Cowardly Capitalism: The Myth of the Global Financial Casino [Hardcover]

Cowardly Capitalism is nothing if not a provocative title for a book that invites the reader to indulge in some vigorous mental gymnastics. Given the usual depiction of capitalism as an all-devouring monster, it comes as something of a shock that it might be thought of more as the lily-livered lion in The Wizard of Oz. Fear of risk rather than a willingness to risk is the prevailing mood, according to Cowardly Capitalism. The financial markets are not, after all, the casinos of popular metaphor.

The pinkishness of many Financial Times journalists is legendary, so it's hardly a surprise to learn that former FT man Daniel Ben-Ami is now a senior editor with Morningstar. What is more of a surprise is that anyone connected with a traditional anti-capitalist name should be berating that same economic system for, in effect, not being ruthless and buccaneering enough; for preferring to save and preserve rather than invest and exploit. These are, indeed, interesting times. An intrinsic system of risk management can hinder economic activity, says Ben-Ami in the chapter entitled "Killing The Patient: Why the quest for safety can be dangerous"--a chapter that addresses the problems of sustainable rates of growth and financial instability. Readers would expect certain standards from an author with such a pedigree (FT, Economist Intelligence Unit, The Guardian) and they will not be disappointed. Ben-Ami writes clearly and lucidly, as, for example, in a brief passage on Gordon Brown, Chancellor of the Exchequer in the UK since New Labour came to power in 1997. Ben-Ami highlights the "Iron Chancellor" as an arch-exponent of an approach that refuses to consider the possibility that a degree of instability may often be a price worth paying for faster growth. "In his emphasis on prudence and in his other rhetoric he often sounds more like the manager of a small bank branch than the finance minister of a large economy," says the author. --Brian Bollen

"Ben–Ami′s well–written and thought–provoking book, is bound to attract considerable comment. This book will not be one of your riskier investments."
(Lloyd′s List, 3rd March 2001)

" This is a thoughtful, easy–to–read book which nevertheless tackles big issues from a fresh perspective."
(Portfolio International, May 2001)

"thought–provoking book."
(MoneyWise, June 2001)

"fascinating analysis"
(Financial News,13 August 2001)
"His is a brilliant introduction to the impenetrable world of high finance and an uncompromising analysis of its function in the contemporary economy."
(The Independent, 23rd June 2001)

"well–documented short book...a book to make you think"
(IFS News, June 2001)
"excellent book"
(www.zdnet.co.uk 23 October 2001)

Ben-Ami's well-written and thought-provoking book, is bound to attract considerable comment.

"thought-provoking book."

"well-documented short book...a book to make you think"

"well-documented short book...a book to make you think"

"Ben-Ami's well-written and thought-provoking book, is bound to attract considerable comment. This book will not be one of your riskier investments."

" This is a thoughtful, easy-to-read book which nevertheless tackles big issues from a fresh perspective."

"thought-provoking book."

"fascinating analysis"

A bold challenge to accepted ideas about the need for regulation of world financial markets
In a controversial new book sure to spark debate throughout the world financial community, British financial journalist and investment expert Daniel Ben–Ami makes a strong case against the current trend toward increased government regulation of the international money markets. In stark contrast to the accepted wisdom, promulgated by the likes of Soros and Krugman, Ben–Ami avers that the real problem currently threatening global finance is not wanton risk–taking, but excessive risk aversion. Rather than reduce the likelihood of financial crises, he believes that greater intervention will bring greater problems including panic waves that could crush the economies of entire regions in a matter of hours. Writing in a lively style, devoid of mathematics, and using many allusions to current affairs, pop culture, and business publishing to illustrate his arguments, Ben–Ami makes this book an enjoyable, highly accessible read.
Daniel Ben–Ami (London, UK) is a professional investment adviser and editor in chief of a well–respected journal for investment advisers.

Barings, Long-Term Capital Management, the Asian financial crisis. The global financial markets often evoke an image of irresponsible individuals or corporations gambling huge amounts of money.

Unlike in a normal casino it is ordinary people who are often portrayed as the victims of the financial instability generated by such recklessness. When the bets go wrong it can be the person in the street or even whole countries that suffer.

