The role of politics in financial crises

The pension fund sector in the UK is currently going through a crisis reminiscent of the 2008 crisis when the state had to nationalise a very large number of financial institutions and provide repayment guarantees on their debt instruments. At present, it is the Bank of England that has to intervene to cap the surge in interest rates and prevent the bankruptcy of pension funds.

Time and time again, history repeats itself and analyses of a disconcerting naivety will flourish on the "drifts" of the use of "derivatives". How could it be otherwise? Once again, interest rate swaps and repo transactions, instruments of "financial capitalism", will be at the centre of all discussions. With our noses to the grindstone, we will defend the same stereotypes and clichés that resurface every time the "unreal world of finance" collides with the "real world of social welfare", in this case, that of British pensioners who must receive defined benefits from their pension funds. This Manichean view is well established in Europe, which for centuries has left the 'handling of dirty money' in the hands of communities that it ostracised as soon as the 'baraka' was no longer on its side. In order to get our noses out of the water, should we not consider the role that politics plays in the emergence of financial crises??

The great financial crisis, whose epicentre was the collapse of Lehman Brothers on 15 September 2008, would never have occurred if successive US governments, particularly those led by Presidents Clinton and Bush Junior, had not followed a purely electoral objective by seeking to democratise access to property ownership for the greater good of the many. Raghuram Rajan, a Chicago professor, former IMF chief economist and former chairman of the Central Bank of India, explained this in a brilliant chapter entitled "Let them eat credit". The scale of the crisis would never have been the same as it was without the US government's acquiescence to the lack of basic safeguards in mortgage lending, while offering its implicit bailout guarantee to the federal agencies that sold these loans around the world. Moral hazard exacerbates the profit motive of economic actors, a fact well documented in the academic literature since the work of Kenneth Arrow, who was awarded the Nobel Prize in 1972.?The state is a master in this field: sometimes even "unwittingly", it creates the ideal conditions that allow private actors to take more risk than they would have to if they had to bear all the consequences.

Remember also the public debt crisis in Greece, a country that should never have entered the monetary union if policy makers had respected the economic criteria they themselves had set a decade earlier. Even today, lyrical flights of fancy continue to be made about the excesses of an ultra-neo-liberal-financialised hyper-capitalism, which would have crushed a country where the weight of public spending in GDP was one of the highest in the euro zone, close to 63% in 2013 compared to 44% in 1997. If the efficiency gains in justice, education or health care in Greece had offset the explosion in deficits and the debt burden, the country would never have been so weakened. Its own government would never have disguised the scale of its debt by borrowing €1 billion through the use of derivatives so as not to have to account for it through the services of the most powerful bank in the world, whose raison d'être is not virtue either.

In the British case, the financial strategy followed by these pension funds is questionable, but the current tsunami that is shaking them would never have happened if the government of Liz Truss, whose finance minister has already been used as a fuse, had not wanted to change the laws of "economic gravity" by launching a "stimulus" budget, without any serious funding, in a period of high inflation, in total opposition to the monetary policy currently being conducted by the Bank of England. This political irresponsibility led, in just a few days, to the explosion of the public debt market and forced pension funds to sell their government bonds, all at the same time, to avoid a liquidity crisis turning into a solvency crisis.?

"As long as the music is playing, you have to get up and dance," was the response of the CEO of Citigroup in an interview in July 2007, a few months before the collapse of the first major US bank, Bear Stearns.??He had forgotten to specify that the musicians are very often those of the Titanic when the conductor is the State.