John P. Hussman poses the question, “An Imminent Downturn: Whom Will Our Leaders Defend?” (via John Mauldin’s Thoughts from the Frontline newsletter)
The global economy is at a crossroad that demands a decision – whom will our leaders defend? One choice is to defend bondholders – existing owners of mismanaged banks, unserviceable peripheral European debt, and lenders who misallocated capital by reaching for yield and fees by making mortgage loans to anyone with a pulse. Defending bondholders will require forced austerity in government spending of already depressed economies, continued monetary distortions, and the use of public funds to recapitalize poor stewards of capital. It will do nothing for job creation, foreclosure reduction, or economic recovery.
The alternative is to defend the public by focusing on the reduction of unserviceable debt burdens by restructuring mortgages and peripheral sovereign debt, recognizing that most financial institutions have more than enough shareholder capital and debt to their own bondholders to absorb losses without hurting customers or counterparties – but also recognizing that properly restructuring debt will wipe out many existing holders of mismanaged financials and will require a transfer of ownership and recapitalization by better stewards. That alternative also requires fiscal policy that couples the willingness to accept larger deficits in the near term with significant changes in the trajectory of long-term spending.
Basically: to whom are the politicians most beholden? To their corporate backers, who give them the money to get elected, or to the voters who actually do the electing? In Western Europe, things haven’t got bad enough yet to tip the balance towards the latter, but we’re heading that way at a steady pace. The financial sector has to be shackled.
Charlie Stross uses the turbulence of the forthcoming decade as part of the background for one of his characters in Rule 34. The following paragraphs brilliantly capture the potential for some ultimate good coming out of this cascade of crises:
Dorothy’s job is an odd one: catching corporate corruption before it metastasizes and infects society at large. After Enron collapsed–while you were still in secondary school–the Americans passed the Sarbanes-Oxley Act, accounting regulations for catching corporate malfeasance. But all they were looking for was accounting irregularities: symptoms of maladministration. The unspoken ideology of capitalism didn’t admit, back then, of any corporate duty beyond making a return on investment for the shareholders while obeying the law.
Then the terrible teens hit, with a global recession followed by a stuttering shock wave of corporate scandals as rock-ribbed enterprises were exposed as hollow husks run by conscience-free predators who were even less community-minded and altruistic than gangsters. The ravenous supermarket chains had gutted the entire logistics and retail sector, replacing high-street banks and post offices as well as food stores and gas stations, recklessly destroying community infrastructure; manufacturers had outsources production to the cheapest overseas bidders, hollowing out the middle-class incomes on which consumer capitalism depended: The prison-industrial complex, higher education, and private medical sectors were intent on milking a public purse that no longer had a solid tax base with which to pay. Maximizing short-term profit worked brilliantly for sociopathic executives looking to climb the promotion ladder–but as a long-term strategy for stability, a spiralling Gini coefficient left a lot to be desired.
The European Parliament responded by focussing on corporate governance. If corporations wanted to be legal citizens, the politicians riding the backlash declared, they could damn well shoulder the responsibilities of good citizenship as well as the benefits. Social as well as financial audits were the order of the day. Directives outlining standards for corporate citizenship were drafted, and a lucrative niche for a new generation of management consultants emerged–those who could look at an organization and sound a warning if its structure rewarded pathological behaviour. And as for the newly nationalized supermarket monopolies, a flourishing future as government-owned logistics hubs beckoned. After all, with no post offices, high street banks, or independent general stores, who else could do the job?