Fox Guarding the Henhouse?

From the “fox guarding the henhouse” category comes news that the Bank of Canada has appointed Tim Hodgson, CEO of Goldman Sachs’ Canadian subsidiary, to be a special advisor for the next 18 months on financial regulatory reform.  Hodgson worked with Governor Mark Carney when the latter was also at Goldman Sachs.  (Don’t forget, Carney himself spent 13 years at GS, Wall Street’s pinnacle investment house.  I bet Carney made more in a month in good years there, than he makes in a year as the most powerful economic manager of the world’s tenth largest economy.  If nothing else, that certainly testifies to Carney’s spirit of public service, whatever one may think of his policies.)

The easy shot in this circumstance is to point out the obvious conflict of interest:  Leader of the Canadian subsidiary of the company that laughed all the way to the bank through this crisis (cap in hand nonetheless), now advising our central bank on how to “fix” the problem. Things that make you go “Hmmmm.” Go and see Michael Moore’s film Capitalism: A Love Story, which excoriates the government connections and corruption of Goldman Sachs, and then tell me that you want this firm (or, pardon me, its former executives — several of whom also work for the U.S. government) influencing the shape of the policy response to the enormous catastrophe that GS itself was so key in provoking.

On the other hand, the choice of Mr. Hodgson could also be an intriguing indication that Mr. Carney is actually trying to accomplish something on the financial regulation file. Reportedly part of Hodgson’s mission will be to “communicate” with big financial market players, keeping them abreast (and onside?) with whatever the Bank is dreaming up to incrementally stabilize the operation of over-leveraged, fundamentally speculative markets.

The problem is, we the great unwashed have no idea what they are all up to. The central bank being “independent” (a central tenet of neoliberal macroeconomic policy), this incredibly important moment in regulatory history is being conducted almost entirely behind closed doors. Bay Street insiders are being briefed, consulted, lobbied, and perhaps even arm-twisted.  But there are no clear marching orders from Canadians or their government to the central bank that they own, on how government should respond to a historically grave breakdown of the private credit system.  The Bank pretty much makes up its own marching orders — and (as shown today) hires who it wants to fulfil them.

In my view, the regulatory response to the meltdown should include some pretty far-reaching, intrusive measures: stronger capital requirements, prohibitions on especially destructive activity (like short-selling and leveraged speculation), separation between commercial banking and investment banking, and the expansion of public guarantees to stabilize the bread-and-butter side of the banking business (the old fashioned things like mortgages and term deposits that ordinary Canadians actually use).

The broader policy response should include other stuff, too, to try to reverse the whole dynamic of financialization: expanded mandates for public or social credit-creating mechanisms (everything from the Export Development Corporation to credit unions), the de-financialization of social policies (from pensions to university education), and the leveling of the taxation field so that speculators pay at least as much tax on their income as genuinely productive people do.

I think it’s pretty safe to say that none of these ideas are in Mr. Hodgson’s playbook. The Bank of Canada has a regulatory agenda, clearly, including an expanded regulatory role for itself. And Mr. Carney and other officials are playing an active role internationally, as well. But it’s a highly incremental agenda: promoting (in theory) more transparency and reliability of leveraged speculation in exotic derivatives, as opposed to questioning the very usefulness of that activity in the first place.

Hodgson’s appointment reaffirms the core argument made in a fascinating article in the current edition of Studies in Political Economy by Chris Rude: “The World Economic Crisis and the Federal Reserve’s Response to It”. Chris and I are old college buddies from the New School. (Like Mark Carney and Tim Hodgson, we also met in New York City! Just a few big blocks toward the cheaper side of town, that’s all.) Chris’s thesis is that there has emerged a remarkable unity of interest and purpose between central banks and the private financial industry, through the crisis. He focuses on the dramatic changes to the mandate, the interventions, and the balance sheet of the Fed. (Largely the same thing happened to the Bank of Canada, too — although they were clearly the tail to the Fed’s dog.) The Fed undertook many actions that were not contemplated before the meltdown (including providing liquidity to investment banks, guaranteeing private assets, and flooding the market with its own direct liquidity when the private credit system froze up and it became impossible to push on the banking system’s string). But it did these things with a particular, peculiar motive: to save the collective bacon of the private financial class, while at the same time disciplining certain players within that class (like the owners of Lehman Brothers). This big new role for a uniquely powerful, uniquely non-democratic arm of government reveals rather starkly the organizing and disciplining role played by the state in a system dominated (economically and politically) by private wealth.  The words “executive committee of the bourgeoisie” seem to spring to mind.

Rude describes the Fed’s usurpation of overall financial regulatory authority as the crisis progressed (in part due to the paralysis of the Treasury, but also because the Fed was far less subject to troublesome public oversight).  The Bank of Canada is clearly heading in the same direction, collecting greater powers for financial regulation — a line of work not strictly in its job description.  Rude concludes by arguing that the Fed’s evolution reveals that the U.S. financial bailout was certainly not akin to the nationalization of the paralyzed system, but rather its exact opposite: “a further privatization of the U.S. state” (p. 142) to a largely unaccountable body which acts powerfully to defend the collective stability of private financial wealth.

Rude’s article is detailed, well documented, and fascinating: well worth a read.  And it has many applications to the Canadian situation.