The culture of financialised capitalism

After the righteous fury that pervaded Royal Commissioner Hayne’s interim report on the financial system, the final recommendations came as a letdown to everyone (except of course the insiders who bid up bank shares in anticipation of the news).

This ought not to have been a surprise. Hayne correctly identified greed and dishonesty as the key drivers of wrongdoing. But greed (or, more politely, incentive) is the guiding principle of financialised capitalism as is seeking profit to the limits of legality, even when this involves what would ordinarily be called dishonesty. In these circumstances, it’s unsurprising that those limits are regularly breached, particularly given that most such breaches go undetected, and the few that are detected go largely unpunished.

The financial system is at the core of the problem but, as Bernard Keane observes in Crikey (paywalled, I think) its effects are pervasive. As he says, it’s not individual industries, it’s our system. Ross Gittins is also good on this. Even Eugenie Joseph of the Centre for Independent Studies has noticed that there is a big cultural problem here.

The only thing that will change the culture of greed and dishonesty is a reversal of the policies of financial deregulation that produced it.

47 thoughts on “The culture of financialised capitalism

  1. Hayne named Ken Henry, not for being greedy or dishonest, but for being in essence unpersuasive. It was Henry’s perceived attitude to the lawyers, not his work as a banker that was found lacking.

  2. The central issue is the use of money as the central measure of value (we acknowledge other forms of value, but money is the prime) and the key denominator or social difference. Given human status competition, this pushes for the ever-expanding monetisation – of the environment, social relations (hello Facebook), childcare….

    If hereditary social position had a merit, it was that it divorced status from money.

  3. Even if one accepts that money is ‘the central measure of value’ there remains the problem of how it is earned (honestly/dishonestly, legally/illegally, etc).
    The fact that everyone wants to amass it (if this is the case) does not mean that they should be able to do this in any way they find convenient (eg dishonestly). Allowing it in the past has lead to revolutions after all.
    Alsi, hereditary social position would have still meant that its holder was able to get ‘free’ services of various kind (benefits through influence for example, without exchange of money between the parties). The money of course was not less important than it is today as it could still buy one the position of privilage (not lastly through marriage for example).
    So it is hardly human competition that should be blamed for the state of the financial system, but rather tge culture that allowed it.

  4. “The financial system is at the core of the problem.” J.Q.

    There is a system even more deeply embedded in our political economy than the financial system. This system is the ownership system. One should say;

    “The ownership system is the core of all our problems.”

    I might write about this sometime in a Sandpit. When I get around to it.

  5. Rubbish from Eugenie Joseph: “Culture can’t be imposed by government, but must be built from inside an organisation”… yet true enough when the organisation owns the government.

  6. In a just world, a few thousand of these bankers would be imprisoned and a few thousand poor fine defaulters would be released.

  7. @Ikonoclast I am not sure how relevant it is to talk about the ‘ownership system’ in relation to the ‘financial system’ (or what the relevant connection/s is/are). The financial system, it seems to me, demages individuals from the general public, independent of anything else (Looking only at individual citizens, the depositors of their salaries with banks, and banks, the lenders, it is clear that the banks take unfair advantage of its customers, whenever they can).
    Are you simply suggesting that they do this on the behalf of their shareholders, because of the shareholders? Clearly this would not provide an explenation for why the financial system is the way it is, or why it could not be different.

  8. “The culture of financialised capitalism” – as is so often the case, the fundamental problem is described in the heading of JQ’s posts.

    IMHO, the habit of using the word capitalism interchangeably with the word market has assisted in creating the problem. [1] Terms such as social and ecological market economy would be much more helpful. Human history records people having exchanged things in markets and they have traded over long distances long before Adam Smith wrote. The idea of freedom to exchange things (ie a market) is compatible with the idea of democracy. The idea of abstract objects such as real numbers dictating all aspects of economic life and beyond as is the case with ‘financialised capitalism’ is not. Unfortunately, most of macro-economic variables (eg GDP…..) belong to this financialised capitalism.

    Good one, Svante.

    [1] Roy Radner’s theoretical model of an economy with a sequence of commodity and securities markets is helpful, IMO, to understand why more competition (in the issuance of securities) doesn’t work. This work was available for all to see before Thatcher’s Big Bang. The financial markets have never been fully deregulated – a lot of time consuming micro-management rules have been introduced. A quantity constraint is required. The very modest quantity constraint introduced by APRA last year had measurable effects.

  9. at Hugo:
    somebody swiping something from a shop will be incarcerated.
    somebody swiping (through fraud) a persons home and home deposit will be ???

    the impoverishment of people through financial malfeasance is so widespread i wonder how many of the people commenting here personally know or know of anyone this has happened to.
    i’m 1,
    my knowledge is of a couple who had their application form replaced and have been fighting unrepresented for six years to hold, at least, the large sum of money they paid as a deposit.

    and finally:
    i have’t actually studied it but thought you might be interested.

    happy perusing.

