Can finance be disciplined?
Can finance be disciplined?
As argued in Chapter 3 of Just Transitions, Carlota Perez expects the current crisis to “follow the script” of previous recoveries. Besides the fact that this will not happen until the deeper underlying constraints of unsustainable resource use are addressed, it was argued in Chapter 3 that we should also be looking for signs that the financial system is being restructured. Although there is a lot of reports about the huge complexities of the re-regulation of the US banking system which is so complex it won’t have much effect, March 2-9 2012 edition The Economist ran a report on p.66 on “The Kay Review of the UK Equity Markets and Long-Term Decision Making”. Although I intend reading the report itself, the report in The Economist – which is the first reference I have come across about this report – makes very interesting reading. The headline is – tellingly – “The British stock market is not fit for purpose”. In essence the Kay report seems to be addressing a range of problems with the way equity markets work, especially with respect to the role that these markets should play in long-term decision making. The problem identified is that equity markets have in recent decades been structured to serve the interests of investors seeking short-term capital gains rather than businesses looking for long-term capital investments. Although a second report by John Kay is expected in future that will address the solutions to this fundamental and related problems, the mere fact that this report has come out to address this fundamental question is hugely important in light of the argument in Chapter 3. Following Perez it was argued that they key indicator of a shift in power will be when finance capital which thrives on short-term capital gains is disciplined and replaced by more patient productive capital that invests over the long-term in order to reap the rewards of dividends. It is, however, quite clear that in light of the Kay Report, this won’t happen when the rules of the game favour finance and productive capital. Hence the title of the article! I will be interesting to see what the next Kay report says about interest rates. What is interesting is that one of the problems with the equity markets at the moment is that businesses in low interest environments can access cheap debt and that this may in fact work out cheaper than equity, especially if stock markets are buoyant. This speaks to another fundamental of the world that Greenspan built, i.e. the worship of low interest rates. Put differently, surely this means that if we want businesses to return to the stock markets to secure investments from productive capital, average long-term interest rates might need to be higher. We need to read the Kay Report and what comes next.