Taming the beast

Font Size

Print

Feedback

Email

Discuss

: “Wall Street got drunk.” “Bankers deserve D.” A few years ago those phrases might have appeared on placards held by purple-haired protesters at anti-globalisation rallies. Now they come from the president of the United States and a former chairman of the Federal Reserve. Thinking the microphones were off, George Bush told a group of Republicans in July that Wall Street needed to “sober up” and wean itself from “all these fancy financial instruments”. And long before September’s events, Paul Volcker gave financiers their D grade along with a devastating critique. “For all its talented participants, for all its rich rewards,” he said in April, the “bright new financial system” has “failed the test of the marketplace”.

In light of the events of recent weeks, it is hard to disagree. A financial system that ends up with the government taking over some of its biggest institutions in serial weekend rescues and which requires the promise of $700 billion in public money to stave off catastrophe is not an A-grade system. The disappearance of all five big American investment banks—either by bankruptcy or rebirth as commercial banks—is powerful evidence that Wall Street failed “the test of the marketplace”. Something has gone awry.

But what exactly, and why? The fashionable answers come in sweeping indictments of speculators, greedy Wall Street executives and free-market ideologues. France’s president, Nicolas Sarkozy, recently said that the world needed to “bring ethics to financial capitalism”. Brazil’s president, Luiz Inácio Lula da Silva, wants to combat the “anarchy of speculation”. A more serious analysis, however, needs to distinguish between three separate questions. First, what is Mr Volcker’s “bright new financial system”? Second, how far was today’s mess created by instabilities that are inseparable from modern finance, and how far was it fuelled by other errors and distortions? Third, to the extent that modern finance does bear the blame, what is the balance between its costs and its benefits, and how can it be improved?

An Anglo-Saxon invention