After the Great Complacence: Financial Crisis and the Politics of Reform [Hardcover]

The aim of this book is to convince its readers (elites? politicians? The Public?) that the finance sector must be brought under "democratic control" -- an idea the implications of which however are left somewhat vague, though their main point seems to be that banking should be simplified, and "financial innovation" curbed. The book's premise is that the 'global financial crisis' should be understood as an "elite debacle". This is at the same time quite right, and very wrong. (More on that anon.) They proceed by analyzing the mental conceptions or narratives that made the deregulation that made the crisis possible palatable -- think here of notions like the 'Great Moderation' and the 'Washington Consensus', the social value of finance and the 'democratization' of finance, as well as of the increasing analytic centrality of notions like market efficiency and actor rationality. Specifically, they argue that this happened via a process of 'mystification' of finance (it seems to me more or less correctly, although it is unclear to me why they ignore the question of whether the academics contributing to this mystifying process were acting in good or bad faith).

Such 'narrative analysis' can be fairly illuminating (if the narratives are understood and described correctly), and the book fairly convincingly explains why (and provides an out for) so (the) many actors (who) were apparently helping create this 'new', and increasingly unstable, system. Moreover, they also give a correct high-level explanation for why entrenched elites were capable of stymieing all attempts at systemic reform: because the few who wanted it at all, lacked a proper narrative to convince the others with.

The premise of the book seems right to the extent that it is true that many politicians and bankers are likely not so callous as they would have to have been for them to knowingly change the rules so as to allow this crisis to occur (though note that the emphasis is on the occurrence and undesirability of crisis, and not on the looting made possible in the run up to the crisis). (As an aside I would point out, however, that, as any psychologist will tell you, people almost always find ways to rationalize their actions, making it unlikely that they would've understood their own actions this way even if that had been their intent.) The authors feel it is important for an explanation of the crisis to acknowledge and emphasize this fact, which is why they start by rejecting a few elite corruption-based accounts of crisis, to note that they feel that the majority of the steps that led to the crisis were "small, and in themselves relatively harmless decisions made by individual traders or bankers and banks". And the majority of these actors wasn't malevolent because "no banking insider from one node had an overview of the changing latticework of circuits" (9). (Complexity fetishism? This presupposes that knowing all aspects of the crisis is a necessary condition for "calling" it or understanding what you're working towards; though they both nuance and contradict this point in chapter four when pointing out that someone like Steve Keen predicted the bubbles while being unaware of the size of the shadow banking system.) In this way, they hope to be able to give their readers a way to understand that most bankers did not set out to destroy the world, but that they were rather out to make a profit, while "complacently" not wondering even for a moment about the possible consequences of their actions.

Frustratingly, however, this framework is actively hostile to the idea that fraud could have played an important role in creating the crisis. They sort-of justify this view that criminal behavior is not an important explanatory factor by first lumping together all actors who played a part in creating the crisis, and then arguing that, since it is "not proven" that all actors were 'callously corrupt' (and here they refer to GS's Fabrice Tourré), we may not assume that a significant portion of them were. Yet this in no way follows, because it seems quite conceivable to me to imagine that while for instance central bankers were mostly dim-witted hacks and dupes who got those posts because they were too stupid to recognize the idiocy of the models they took to describe reality -- the neoliberal self-regulation propaganda sold by the Thatcherites and Reaganites, the crap about (self-)equilibrating markets, rational actors, etc. -- (investment) bankers, on the other hand, were rather more aware of the illegality of their actions. As such, I am not sure why it seems so inconceivable to these authors to allow for the possibility that this played a role, except that they simply do not want to believe it. (They similarly simply assume that politicians, being 'representatives', are automatically interested in acting in the interests of their constituents, which is equally naive.) This is the main reason why I think this book's thesis quite wrong: because it furthers the myth that fraud did not play a significant role in creating this crisis, and that there wasn't at least an influential subset of bankers and politicians who did know what they were doing, whilst being quite happy to keep at it (for this, see Hare's work on corporate psychopaths, as well as the work of e.g. Bill Black on what's called 'control fraud'). This is underscored by the fact that the word 'fraud' is used exactly once in the book, to describe Madoff, while events like the S&L Crisis and the Abacus deals are described as a '(regulatory?) fiasco/scandal' rather than the fraudulent schemes that they were -- the message being 'look away, there's nothing more troubling to be seen here'.

Additionally, I would take issue with the suggestion to view the crisis as a "debacle," for two reasons. First, it in a strange way seems to efface the moral relevance of any and all actions taken during the Great Moderation, because of the way in which everything is cast as a "policy failure" on the part of the government only, rather than as something more morally disturbing, such as, say, a nasty mixture of looting, theft and class warfare. Moreover, it seems to be cast this way at least in part because the authors cannot shake the belief that economic policy, post-Washington Consensus, is 'beyond politics,' so that nobody could be bothered any longer to identify the growth in income inequality as events in a political project, rather than as a bland "consequence of globalization", and of "bad incentives."

