Short memories, big crisis, 29/01/16

Niaz Alam, Dhaka Tribune op-ed 29 January 2016 
Davos, The Big Short, Ha-Jun Chang et al

Another January, another Davos.

Another Oxfam report timed to coincide with the annual World Economic Forum jamboree in Switzerland highlighting the ever-narrowing concentration of global wealth. The report estimates the net worth of the world’s richest 62 billionaires to be some $1.76 trillion … give or take.

An eye-catching amount because it’s reportedly the same as the net wealth owned by the poorest half of the world’s population. But basically no different from two years ago, when it would have taken the richest 85 billionaires to club together to match the net wealth of the planet’s poorest 3.6 billion people. One bus or two then? The big picture remains the same. Like the poor, plutocrats are always with us.

No doubt, among the assorted celebrity campaigners, politicians, and economic power-brokers who materialise at Davos each year, there are some who genuinely want to make a meaningful difference. They even have allies among those top 62 billionaires, like Bill Gates, who have pledged to give their wealth away for the greater good. But just as incontrovertibly, it is a truism that the tendency of those with wealth and power seems to be to use their wealth and power in the interest of protecting and growing their wealth and power.

To expect otherwise is to be naive.

The not-so-subliminal message of global summits and elite talking shops like WEF is “we like to listen and do our best for the world. Trust us.” But why should we?

The history of capitalism is replete with recurring financial crises that nobody was able to prevent. Even when the price of these is reflected in share price crashes which slash the net worth of the world’s wealthiest, everyone knows that their real costs are paid by everyone else through unemployment and economic misery.

Marxists, of course, pin the blame for this on the inherent contradictions they observe in the capitalist system. But given that few outside the most deranged Randian think tanks deny that democratic regulation is essential to curb the excesses of unfettered capitalism, the true answer probably lies in human psychology.

If everyone is constantly being told that stewardship of the global economy is in the hands of the well-intentioned and Wall Street and its equivalents leave no cheque-book unfurled to recruit the brightest minds they can find, it becomes easy for group-think to take over. The world keeps moving on, oblivious, comforted in the belief that those at the steering wheel know what they are doing. Until the next crisis hits.

Even when there are, as always, ample warning signs, FOMO (fear of missing out) is usually enough to keep most people bought into the prevailing consensus that all is, or will be, well. Witness the aftermath of the credit crunch that brought down the Lehman Brothers during the global financial crisis of 2007-2008. It was a genuine catastrophe. The world’s biggest banks and their cohorts essentially bankrupted the system by gambling away their assets on bubbles of complex, but vacuous financial instruments. For all intents and purposes, leading Western governments had to turn capitalism off and on again, by taking more control and injecting new money.

And then they let it all slip away again.

Politicians and the public alike revel in talk of reforming the system. But it’s mostly just that, talk. And no match for endless, well-funded lobbying by vested interests. Only Bernie Sanders among the current crop of would-be US presidential candidates shows any willingness to ask more fundamental questions. It is deeply interesting then to see The Big Short is in contention for the Oscars next month.

An entertaining dramatisation of Michael Lewis’ best-selling non-fiction book, this smartly-scripted film provides an insightful account of a disparate group of Wall Street investors and hedge fund managers who made billions by being among the few people on Earth able to both predict and benefit from the housing market crash that sparked the big credit crunch.

Although full of Hollywood A-listers and helmed by a director famed for comedies like Anchorman, it stands out from most movie depictions of business and finance by naming the real-life institutions and individuals it gleefully depicts.

On the whole, populist screen references to business or money focus on simplistic tropes and stereotypes like Mr Burns from The Simpsons, or crowd-pleasing fantasies like Trading Places. And, of course, most profitably, as far as Hollywood is concerned, they are conventional morality tales about gangsters or ordinary people seduced by hubris and criminality like Oliver Stone’s Wall Street.

It is highly refreshing then to see a Hollywood film deconstruct and explain real life deliberately obfuscatory, but totally legal terms like “synthetic collateral debt obligation”, which baffle even the insiders who are meant to be familiar with them.

If the story has a weakness, it is the emphasis inherent in the book, which makes great play of these real-life individuals being maverick eccentrics whose opinions were easily derided and ignored by peers. When, in fact, as the film does its best to point out, its small band of anti-heroes were still insiders with the capital and connections to be able to make their titular “big short” bet in the first place.

As those with longer memories will recall, the narrative device downplays the fact that, in the decade or so before the crunch, other genuine outsiders, who also warned of the risks posed by derivatives reliant on never-ending house price rises, were even more readily dismissed as Casandras.

Unless an investor had an ethical policy to avoid such instruments altogether, FOMO made it very easy for banks and institutions to get sucked in, because the consensus would assure them everyone else had faith in the same game.

From personal experience, I can think of only one prominent ethical investment institution which actively avoided anything that could be linked to the euphemistically named sub-prime mortgages, gambling on which caused the Big Crash.

And in that case, it was not because of complex calculations to guard against market risks, but a fundamental wish not to be associated with sub-prime mortgages, because, by definition, they imposed higher interest rates upon poorer borrowers.

Some Islamic financial institutions with rules avoiding usury did likewise. But just as many, being themselves either a part of or heavily-influenced in their Sharia-compliance committees by mainstream global banks, were just as likely to be sucked in by FOMO as the rest of the world.

If there is any lesson I can draw from this reminiscence, it is the wisdom of asking simple questions. It ought to be common sense to avoid investing in something that cannot be simply explained. But history shows that, in practice, this is often not followed. Human nature makes it natural to misplace faith in the infallibility of experts and the prevailing consensus. It is for this reason I end by recommending 23 Things They Don’t Tell You About Capitalism, the 2010 book by Ha-Jun Chang, a South Korean-born economist currently teaching at Cambridge University. Like The Big Short, he uses highly accessible plain English to consider some simple-yet-totally-fundamental questions about economics.

To give an example, one of the 23 things he says they don’t tell you is that “free-market policies rarely make poor countries rich.” He reviews this by noting historical facts about the role played by protectionist policies during the economic take-offs of the US, UK, and Korea, before they began espousing and imposing market orthodoxies on other nations.

While other economists have asked similar questions, their observations tend to be wrapped in a particular political school of thought or obscured by jargon, whereas Chang’s views are illustrated by amusing anecdotes and simple challenges such as why and how a bus driver in Stockholm gets paid 50 times as much as one in Delhi, when the latter has more cows to contend with. His witty analysis provides valuable food for thought. Next year’s attendees at Davos would be well advised to get a copy and consider the same questions, if the top tables really want to make a change for the poor of the world.

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