Unfortunately this image of financial markets as havens for rampant risk taking is rarely questioned. Yet it is at best one-sided and often entirely inaccurate.

It is risk aversion that has shaped the modern financial markets rather than an over-active appetite for risk taking. Indeed it is remarkable that so few commentators have grasped the extent of the changes to the financial markets in recent years.

The financial markets are simply one area that has come under the influence of a broader fear of risk that has gripped society. In areas as diverse as crime, food and medicine it has become common for the risks that individuals face to be grossly exaggerated. Even healthy people have become anxious about the rarest of diseases or eating the wrong kind of food.

There are plenty of examples which, if probed, call into question many of the conventional fears about finance. At the most basic level it is possible to give lots of examples of risk aversion in the financial markets for every instance of reckless risk taking raised by the critics.

Derivatives are an excellent example. The market for such instruments, which allow individuals or corporations to bet on the price movements of financial assets, has grown explosively because of the demand for risk management products.

For instance, a bakery might want to protect itself against the impact of a rise in the price of wheat. So the firm can take out an option which essentially insures itself against the price going too high. In this way corporations can help protect themselves against uncertainty.

Another example is investment funds. While such funds account for the bulk of investment in the stock market nowadays they are at least as concerned to diversify risk as to make a good return. Such firms, developing the work of financial economists, have developed the old adage about "not putting all your eggs in one basket" into elaborate mathematical models.

A closer look at both Britain and the US reveals that corporations are also using the stock market in a conservative way. In both countries it is far more common for companies to buy back their own shares rather than issue new ones to finance new rounds of investment.

If the financial markets are indeed so risk averse it begs the question why they have become so bloated. Despite recent fluctuations both bond market and the stock markets have increased enormously in size in recent years. Indeed this is the most powerful argument of those who believe that investors have a strong appetite for risk. For such critics it is essentially the desire for risk taking which has played a key role in pushing up the prices of financial assets over the long term.

But there is an alternative explanation for the growth of the financial markets. Rather than being largely a result of strong demand from risk-hungry investors it can be seen more as the outcome of a supply of excess liquidity from corporations.

Since the end of the post-War boom in the 1970s many companies have found it easier to make a good return from playing the market than from their core businesses. It has even become standard practice to compare the potential returns on any new investment with the likely return on financial assets.

So the modern financial markets should be seen as the result of the combination of two factors rather than one. The current mood of risk aversion in society has reshaped the massive amount of spare liquidity circulating in the financial markets in all sorts of peculiar ways.

It is also this fear of risk taking which, paradoxically, explains the obsession with instability in the financial markets. In an era which values safety and stability above all else it is not surprising that global finance should become a focus for contemporary anxieties.

By Daniel Ben-Ami, author of Cowardly Capitalism

Cowardly Capitalism calls into question the notion that the global financial markets are out of control. In this controversial book, Daniel Ben–Ami rejects the orthodox view put forward by proponents of "Casino Capitalism" that reckless risk taking by global finance threatens to destabilise the world economy.
Instead Cowardly Capitalism argues that an intense mood of risk aversion has reshaped both the financial markets and how they are perceived. This fear of risk taking represents a real threat to humanity rather than the lack of sufficient regulation which is normally seen as the problem.

"Cowardly Capitalism combines an excellent survey of modern finance with the striking idea that our aversion to risk is more dangerous than our love of it. Its message should be taken seriously by everyone with a stake in modern financial markets." – Andrew Freeman, European Business correspondent, The Economist
"Ben–Ami′s arguments are controversial and provocative and many bankers, investors, policymakers and business executives won′t like them. But they would do well to read it. Whether they agree with Ben–Ami or not, his book will give them much food for thought." – David Fairlamb, Frankfurt correspondent, Business Week
"Understanding risk–takers and risk–taking is essential in a global economy in which economic growth is financed increasingly by capital markets rather than banks. Daniel Ben–Ami helps the reader to better understand the role of the financial markets." – Michael Hughes, Chief Investment Officer, Baring Asset Management

DANIEL BEN–AMI has worked as a financial journalist in London for 15 years. He has written for several national publications in the UK – including the Financial Times, Guardian, Independent, Sunday Times and Prospect magazine – and numerous specialist journals. In addition he has written on the Middle East for the Economist Intelligence Unit and contributed to Cultural Difference, Media Memories (Cassell 1997) on media images of Japan. He was the editor of Investment Adviser, a specialist weekly newspaper on mutual funds from the Financial Times group, for four years. He is now a senior editor for Morningstar in London. His website can be found at www.cowardlycapitalism.com.