Having said that, the book does offer a few points of interest, such as some empirical support for the point that New Labour did not take much convincing, and that it cared little for the macroeconomic consequences of their supporting the growth of finance. The authors here neatly undermine the idea that Britain profited from allowing unlimited financial sector growth. Second, it has a decent -- if too short -- discussion on the role and history and importance of the BIS, the Basel Committee, and the ECB as being entirely outside of the reach of democratic politics. In all, though, while the touch on a number of important issues, it seems to me that their analysis is far too shallow to really impress.

Weighing the good against the bad, however, I would have to say that I take what's right in this book is not interesting enough to balance out that what's wrong and omitted; it seems to correctly identify a number of important considerations, only to then deliver a far too superficial analysis of what went wrong and why. And the major reason for this is that the authors place far too much emphasis on their belief that most of the actors involved could not and did not know what the precise result of their actions would be; while paying too little attention to the fact that the actions that led up to this crisis were quite problematic in themselves, that is, even if they had not led to the current crisis. As such, I cannot recommend buying this book.

A final note: In the concluding chapter, the authors say that what they think is needed are "stories that can displace the ones currently circulating". It seems to me that there are no stories better suited for getting this process of story displacement rolling than those that tell us of the massive number of frauds and scams perpetrated by (mostly) financial sector employees attempting to enrich themselves at the cost of everyone else. The primary difference (relevant to this discussion) from the way the 1929 depression unfolded, then, is that back then, it only took three years for the Pecora committee to be installed; whereas this has yet to happen this time around. (And no, the various parliamentary hearings, which assigned blame to "the system", while leaving all of the primary actors alone -- of course only after 'extracting' a number of variations on "wir haben es nicht gewußt" -- do not count.)

Even before the crisis, Britain's private sector was unable to create enough jobs. There were 7 million manufacturing jobs in 1979, 4 million in 1997 and 2.8 million in 2008.

From 1996 to 2008 business investment was flat at 10 per cent of GDP; bank lending to productive business fell from 30 per cent to 10 per cent, while bank lending to other financial firms and to property developers soared.

The transfer of 750,000 jobs from the public to the private sector accounted for 71 per cent of the apparent increase in private sector jobs between 1979 and 1997. Under Labour, increased spending on health and education accounted for 37 per cent of job growth (61 per cent in the West Midlands, 43 per cent in Wales and 46 per cent in Scotland). Privatisation and outsourcing led to an expansion of state funding for private employers, as in nursery education and services for the elderly - 1.7 million jobs.

In 2007, the OECD's chief economist forecast `a strong and sustained recovery in Europe'.

The authors argue that the economic crisis was not an accident but a debacle, like the Iraqi and Afghan war disasters and the euro. As they note, "two debacles collided as the financial crisis crashed into European Monetary Union." They observe that neither the euro, nor the European Central Bank nor the EU was any use in the crisis. The euro no more reduced the risks on government debt than all the securitization and special financial vehicles reduced the risks of investment.

The bailout cost the British taxpayer £1,183 billion in loans and guarantees (not all used) - £46,700 per household. Public debt rose from 36.5 per cent of GDP in 2007 to 63.6 per cent in 2010, the public sector deficit from £634 billion to £890 billion.

Globally, the crisis cost between one and five times 2009's world output, in terms of output lost now and in the future: $60-200 trillion for the world's economies, £1.8 -7.4 trillion for Britain's. Globally, the crisis destroyed at least 30 million jobs and cost $3 trillion in extra public spending, to bail out the banks.

The authors write, "Finance is not only an economically unsafe and violently pro-cyclical sector but also part of a democracy that is not working." It is hardly a democracy at all: as they note, "the privatization of gains and the socialization of losses usually indicate the presence of an uncontrolled and predatory elite."

Indeed, the finance sector is not adding value but extracting rent. Much financial innovation was worse than `socially useless', it actually harms the economy. This sector is built on tax avoidance: from 2002 to 2008, tax receipts from finance were just £193 billion, only 6.8 per cent of the total, half what manufacturing industry paid. Finance employs just a million people, 4 per cent of workers, no more than in 1991.

The government is still running banks for shareholder value, the model responsible for the crisis. Rather than the government nationalising some banks, it has privatised the Treasury into being a new kind of investment fund.

It is not just the free movement of capital that is bad for us. The free movement of labour is bad for us too: as the authors observe, "mass inward migration ... kept downward pressure on labour costs in the private sector."

The authors conclude that we need to put banking and finance under democratic control. They point out, "Debt is not a problem when put to productive use to create credit which facilitates physical investment and material transformation via infrastructure, care services, or manufacturing, as the basis for economic advancement and social improvement."

We need national banks designed to invest, in R&D, housing, industry, energy and infrastructure.

Top drawer academic read. Different perspective on the financial crisis asking thereafter to think on a socio political level for answers rather than the more orthodox argument on crisis of hubristic elite, complex product, technological disaster, financial engineering, and regulatory failure. We must look to develop standards of both international accounting and international and regulation governing on a global level that all countries buy into in our now globalised world, only this can provide a framework for the future.