Respected economist John Kay is about to make a public statement which essentially says that the world economy is a ticking time bomb and global markets are a lit fuse.
Kay is a professor at the London School of Economics, a columnist for the Financial Times, and the author of a widely-read report on stock market flaws which was commissioned last year by the British government.
Kay says that the world is “waiting for the next crisis.” He’ll present that conclusion in a keynote speech which was previewed and extensively quoted earlier this week.
“Prices are driven to silly levels,” Kay says, “but everyone makes a load of money in the meantime, and then you get a correction.”
What is known as a “correction” in financial parlance is better understood by most people as a recession or depression resulting in lost jobs, wealth, health, and security. The lords of finance have been disarmingly frank about this money-making strategy at times.
“We actually benefit from downturns,” JPMorgan Chase CEO Jamie Dimon told investors earlier this year. After the 2008 crisis Dimon told reporters he had explained downturns to his seven-year-old daughter by saying they’re “something that happens every five to seven years.”
In case you haven’t been counting, the last crisis occurred five years ago.
Arbitraging the Future
Tomorrow’s crisis is already making billions today for bankers and investors. But then, there’s almost no way for financiers to stop profiting from the next crisis under current conditions. The Federal Reserve and other central banks have flooded them with cheap money, making it inexpensive to borrow.
That was the right thing to do, but these low-cost loans should have come with strings, especially requirements that the money be used to provide consumers and small businesses with loans that could benefit the real-world economy in which most people live. Instead, as Prof. Kay points out,
“(T)he system is geared around trading profits, which are, in large part, money that is borrowed from the future. A crisis results from the moment at which this money has to be paid back.”
On Borrowed Time
“Margin debt” – money which is borrowed to invest in markets – has soared to pre-crisis levels, according to the New York Stock Exchange. Stocks are running as far ahead of inflation expectations as they did in the run-up to the last two crises. And yet there is very little sign of dramatic improvement in traditional economic indicators such as employment or consumer confidence.
That has given us the “Truman Show” economy, with an artificial veneer of prosperity for the many – and great wealth for the few.
Prof. Kay says that he considers the Eurozone the likeliest spot for the next disaster. But wherever the spark is struck, disaster seems imminent. In the meantime, bankers are making enormous amounts of money with borrowed money … and on borrowed time.
Many financially sophisticated investors and bankers will say privately that they agree with Prof. Kay – that it’s only a matter of time until the next crisis comes. Why do they do it, then? Chuck Prince, the ousted CEO of failed megabank Citigroup, probably put it best of all. “As long as the music is playing,” he said of the run-up to the last downturn, “you’ve got to get up and dance.”
That’s the paradox of the modern banker, who is both the lord of his or her domain and its servant. They’re arbitraging the future for short-term gain, making money by laying the groundwork for a massive wave of oncoming misery. But they’re also caught in ta fiscal frenzy, as Prince’s graphic description illustrates, jerking back and forth in the grip of forces greater than themselves.
The economy that enriches them is already dead, and their movements are its St. Vitus’ Dance.
Returning to the Real World
If these involuntary fiscal movements are the problem, what solutions are available? The first step is tougher and smarter regulation. A few good people are also trying to instill the banking profession with a better moral conscience. But ultimately we’ll need to fundamentally re-envision our concept of a national and world economy.
We’ve replaced the traditional image of economic well-being – which includes well-paying jobs, upward mobility, and consumer confidence – with the speculative, get-rich-quick world of heavy trading. But, as Prof. Kay notes, it’s no longer clear that stock markets provide real economic value.
Financial intermediaries are capturing an increasing share of monies exchanged, rising from 5 percent in 1980 to 9 percent in 2010, an enormous take for the industry that failed so spectacularly only two years earlier. Financial-sector profits have once again soared to their bloated pre-crisis levels, consuming nearly a third of all corporate profits– and after-tax corporate profits haven’t been this high in modern history.
“As long as the music’s playing …”
To paraphrase an old saying: It’s still good to be Prince. (Although he lost his job, he went away wealthy.) But tens of millions of people – perhaps hundreds of millions – are still suffering the after-effects of the last crisis. What happens when the next one comes along? It’s a frightening prospect, filled with the threat of even greater tragedies – and perhaps widespread social unrest.
We can learn the lessons of the past and stop stealing from the future, or we can face an uncertain fate so that a few people can keep on dancing.