  10. Hayne has been like a slap in the face to bankers – for too long they thought that the law, and the lawyers, were irritations to be avoided. I think now we will see more vigorous regulators and a more lawful banking culture.

  11. AleD,

    The financial system (in any given extant form) rests on the ownership system. The ownership system in turn rests on legal laws and customs. These in turn rest on violence, in the final analysis, to back them up. Where state laws are involved then it is the state’s monopoly on violence which, in the final analysis, backs these laws. These are very bare statements, on their own, without extensive explanations to back them up. I intend to write about this issue (ownership) in a “Sandpit” fairly soon. J.Q. kindly provides Sandpits from time to time for long posts, involved discussions, idees fixes and so on.

    The idea that any or all aspects of the financial system are “independent of anything else” is an idea that I reject, essentially. Rather, I take the position that everything is connected and interacting in the complex systems sense and that each more rarefied or formalized system is built on a more elaborate or more concrete (real) system below it. Ernestine Gross refers critically to “abstract objects such as real numbers dictating all aspects of economic life”. This cuts to the essential nature of the problem. We see this playing out when the abstract numbers (and formulas) “dictate” a great flow of wealth to a few already wealthy people while homeless people, real people, doss on the street. Leaving aside exogenous causes (war, resource shortages), the real system is telling us that the formal system is in error unless our express goal is to create extreme polarization of poverty and wealth. Actually, that is the real but seldom openly expressed goal of the already and soon-to-be wealthy.

    The formal systems (legal systems and financial systems) are constructed, in the main, by an exclusive set of real, rich people with their own agendas and sectional interests. The formal systems are not free-standing nor neutral. They arise out of and bear the biases of the most powerful sectional interests, those who are most powerful in both financial and real power terms. These people via their ownership of capital (as money, stocks, bonds and real material capital like real estate and factories) have the real power of control in our society. This is so as “ownership” is always backed by power (backed ultimately by the state’s laws and its monopoly on violence). This ownership power manifests itself in the ability to physically control, via the use of servants, employees, factotums, managers and private security forces, the disposition of material and human assets. The state’s security forces, as police, para-military and military, certainly act to guarantee the security of the nation and its people overall, but they also act in the service of owners against non-owners in almost every context in civil life. The more someone owns, the more, differentially speaking, the (capitalist) state is acting in that person’s service to guarantee their ownership against other claims and hazards.

  12. Top example just a day or two ago with Nat Bank shutting down 22 branches just days AFTER the RC delivered its findings.
    Change of culture, indeed!

  13. JQ: “it’s our system”. Always the system. And “The only thing that will change the culture of greed and dishonesty is a reversal of the policies of financial deregulation that produced it. “. Thank you JQ.

    And I did not anticipate “EvenEugenie Joseph of the Centre for Independent Studies has noticed that there is a big cultural problem here.”

    Rog, you doesn’t get it imo… “not his work as a banker that was found lacking.”

    Where do you draw the systemic line of a banker Rog. Circumscribe a line from Ken H and it will pass by me and end up back at his desk vectored by laws, culture and govt.

    Peter t… wish I’d said that at 2.

    AleD. “but rather tge culture that allowed it.”… and the systems it allows.

     Ikonoclast.  “The ownership system is the core of all our problems.” via cultural acceptance.

     Svante- Thanks for the “Rubbish from Eugenie Joseph: “Culture can’t be imposed by government, but must be built from inside an organisation”…”

    Hugo – good hugo.

    Ernestine – thank you for pointing out the topological (?) epistomalogical? ontological? cultural value of words. Excellent point we all need to follow through on… “the habit of using the word capitalism interchangeably with the word market has assisted in creating the problem.”

    A reference or small details if poss would be great. I don’t follow APRA. Nor read the fin.
    …”The very modest quantity constraint introduced by APRA last year had measurable effects.”

    “Among Radner’s various contributions, the one that bears his name, Radner equilibrium(1968), is a model of financial markets.[3][4][5]In the traditional approach if the value of an asset or a contingent claim is affordable then it can be achieved. Not so with incomplete market as the payoff has to be replicable by trading of available assets that are now part of the definition of the economy.”

    Anonymous – “Hayne has been like a slap in the face to bankers” And how refreshing.

    paul walter – “Change of culture, indeed!” They are still using the system until it is changed to as Jq said “is a reversal of the policies of financial deregulation that produced it.” 

    Excellent example. Only 22? A thoughtful feedback model (read human) decided scenario 22. For shareholders not society. Thanks. I’d missed it.  

