Is the bracket of financial neoliberalism closing?
Will the long sequence of free movement of capital and deregulation of financial systems that began with North American, British, and then European impulses in the early 1970s and early 1980s soon come to an end?
The process of liberalization and financialization of the economy, which had been extended over the following decades, had almost stopped after the great real estate and banking crisis of 2007-08. At the time, many believed that the neoliberal bracket would close because of the economic damage caused by the financial earthquake (the Great Recession) and the massive loss of capital, so ending what President Nicolas Sarkozy said in 2012 was crucial. as “the extremes of financial capitalism” during
Fifteen years later nothing like that happened, of course…
During this episode, the pragmatism of central banks and governments allowed the liquidity and/or insolvency risks of financial systems to be covered by thousands of billions. To avoid the chaos of activation of systemic risk, it was rightly necessary to clean up bank balance sheets by ridding them of worthless assets.
The G20, especially the Washington summit of November 15, 2008, undoubtedly pointed the finger of responsibility for accounting deficiencies, the opacity of certain securitization products, various embezzlements, the failure of rating agencies, or even the country’s permissive monetary policy. onset of crisis. Later, several (re)regulation processes were initiated… But in general, the belief in the efficiency of market mechanisms in the allocation of capital was never shaken, or indeed questioned.
However, this belief underlies the neoliberal system of market regulation that has been in place for over 40 years. It is based on the Hayekian idea that prices contain all the information necessary for making economic decisions.
As the economist André Orleans reminds us, within this conceptual framework:
“Each agent has local knowledge limited only to their own environment, and it is up to prices to gather all this local information to create a coherent global vision. »
A modern version of this pricing theory was developed in the 1970s and is known as the efficient financial market hypothesis. The prevailing competition and self-regulating virtues that markets will be endowed with will create “fair prices” that constitute reliable signals for investors.
When competing, the latter can objectively assess risks and bring market prices closer to their fundamental value (informational efficiency) and thus ensure optimal allocation of savings (allocation efficiency). This neo-Hayekian concept offered an ideological basis and strong legitimacy to the process of financial regulation.
… but wrong
But the economic history of the last forty years shows that financial markets are not self-regulating. The principle that financial assets have an underlying, determinable value in the face of fundamental uncertainty about the future ex anteand whose price will be a good appraiser is no longer reliable.
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Even if all investors have the same data set at a given time, there is no guarantee that they share the same model for interpreting fundamentals. From then on, everyone defines themselves not by an estimate of their core value, but by what they think others will do.
Market prices then only reflect assumptions, scenarios about the future, because they are based on unstable collective beliefs. Without an anchor value, investors cling to unstable ideas and self-referential beliefs. According to engineer and philosopher Jean-Pierre Dupuy:
“The most absurd rumors can polarize a unanimous crowd on the most unlikely object, each finding proof of its value in the view or action of all the others.”
In this context, speculative bubbles (those mimetic dynamics supported by this or that view of a hypothetical future) follow each other and burst with each reversal of the dominant belief (Internet bubble, real estate bubbles, commodity and energy markets, bond bubbles, cryptocurrency). . – assets, etc.). Therefore, the determination of a new equilibrium point (fundamental price) may be forever out of reach for markets that fail to achieve the smallest valuation. The price system may disappear, and the intervention of an external actor (central bank and/or government authorities) is the only way to provide an exogenous valuation framework capable of stabilizing forecasts.
Financial volatility finds a rational explanation here. It can no longer be regarded as an anomaly, the fruit of collective irrationality. On the contrary, it should be understood as a result of the internal instability of the valuation process in force in the markets, that four decades of financing have been extended on a large scale, including real estate, food and mineral raw materials, etc. energetic.
The return of managed prices?
So, to deal with these multiple financial, health, energy, and environmental challenges, and as it had for many years prior to deregulation, finance again began to operate largely from managed prices.
This is especially true of the value of money and interest rates. As economist David Cayla points out in his recent book The Decline and Fall of Neoliberalism (De Boeck Superior, 2022):
“After the 2008 financial crisis, the zero interest rate policy adopted in developed countries, but above all the unconventional practices known as quantitative easing, allowed central banks to intervene directly in financial markets, transforming them into real political actors.[…] »
The recent increase in their key interest rates and the end of structural asset purchase programs may lead one to believe that central banks are inclined to exit the game (leaving the field open to the markets once again).
Read more: Good Leaves: “The Decline and Fall of Neoliberalism”
However, they will not risk a “volkerization” of monetary policy (referring to US Federal Reserve President Paul Volcker’s policy of sharply raising key interest rates, which has reduced inflation but crushed growth). Monetary authorities will certainly tolerate a certain dose of inflation. They will also not hesitate to intervene, especially if the financing of the economy becomes strained, thus undoubtedly continuing to protect interest rates from financial market arbitrage for a long time.
But now we have to go further. Excluding (and therefore eliminating) markets for energy, commodities, metals, minerals, real estate, cash, pension savings, and corporate finance facing health, environmental, and social crises is becoming essential. from the logic of optimizing risk/return pairs inherent in the shareholder value paradigm).
Read more: Why finance can never be green (and how to finally make it green)
Without necessarily returning to a price system completely controlled by public authorities, as they practiced before deregulation (nationalized credit system, fixed exchange rates, public transport, water and energy, collective regulation of wages, regulated prices of agricultural raw materials, etc.). , this involves turning to alternative valuation logics to the logics of markets (promoted by States, public authorities, Social and Solidarity Economy structures, the associative sector, NGOs, local civic assemblies) and therefore promoting in a form. or otherwise, the socialization of the price regulation system.
It will also include expanding the prerogatives of central banks in terms of financing green projects, greening prudential regulations, restructuring the financing cycles of the economy and states, and even publicizing investment and credit. .
This political choice is critical if we are to face the future energy and health crises and make a clear commitment to the financing of the environmental and social disruptions we so desperately need. By doing so, we would seize the opportunity to firmly close the bracket of financial neoliberalism.