In a special edition of the Financial Times, with a dramatic cover wrap which was virtually blank but for the giant words “Capitalism: Time for a Reset,” its economics doyen Martin Wolf went out of his way to define it for readers, guessing they too had to be enlightened. In an essay which bemoaned stagnant wages and productivity, inadequate competition, and rampant inequality, he explained that rentier capitalism “means an economy in which market and political power allows privileged individuals and businesses to extract a great deal of such rent from everybody else.” The half-forgotten term is as old as Adam Smith, who first defined rentiers as capitalists who were able “to reap where they never sowed.”
The first lie is that if finance is entirely free, globalised and unregulated, it will develop instruments to insure against risks (derivative products), rendering impossible the spread and intensification of the blaze. After two decades of stable inflation and financial liberalisation, the financial community, the media, and the political establishment loved to proclaim that systemic crisis had now become impossible (‘this time it’s different’). But the impossible did happen. This owed not to some external mega-event but rather to the fact that speculation had eroded from within any sense of reason and any barrier to the appeal of greed. This first lie is also the basis for the other two.
Iceland was unique in that they handed over jail terms to bankers.
Gylfason believes that when a country goes through a major economic shock, in addition to getting its financial house in order – which Iceland successfully accomplished at the behest of the IMF — it also needs to clean up its act in the judicial and political realms. “We have a mixed picture here,” he says. “Thirty-nine bankers were awarded prison sentences by the Supreme Court of Iceland, to the tune of 2.5 years on average. This means the amount of prison time in man-years that the Supreme Court handed out is close to 100.” He admits some critics have alleged that “the small fry were sentenced, while the big fish got away. This raises sensitive questions about equality before the law. But we will know more once the Supreme Court hands out its last sentences in 2019.”
Most of us remember the pains and uncertainty around that time. But, have we learnt the lessons?
During former Federal Reserve Chairman Paul Volcker’s famous remarks to members of the Economic Club of New York after details about Bear Stearns’ rescue by JP Morgan Chase and the Fed came out ten years ago, he pointedly observed that such actions carried an “implied promise of similar action in times of future turmoil.” The Fed’s intervention is commonly remembered as the start of a cycle of institutional collapse and government bailouts that defined the 2008 financial crisis. Volcker went on to observe that such crises have in fact been a “recurrent feature of free and open capital markets” and that “any return to heavily regulated, bank-dominated, nationally insulated markets is pure nostalgia.”
On the importance of measuring financial inclusion.
The latest Global Findex report informs us that 515 million individuals opened a “bank account” at a traditional financial institution or through a mobile money provider between 2014 and 2017. As a result, 69% of adults worldwide now have bank accounts, up from 62% in 2014 and 51% in 2011. This rise in financial inclusion is welcome news, not least because, in the event of a downward income shock, a household’s consumption will fall much less if it is linked to the formal financial sector.
Story of a massive scandal. And how the biggies got away, again..
Knowledge@Wharton: Nobody has been doing any jail time because of this. That’s a disturbing pattern on a lot of fronts, because we’ve seen a similar result here in the U.S. after the financial crisis, and many of the other banking-related scandals that have occurred.
Enrich: You know what’s interesting? As part of the publicity for this book, I’ve done a tremendous amount of radio. And radio, as you know, can be very deeply polarized on both the right and the left in this country. So just as preparation for a lot of these interviews, I did some quick research: Is this a Trump radio station or Clinton or Bernie Sanders radio station? And I was expecting different slanted questions. You know what? Everyone’s asked the exact same thing, which is, ‘Why do the financial elites keep getting away with murder?’ It seems to be this really unifying theme across the country right now. It just makes people’s blood boil. There was so much public pressure on politicians and prosecutors after the crisis to find some individuals to hold to account for the massive harm that the banking industry caused to the country and to the economy, really to the world.
Banking industry is ripe for disruption. The interesting thing is that Banking comprises of a host of different services and each of these service lines can potentially have its own Uber or Airbnb.
Nair: You’ve been in this space for some time. What do you think are the most exciting trends in fintech?
Gade: Financial inclusion is probably the most exciting trend for me. … We are providing access to credit to more than 2.2 million people on an annual basis. This is a source of satisfaction that is very unique. … We are the settlement bank for a number of fintech players, and we execute anywhere between 3 million to 5 million transactions a week. That’s also a very big source of satisfaction. These numbers are important not because they’re associated with dollars and earnings, but more because we are providing people the ability to transfer money to their families, to their friends, on an international basis or even domestically.
The world moves in cycles. Some new technology comes, rapid growth, negative repercussions, rules & regulations, stifling of business, and then something new comes up..
Our best bet to drive inclusion and catalyze necessary change is fintech and reg-tech innovation. We now see huge leaps in financial sector disruptors creating and transacting in “assets” and “stores of value” (e.g. cryptocurrencies), and furnishing technologies that drive transparency, and security and privacy –- the basic building blocks of secure financial intermediation.
Do you believe in Bitcoin’s future as the currency of choice?
The same technology that makes bitcoin secure as a means of exchange also makes it hideously inefficient compared to other payment technologies. But the more serious objection to bitcoin is that it enables criminals and terrorist organizations to move value around the world out of sight of national governments and law enforcement. Some nations that have already banned bitcoin include China, India, Sweden and Vietnam. So far none of the Anglo nations have been willing to prohibit this overt act of criminality – at least not yet.
Promises made on banknotes have changed over time. Interesting blog looking at these changes.
Most members of the public don’t know how the underlying monetary systems work, but they do see what is printed on its banknotes. To the public, the morphing set of promises on the face of a Federal Reserve note would have been one of the more visible manifestations of a shift from a mish mash of paper currencies issued by two different institutions and pegged to gold… to one single legal tender currency issued by the U.S.’s now-dominant monetary institution, the Fed—the Treasury receding into the background.