political leadership that can frame the problem in a language that people can understand, make proper exposition of the consequences if problems continue to be neglected, and orchestrate a co-ordinated solution that spreads the pain equitably among surplus and deficit countries, the only solution left would be a choice between a deep depression or a prolonged recession accompanied by inflation, which, over a number of years can work its way to making debt burdens more sustainable. In any event, the greatest burden will fall on the weakest.
Occupy Wall Street and similar movements are important to raise sensitivity about important issues but they never offer true solutions. Like similar popular movements, Occupy Wall Street and their like have a clear idea of what they do not want, but rarely have any clear ideas about what they actually want or how to achieve it

Alfred Mifsud

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