Abstract
Gordon Clark reports the global financial crisis as a multiple car pile-up, caused by drivers who relied on steep discount functions and thus ignored base-rate information, making them vulnerable to momentum and likely to overvalue recent events. Reporting that the costs of the collision are enormous, though differentiated, he observes that these drivers did not see their way out of a time trap. He reinforces, but goes beyond, Peter Shiller’s critical review of the benchmark and bonus systems used by pension funds: more than ‘animal spirits' need to be accounted for in regulating financial markets. Gordon Clark identifies three complicating elements in the ecology of financial markets: difficulties in establishing the identities of counter-parties, and therefore the extent of liquidity; the need for a shared metric of valuation; and the chains of agents with interests in short-term profit that confound principal-agent relations. Gordon shows that in this context increasing myopia is a cause of severe market volatility, and that retreat from the market causes market liquidity to collapse. Gordon calls for controls over bank bonus culture, and he seems to support regulation of compensation in the industry, the imposition of leverage limits on banks, and requirements that traders contribute their own collateral when participating in the market. He baulks at further efforts to make bankers more moral, on the grounds that ruling myopic behaviour out of financial markets has too high a cost. Bubbles and psychology dominate this analysis, but we must not mistake Gordon Clark’s intent, which is to understand the crisis as a problem of myopic behaviour in a complicated environment, not of animal spirits. Corrective lenses are required, he argues, not simply a speed or alcohol ban. Gordon Clark calls for better understanding of risk-taking and its governance, and marks the opportunity for economic geography to develop a deep understanding of the interaction between cognition and context.
While applauding this paper and Gordon Clark’s intent, I nevertheless write seeking clarification of several aspects of the case, and largely because Gordon seems to write a kind of apologia: financial crises can be produced simply through the ecology of financial markets; re-regulation of those markets must pay special attention to their ecology. Some institutions amplified myopic behaviour, others tried to regulate it, and so ‘behaviour was more diverse and more or less effectively regulated than commonly recognized’. Further, ‘we do not need villains, extraordinary events, or the “unique” confluence of reinforcing “factors” to produce crises, although they often precipitate immanent crisis tendencies in financial markets'. To what extent is Gordon Clark writing a case for the defence? In what follows I ask some open-ended questions with the intent of measuring the distance between myopia and criminal neglect.
Myopic behaviour is an attribution of legal responsibility that is distinct from either intoxication (animal spirits), which is irresponsible when driving, or criminal neglect, where the driver failed to maintain his or her vehicle or officials failed to take suitable safety precautions to protect pedestrians and onlookers. Myopia becomes a legal and a moral problem when a driver drives a motor vehicle without glasses, or faster than his or her field of vision safely permits. Gordon Clark makes clear that myopic behaviour has a psychological property: people have difficulties conceptualizing their long-term interests, are impulsive, and inconsistent over time; they tend to be ‘momentum players' rather than ‘deliberate planners'. But throughout he assumes that the game is one of high stakes: a ‘dance’ or race, where only real ‘players' should venture. Some ‘people’ may be ‘risk-averse’ whereas others ‘gamble on their prospects', but the structure of the game will be gambling. Now this is a special plea. Gordon Clark asks us to treat the finance industry as a casino rather than as an industry with a functional role in the economy. The traders are to be seen as Formula One race-car drivers who do not need to take defensive driving courses. So, did the ‘regular guys' who met for takeaways in Deutsche Bank’s New York office, with their lawyers of course, to discuss the possibility of inventing subprime mortgages, do anything wrong? Alternatively, perhaps officials, whether from Standard and Poor’s rating agency or the Commerce Department, have a case of criminal neglect to answer? After all, they attested to the probity of these products and allowed the toxic instruments to multiply.
How global is the global financial crisis? Gordon tells us that there was an ‘enormous destruction of private wealth’, the ‘impoverishment of the public sector, especially in the UK and the USA’, combined with ‘compromised standards of living’ for many pensioners and others preparing for retirement, and increased taxes and lower incomes for workers. There is a geographically differentiated impact: much of western Europe, Australia and Canada ‘successfully weathered the storm’. Gordon notes that this was not a crisis ‘manufactured in the periphery and sent to the core’ as in previous Asian crises. It was ‘failures of governance and regulation that brought Atlantic economies to disaster’. That is a reasonable view, but it leaves out mention of economic effects in most of the world. A view of the accident from an Oxford or London roundabout may entail further constraints on vision. To be fair, the collision and its destructive potential was never really the focus of this paper; nevertheless I think that it is important to establish the seriousness of the case before passing judgement.