  14. @Ikonoclast Thank you for the clarifications. As someone grown up in a socialist country where state owned everything for a significant period of time I believe that ‘ownership’ cannot explain everything that goes on in a country. It is true that the distribution of wealth was much more even under state ownership, but a critic has suggested to me that this was because ‘everyone was poor’.
    Of course not everyone was poor, and the majority of people lived comfortanly enough before the eventual economic crisis and the rise of nationalism spelled the end of socialism.
    Even under the socialist/communist systems as we have seen, some proportion of individuals will try to get an advantage and power over other people. Once they have power they will use law/army/police etc to reinforce their power. So for the average citizen things are pretty bad independently of who or what exactly owns the capital.

  15. @Ikonoclast So why not insist on regulation of the financial system, independently of ‘ownership’, since implementation of a 70% tax rate on the trully rich (to decrease their ownership) is much less likely to succeed?

  16. Driving customers away from mortgage brokers, who have a high rate of customer satisfaction, will only help not hinder the banks.

  17. @KT

    It was Hayne who expressed his lack of confidence in Henry’s performance at the RC, he didn’t find his answers or attitude convincing. I put that down to poor communication skills on Henry’s part.

    Btw I am “Anon” (browser update lost the details).

  18. Aled,

    I take your point that “Even under the socialist/communist systems as we have seen*, some proportion of individuals will try to get an advantage and power over other people.” That seems to be a perennial problem under every socioeconomic system yet attempted by humans. I guess the question is what problems do we tolerate, and to what degree, in order to ameliorate other problems?

    * Note: I take “as we have seen” to mean the real extant systems which we have seen in historical practice to date. I also take this set to not exhaust the possible types of socialisms which could, in theory, exist. In other words a better variant of socialism than any that has yet existed, could still be brought existence, at least possibly.

    You asked the question: “So why not insist on regulation of the financial system, independently of ‘ownership’, since implementation of a 70% tax rate on the truly rich (to decrease their ownership) is much less likely to succeed?”

    That’s a fair enough question. I am certainly in favour of the types of regulation and re-regulation of the financial system which economists like John Quiggin and Ernestine Gross, for example, have recommended on this blog and in other writings of theirs. Greater financial regulation would be an improvement. There’s no need to stop there however. Increased financial regulation AND a 70% tax rate on the truly rich would be better than just one or other of those measures in isolation. In turn, tax rates to re-distribute wealth (accumulated as income and capital gains) is inferior to measures to prevent excessive wealth accumulation in the first place. Before re-distribution there is distribution. Distribution occurs according to the laws of ownership and related laws like wage and remuneration laws (minimum wage laws being an example) and common ownership laws (adult residents of Alaska get a personal dividend from the exploitation of Alaska’s resources via The Alaska Permanent Fund for example).

    Changing ownership laws to achieve more equitable distributions in the first place would reduce, though not obviate entirely, the need for re-distributive taxes. This reduces “churn” essentially, as well as having many other benefits including re-conditioning our expectations of our economic system. Currently our expectations are low. We expect politicians to lie, managers to bully and owners to exploit. We also continue to expect nothing can be done to reduce the power of the rich. Saying “implementation of a 70% tax rate on the truly rich (to decrease their ownership) is much less likely to succeed” is a fair indication of people’s low expectations these days, in such matters. This is particularly the case since some historical rates of taxation on the very rich went as high as 95%, during which period incidentally, the economies in question performed quite well.

  19. KT2, the paper by Prof Roy Radner I have in mind is: “Existence of Equilibrium of Plans, Prices and Price Expectations in a Sequence of Markets”, Econometrica, vol 40, pp 289-304, 1972. (Prof Radner has worked and published in many areas, primarily in economic theory – the math econ variety.)

    Re Radner (1972) and APRA. A problem encountered by Radner when extending the Arrow-Debreu model (1950s) by allowing markets to open again and again but for a finite number of times and there are commodity and financial securities markets is that in contrast to the Arrow-Debreu model, there is no lower bound on the financial securities (roughly translated, there is no limit on issuing financial securities). Radner considered the simplest form of securities. But this brings out the problem of the unboundedness of the system and removes the tendency in more applied areas to get lost in irrelevant details. Last year, APRA put a quantitative constraint (ie a bound) on financial institutions in Australia regarding interest only loans (a type of financial security) to curtail the housing price bubble (I am using the term ‘bubble’ in the sense of asset prices (financed by debt) rising to levels that make no sense – eg in relation to wages). This relatively mild measure worked in the sense that real estate prices, particularly in Sydney and Melbourne, stopped increasing, setting aside some small pockets). Prior to the so-called financial deregulation, the monetary authorities (eg the RBA in Australia) had other policy measures besides the short term interest rate to limit the lending behaviour.) Financial deregulation involved further changes (eg derivative securities), which compounded the problem. IMHO, the deregulation led to an avalanche of band-aid regulations, which understandably results in objections, while leaving the fundamental problems unaddressed. Given the ‘culture of financialised capitalism’ (the mind-set of believing that more competition will solve the problem) the financial sector demands more deregulation. IMO, this problem of excess debt, generated by private financial institutions that are motivated by profits is a problem that cannot be solved by focusing on fraudulent, or greedy behaviour – ie internal culture). It requires a change in the institutional environment (rules of the game), such that limits on various types of financial securities can be set by an institution such as the RBA. IMO, the fraudulent or greedy behaviour is a secondary problem only. Moreover, it is not confined to the financial enterprises.

