Seven years ago, as the ‘limited’, ‘contained’ subprime crash of 2006/07 morphed into the much larger and infinitely more dangerous global financial crisis of 2007/08, a whole generation of young people made a shocking discovery.
Tens of thousands of the brightest men (mostly) and women from around the world had been sucked into the financial services sector in the belief that this was where both fame and fortune were to be found easily and quickly. They were ‘educated’, first in university and then in business school, in the ‘knowledge’, the scientifically-proven certainty, that the free market was an inherently superior system for managing businesses and national economies. They were inculcated with the dogma that governments were ‘part of the problem, not part of the solution’, and that if governments and their agencies would just stay out of things, everything would work out fine and everyone would be better off. This was correct, true and valid in all areas of the economy, but especially in financial services, where the markets were the most sophisticated of all.
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Those who had the good fortune to embark on a career in financial services in the 1990s had grown with the boom and proven through their own experience that if you worked hard, you would be well rewarded. They were convinced that it was their talent, brains and hard work that had brought them success — and often outright riches.
How disconcerting, to say the least, it must have been to then learn in the course of 2007 — and far more so in the ‘advanced’ course provided in 2008 — that in fact the entire structure of the financial markets was artificial and depended for its very oxygen and water on the involvement and active participation of the much-derided government and its agencies — notably that mega-agency, the central bank. It transpired that the government and its agencies made the rules whereby the bankers and brokers played their games — and the government and its agencies could, and actually did, change the rules whenever they wanted to.
Fortunately for the people at the top of the financial sector, they were able to influence the decisions that the government made — including obtaining bail-outs (using taxpayers’ money) for the institutions they headed, or not bailing out those of their rivals. But for all the bright young and not-so-young things further down the corporate ladder, the government emerged from obscurity and impotence as the arbiter of life and death at the institutional level and of wealth and poverty at the individual level.
Fast forward to 2014 and it has already become difficult to remember that there was a time when people actually believed in the infallibility of markets. The quasi-religious terminology is not out of place, because the level of persuasion and the translation of ‘belief’ into behavior and lifestyle was of that intensity. However, the markets were finally exposed as false gods, especially when they completely failed to predict what was going to happen, as their adherents believed them capable of doing. The system even failed to correctly interpret what was happening in real time.
Instead, we have moved to a system in which the central banks, whose role was downplayed or even ignored in the boom years prior to 2007, have become the primary arbiters of how the markets behave and which direction they go. The central banks do this by providing endless amounts of liquidity and pushing interest rates to zero for a period of time that no-one thought possible — let alone necessary — when the great monetary experiment started in 2008.
Today, and for some years past, the supposedly free markets have become an overtly manipulated system in which the prices of financial assets are pushed steadily higher — and occasional slips or falls are seized on as “buying opportunities”, by investors who have come to rely on the provision of central bank liquidity as a law of nature that must perforce continue, and in fact expand, forever.
This perspective, which has also solidified into a belief, is plainly irrational and divorced from reality, no less than its predecessor which deified markets. At least markets are inherently impersonal; central banks have individuals at their heads and these are indeed being beatified and then deified.
Alan Greenspan was placed on a pedestal — later smashed — because he did nothing to stop the bubble expanding, when it could still have been constrained. Ben Bernanke, on the other hand, was treated as possessing super-human powers, because his policies stopped the crash and triggered a new boom. Whenever that showed signs of flagging, Bernanke came to the rescue with another dose of liquidity, via a mechanism he termed “Quantitative Easing”.
Bernanke’s European counterpart, Mario Draghi, stopped the Eurozone crisis just by threatening to act, without actually doing so — a perfect display of quasi-divinity.
Yet the newer idols and the temples they operate from are as flawed and phony as their predecessors. In a few years’ time, people will look back in amazement at a period in which even the supposedly smartest operators risked all they had on a belief that proved baseless.