Introduction: Fear of Finance

The Western financial system is rapidly coming to resemble nothing as much as a vast casino. - Susan Strange

Wall Street's free-market capitalism is doubtless a wonderful thing and a boon to humanity, but it scared me. - P. J. Rourke

The global financial markets are often seen as a giant casino. Perhaps the typical image of how they work involves a crowd of aggressive young men screaming and waving their arms frantically on a trading floor. This is the picture that is most likely to be beamed through television sets into living rooms during a financial crisis. Every few years such a crisis tends to grip the popular imagination before being temporarily forgotten until the next one comes along.

A few find the portrayal of a global financial casino exhilarating, but for many more it is frightening. Even those who work on Wall Street or in the City of London are often nervous of their own institutions. Although a lot of money can be made in the financial markets it is also possible to lose large sums. Only the most complacent ignore the risks involved.

It is the apparently random character of the markets - as the notion of casino capitalism suggests - that can make them so frightening. Markets often seem to move in as random a way, like the throw of a die or the pick of a card. They appear to he out of human control. Even Alan Greenspan, the chairman of the Federal Reserve Board, has famously referred to 'irrational exuberance' in the markets. If the head of the Fed thinks the markets are out of control, then the obvious question is what hope mere mortals can have in controlling the wilder excesses of the markets.

This book's main contention is that the critic's image of the global financial markets as a giant casino is wrong. On the contrary, the modern financial markets are more often characterised by a fear of risk taking than a reckless disregard for danger. For about a decade a powerful mood of risk aversion has completely reshaped the financial markets. To the extent that there is a problem, it is basically the opposite of the one generally identified. There is a new economy in which fear of financial instability and the demand for more forms of restraint are central. The financial markets reflect the same culture of restraint that drives its critics.

The consequences of accepting the alternative view proposed in this book are enormous. If the financial markets were essentially a giant casino then the obvious solution would be to impose new forms of regulation to quell their destabilising potential. Indeed, the conventional wisdom involves precisely such a clamour for regulation - a trend this book dubs 'regulationism'. However, the argument of this book is that it is not finance but the broader climate of risk aversion that is a pressing problem for the world economy. So it is the fear of risk taking, rather than risk itself, which is the main danger that needs to be tackled. Indeed, a key paradox which will be examined later in this book is that a fear of risk taking can make the world a more dangerous place.

It is important to emphasise that this book's quarrel is not with the use of the concept of risk itself. It makes sense, at the most basic level, to balance potential risks with likely rewards when making any decision. The possibility of a huge return in any transaction is clearly less attractive when there are enormous risks involved. The problem arises when risk aversion becomes so strong that the reward side of the equation is neglected. If the financial world is examined from a broader social perspective, the preoccupation with risk has reached the stage where it can be irrational. It is this work's contention that the concern with risk management in finance has reached such a stage.

Another way to conceptualise this problem is to harness the often forgotten distinction between risk and uncertainty. According to Frank Knight, one of the founders of the Chicago school of free market economists, risk can be precisely quantified while uncertainty cannot. In this sense a roulette game or tossing a coin, for example, involves risk as precise probabilities can be calculated for each outcome. In contrast, predicting interest rates in ten years' time involves uncertainty as there is no precise way of calculating the probability of future rates. However, modern techniques of risk management attempt to use advanced statistical techniques to quantify all forms of risk. In this sense risk is unavoidable but the practitioners of risk management seek to eliminate uncertainty.

Unfortunately, the attempt to stifle uncertainty in markets can have a down side. The market system inevitably involves a degree of risk - there is no guarantee that a particular investment will make a profit. The attempt to create a culture of restraint in which risk is always managed - which itself indicates a profound lack of confidence in the capitalist enterprise - can also mean curtailing a possibilities of growth.