    I find it a little difficult to go more into details on a blog.

  20. The above ‘Anonymous’ is I, Ernestine Gross. I forgot to fill in my details box or to click on the icon. Apologies.

  21. Again I enjoyed so much reading Ernestine’s comments. Mind you I do not understand all of it but that is my fault. I gave up reading the literature on financial markets after reading John Quiggin’s pivotal book on the weaknesses of financial market theory. The one thing that really struck a cord with me was what Ernestine said about the “ripples” from financial deregulation. The Campbell Commission of Inquiry from 1983-84 and the Martin report from 1984 was the smokescreens for a large political deception. Both sides of politics were keen to join the USA in deregulating our financial markets. In one way, it was the beginning of globalization of our money economy. Whilst vicious rearguard actions were launched to continue to protect Australia’s real markets, politicians wantonly threw away control of our money markets. The idolization of Hawke/Keating era has stopped both sides of politics from seeing the errors in these past deeds.
    I had to teach Economics in this period of a constantly changing deregulation mania. It was NOT pretty.
    Many mistakes were made, but the biggest one was the obsession with the four pillar policy for the banking sector.
    Anyway that is the past. We now must face a future with a lot more uncertainty in financial markets. Any economists will tell you that orthodox economic theory cannot handle the effects of such uncertainty Empirical evidence is of little value when greed and self interest drive financial habits.

  22. Ernestine. As always an excellent post. Thanks.

    “APRA put a quantitative constraint (ie a bound) on financial institutions in Australia regarding interest only loans”

    That is it. All they did. Hayne or someone needs to put a serious culture broom into apra – and manage how humans are appointed. As you say greed seems secondary to the rigging of rules and powers.

    Bounding “no bounds” needs to be embedded in legislation. An ignorant analogy, it seems the reverse of a divide by zero error – a “we can divide infinity ” feature as opposed to bug.

    “Derivatives and an avalanche of band aids”, (a journo would love this phrase) captures nicely in words, the problems continuing to keep the culture of financialisation embedded. I heard some realist on radio saying ‘we will be having another rc into finance within ten years”.

    I delivered a systems dynamics software lesson to a person in 1991 who developed a currency trading algorithm who stated “I could train bar flies (alcoholics) to do this as the pass mark for trades is 51%”, and “the majors will incorporate my edge within two years further driving algorithmic arms race”. We are still reaping negative societal and cultural effects.

    I am loathed to admit it, but i rang the rc, and if victims went out to 20 yrs instead of ten, I too would have received minor compensation. I had two negatively geared P & I mortgages, one a principal place of residence. Rapid increase in house prices in an area I knew well. Borderline on expenses. I doubted I’d get a full p& I loan and floated question to new loans manager, who was, stunningly, head and shoulders above any I’d encountered before. For some reason he had come from a trading arm of the bank and I now believe he was there to book build with suckers like me (groan – I learnt my lesson). With the aid of an accountant for paperwork ( secret commish?), I took two loans, (greedy and stupid ) one at 110% interest only. Disaster tennants, company I worked for went into receivership and within a year I sold both, coming out even, only due to strength of prevailing market. Stressful and very sobering. This experience finally awoke me from my cultural slumber (she’ll be right, you’d be a mug not to) to take a real interest in banking and economics, leading to JQ’s blog eventually.

  23. Moving forward via “reversal of the policies of financial deregulation that produced it. ”

    Wealth tax in America
    “”Reagan, then Bush and Trump subsequently endeavoured to destroy this heritage. They turned their backs on the egalitarian origins of the country, by counting on historical amnesia and by fuelling identity-based divisions. With the hindsight we have today, it is obvious that the outcome of this policy is disastrous. Between 1980 and 2020, the rise in per capita national income was halved in comparison with the period 1930-1980. What little growth there was, was swept up by the richest, the consequence being a complete stagnation in income for the poorest 50%. There is something obvious about the movement of return to progressive taxation and greater justice which is emerging today and which is long over-due.””

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