The Trouble with Markets

I've recently read Roger Bootle's book, The Trouble with Markets, which examines the current global financial crisis.  Bootle is decidedly a leftist of the Keynesian camp, which means he must be taken with a grain (or a shaker) of salt.  The left-wing perspective on economics can be as absurd and disingenuous as the right-wing perspective on civil rights - i.e., riddled with half-baked ideas, specious logic, and tenuous and perfunctory conclusions.

That said, there are four basic theses that seem entirely sound and merit some consideration:


Irresponsible Levels of Consumer Debt

The thesis that consumer debt, primarily in the real estate sector, was one of the primary causes of the "bubble" inflating and deflating, is an accepted perspective that has been thoroughly chewed over in the mainstream media: banks were encouraged to extend mortgages to borrowers with no ability to service the debt, then bundled the debt into securities and sold it off to institutional investors, who are now left holding the bag.

There is still, however, some hay to be made over their motivation for doing so - whether it was greed on the part of the banking industry, or whether arm-twisting by regulators to pander to public demand to have things without the responsibility of paying for them will likely remain a topic of much debate, though it seems more along the lines of propaganda and posturing.

Ultimately, the question to consider is how far a firm should go in facilitating the financing of their product - to drive sales while accumulating a significant amount of uncollectable accounts receivable is ultimately unprofitable.   When a single firm does so, it falls into bankruptcy, when multiple firms in an industry, and multiple industries in an economy, engage in this practice, the result is a market-wide catastrophe arising from the dereliction of shared responsibility.

International Trade Imbalances

Bootle is far more detailed in his analysis than any author I have yet encountered on the topic of trade imbalances - chiefly, that manufacturing nations in Asia and oil-producing ones in the Middle East have accumulated huge surpluses in trade and hordes of capital.

That is, there is a general mood of panic about the massive amount of US debt held by China, and the fear is focused on what they might do with that wealth in future - to dump dollars on the market would be devastating to the world economy (not just the US economy, as many or most national currencies are pegged to the dollar, explicitly or implicitly).

Fear of what might happen in future has overshadowed the damage that has already been done. The capital that has been amassed has effectively been removed from circulation - specifically, because it is horded, it is not available to use in production.   The immediate problem is that productivity has been sapped, and the greater future problem is that the infrastructure of production is eroding, such that when the horde is spent out, the market will be unprepared to meet the demand.

Dysfunction in Investment and Financial Services

Oddly enough, Bootle takes a page from classical economics, looking to the original purpose of investment: it provides entrepreneurs who have productive ideas but no means to act upon them access to the capital of investors who have capital but no idea of how to put it to productive use.

In that sense, the original investment is win-win - but when investments are bought with an eye toward reselling them at a higher price, facilitation of productive enterprise is pushed to the sidelines and the financial market takes on the character of a casino in which one party's gain is counterbalanced in equal measure by another party's loss, and the valuation of investments is chiefly according to expectation of profit in the investment market, not the expected profit of the productive enterprise into which the investment was originally made - which itself becomes incidental to the point of irrelevance.

This has always been so: the valuation of any security has consisted of the asset value it represents, the present value of future income from productive activity, and a measure of hype and hope on the part of speculators looking to flip investments for a quick profit.  However, speculation on the future value of investment vehicles had been, until just a few decades ago, a fringe activity rather than the primary business of investment markets.  Arguably, speculation has now become the mainstream and investment the fringe, which creates significant instability.

Mismanagement of Productive Enterprise

Finally, there is the matter of how productive enterprises, themselves, are being managed.   The specific problem is a short-sighted pursuit of profit as a goal, rather than considering profit to be a byproduct of success at the more valid goal of providing value to paying customers.

There's some implication that management has pulled away from ownership, but it's far more likely that ownership is complicit in this change of purpose, especially given that a majority of stock in commercial enterprise is held by other companies - retirement and pensions, mutual funds, managed portfolios, and the like in which the actual owner is often unaware of the securities he owns and exercises no voting privileges.   This feeds back upon the dysfunction in the investment market, as firms are managed to serve their investors first, serving their short-term interest to the detriment of other stakeholder groups (chiefly customers and employees) who have a more long-term interest in the perpetuation and proper functioning of the firm.

This, at least, is a problem that has the potential to be self-healing, though there is considerable inertia and, in some instances, lack of options, but in practice it can readily be seen that firms who have become parasitic are readily abandoned, sometimes in a dramatic shift and others in a slow trickle, as customers and employees transition to firms that better serve their interests.