The choral rendition of Ode to Joy at the climax of Beethoven’s Ninth Symphony is playing, conducted by maestro Paul Volcker. And all are joining in, as if they are deaf. Just that the spirit of Volcker’s rendition is not that of Ode to Joy. In contrast to those in governments and big businesses around the world who are hearing without really listening, Beethoven’s hearing was perfect.
The current financial crisis, the panic that began exactly 100 years after the last great panic in 1907, occurred under very different circumstances from that in 1907. The market for global finance is very, very large. And the prospective market is even larger. J.P. Morgan’s world was Lilliputian compared to the Brobdingnagian behemoth on the horizon. The financial Gullivers and their governments have to figure out how to navigate those unchartered waters just as they had then. The scale changes but the fundamental nature of the problem is the same.
As the turn of the century boom began to fade in the early 20th century, with bankers exiting out of the old and into the new industries, famously, America’s banker ― the House of Morgan ― had locked up its colleagues in his New York offices until they figured out how to work together to bail out American finance. Alan Greenspan’s Fed, the Federal Reserve being the logical successor in government to the Morgan phenomenon, did something similar with Long Term Capital Management (LTCM). Former Bush Secretary of Treasury Henry Paulson also attempted something similar with a voluntary clearinghouse of about 60 million dollars in the current crisis.
Still, what is common to all of these rescues is protectionism in the financial markets. The champions of free markets want to protect themselves when it is their neck on the line. From Europe to the United States, every country wanted to protect its own banks. And every country had its favorites. Central banks and governments favored their cronies at the expense of those whom they saw as being dispensable.
Iceland, with a ratio of the notional value of its financial assets to its gross domestic product (GDP) or financial depth equal to that of the United States, even went to the extent of sacrificing its solvency as a nation to protect is deadbeat banks and the United States is not far behind. The other European countries did not see it necessary to let capital move freely across borders to consolidate the banking sector nor did the global investment banks see it as an opportunity. Again, the United States behaved very similarly taking the cue from the United Kingdom’s bailout of Northern Rock.
All large banks are too big to fail if there is protectionism in the banking industry. If there isn’t there are not. This phenomenon is no different from what the U.S auto industry went through. If Chrysler is any indication, the beginning of the end of American finance has begun. American and global finance is a perfect market in terms of the number of firms in the marketplace but for the textbook imperfections that lead to market failure in how they operate both with the consumers and with each other. It is a market for lemons.
What is needed is for financial globalization to walk the talk.