Which is the periphery and which is the core? Savings from Asia, Europe and North America fuelled the global economy. Investors could be seen as core and the City and Wall Street as convenient sites for managing these investments. The US and UK banking systems may have survived, but these are not the same ‘national’ banking systems that we had before the crisis. There is now an increased share of non-US and non-UK ownership, as well as government control. So I wonder how national boundaries and economies figure in Gordon Clark’s analysis in relation to the global finance industry. Attention is devoted to Alan Greenspan, Mr Prince and the culture on Wall Street, but the cultures of Shanghai, Hong Kong and Beijing, of Tokyo, Singapore and Mexico City, of Mumbai, Frankfurt and Sydney, let alone Delhi, Berlin and Canberra, are not explored. While asserting that London and New York are the core of the world economy, Gordon’s analysis places these centres at the heart of national economies. In so doing he runs the risk of seeing these two nation states as the reliable bulwarks of global capitalism, and perhaps understates the globality of the financial markets, the risks that have been produced, or the regulatory systems that will be required.
Was this a ‘storm’? A storm is a short-lived event but this crisis seems to have other properties. The economic effects are ongoing, even concatenating, more like repeated tremors and aftershocks than a storm. One danger from focusing on the effects of myopia within a bubble is that we may understate the character of the crisis, and may shorten the list of possible remedies, after all the storm has passed the finance industry by. Perhaps this was not a bubble but a capitalist crisis? As pension and sovereign wealth funds circulated the globe looking for appropriate investments, they found the opportunities drying up. The American suburban dream linked the US housing market, federal highway construction programmes, tax policies, Washington’s efforts to affect oil security, and the aspirations of many investors. And it was an effort to extend this market by introducing subprime mortgages that precipitated the bursting of the ‘bubble’. Gordon does devote a paragraph to this facet of the circuits of capital approach before moving on, but the question remains: to what extent can the US housing market be revived as a key site for the exchange of various forms of capital? This is not merely a matter of saturation: proper regulation of this market was pivotal to US financial dominance, consumer affluence, manufacturing prowess and public debt. Gordon directs our attention to behaviour within the financial sector and, potentially, away from the regulation of this major constellation of economic activity. Does he mean to imply that everything will be OK with the financial industry once the appropriate re-regulation takes place?
Which historical record? Gordon Clark accuses the financial industry of having a limited historical memory of no more than 20 or perhaps 30 years, and with models unable to cope with longer time periods. Very good, but the monetarists also devoted their time and energy to reinterpreting the great crash. Perhaps it was this work that did the damage? Not only did it critique the need for government intervention to regulate markets, but it built the careers of the many economists who took over from Keynesians at the World Bank, the IMF, Goldman Sachs and the Federal Reserve. This work paved the way for acceptance of quantitative models of expected market performance, with low probability of catastrophic events. Could there be contending historical records? Glennie and Thrift (2009) are referenced in relation to the significance to people of how to calibrate the value of time in modern life. Yet, ‘In the main, experimental evidence suggests that people have quite steep discount functions: they value very highly immediate or close at hand rewards and discount very heavily future benefits'. Could it be that the experiments reveal the current learned behaviours that are, in fact, artifacts of financial and other performativities? Could it be that experts and traders in the financial industry have developed different behaviours from ‘people’? If ‘people’ or traders value time according to a learned set of practices relating time to rewards, then perhaps this behaviour can be unlearned, and a new set of practices can be established?
Finally, since my questions revolve around the issue of what it means to call these events a ‘bubble’ rather than a ‘crisis', I must acknowledge that Gordon Clark does not proclaim that it is one and not the other. Indeed he declares that risk-takers in the financial centres of London and New York produced mispriced and unregulated risks and distributed them as products around the world, and that confidence in ‘light-touch’ regulation allowed the subprime debacle to become a global crisis. He then turns, with great effect, to consider the issues for economics in thinking of the problem of myopia in the bubble economy. Now this suggests that his target audience comprises economists rather than economic geographers: he writes to communicate with those who are insiders in the circulation of expertise, models and knowledge in finance markets. With this in mind, I write to assay ‘myopia in a bubble' and ‘criminal neglect in a crisis', to establish the difference between them, and to measure the distance between Gordon Clark’s economic geography for economists and an economic geography of the global financial crisis.