Duncan’s Economic Blog

Governments Vs Capital

Posted in Uncategorized by duncanseconomicblog on October 16, 2009

When lefties talk about a conflict between governments and capital, many people roll their eyes and assume that the speaker is at best doctrinaire and at worst a little crazy…

So I find it interesting when the FT runs an article from a well respected investment strategist (and author of a superb history of Wall Street) on this very topic:

 One consequence of the financial crisis is that fund managers are increasingly going to come into conflict with governments. Actions taken in the best interest of fund managers’ clients are likely to be considered against the national interest. Preserving clients’ capital in the “great recession” is a big enough challenge. But this ignores the much more important structural change that has just occurred.

This differs from the environment of the past few decades when investors were happy to save in their own currencies, buy government debt and participate in credit-fuelled domestic asset booms. Will fund manager fiduciaries now be prepared to finance record fiscal deficits? Will they buy domestic assets in an era of sub-par credit growth? And will they buy shares in banks stuffed with government credit and loans aimed at securing employment rather than sound returns?

Until 2008, capital colluded in maintaining the myth of prosperity, by providing the credit for excessive consumption. Capital supported the illusion of savings by pumping up equity valuations to ridiculous levels; and it supported the need to speculate, most notably in the housing market, by manufacturing savings that could not be earned. This support ended with a bang, and governments stepped in to prevent the deflation that would have brought poverty all too quickly.

Capital controls seem impossible to many, but when a choice has to be made between economic principle and government bankruptcy, they are a likely political response. In 1931, JM Keynes, acting as director of the Independent Investment Trust, refused to sanction a new financing arrangement that effectively involved shorting sterling. According to his biographer Robert Skidelsky, this reluctance was due to public interest considerations rather than the shareholders’ interests. Within the month sterling had left the gold standard and the Trust had missed out on a profit of £2 million (in today’s money). A hedge fund manager with such priorities today would risk major fund outflows and perhaps a civil action. In the West’s long boom, capital and the public interest were largely aligned. That alignment ended in 2008; now, conflict between government and capital is the future of investment. (My emphasis).


4 Responses

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  1. Tom P said, on October 16, 2009 at 3:39 pm

    Very interesting stuff. Also the para about transaction taxes.

  2. dannyboy said, on October 18, 2009 at 9:27 pm

    Duncan great work in fishing all these articles out – so little time to read the press these days it’s great to have a lazy feed from you!

    Not long ago everyone was poo poo-ing Lord Turner on this. I recall the commentary at calculated risk being ‘Lord Turner walks into a buzz-saw’.

    Do be sure to highlight opposing trends in the press too though, I’m very interested in which if any papers, including tabloids (apart from the sun) are throwing their weight behind osborne’s policy proposals.

    Keep up the good work!

  3. newmania said, on October 19, 2009 at 9:09 am

    Hard to see how all this was possible without the money supply getting out of control on some sense . How does “capital” force up prices unaided ?

    • duncanseconomicblog said, on October 19, 2009 at 9:52 am

      If volumes (in equity markets, commodity markets, housing markets, etc) are low (and they have been) it doesn;t take much cash to push up prices.

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