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Thursday, May 15, 2008

"Change is in the Air for Financial Superclass"

Is the financial superclass about to have its wings clipped?

Change is in the air for financial superclass, by David Rothkopf, Commentary, Financial Times: ...The re-engineering of international finance has been one of the transformational trends of our times – in just a quarter-century, capital flows became massive, instantaneous and controlled by a new breed of traders representing a handful of major financial institutions from a few countries. Their rewards have transcended any in history as shown by an estimate ... that the top hedge fund manager last year made $3bn.

The concentration of power has also steadily grown..., the key executives are in the US and Europe, underscoring the transatlantic nature of this elite. Change, however, is in the air. The history of elites is one of their rising up, over-reaching, being reined in and supplanted by a new elite. Several recent developments suggest that the financial crisis could signal the high-water mark of power for this group.

First, the crisis is prompting a re-regulatory drive. The power of financial elites had been evident in their ability to argue that global financial markets and markets in new securities should remain “self-regulating” (how many of them would hop into a self-regulating taxicab?), then when crisis comes ... these champions of less government involvement have then persuaded governments to cauterise their wounds.

Now, however, there are encouraging, if preliminary, signs of a push towards more effective collaboration between governments – the first steps towards creating the much needed checks on global markets... This could erode the agility of financial elites to play governments off against each other, with the weakest regulator setting the rules.

Second, the credit crisis is exacerbating the emerging backlash against corporate excess. Elites make billions on markets whether they go up or down and their institutions win government support while the little guy loses his home. ... The crisis has focused attention on the obscene inequities of this era – the world’s 1,100 richest people have almost twice the assets of the poorest 2.5bn. There are signs of open and growing anger at this, as we have seen this week in the Netherlands with calls to address bonuses, and the attack on the world’s financial markets as “a monster that must be tamed” from Horst Köhler, the German president.

Third, the accumulation of financial reserves in the Persian Gulf, Russia and China underscores that the centre of gravity in global finance is also shifting. ... The top creators of great new personal fortunes are in China, India and Russia. It seems unavoidable that the transatlantic elite ... will be rivalled in influence by the Asian contingent – a group that has as little appetite for the ... the values and priorities of the western financial superclass.

So, are we at the beginning of the end of a golden era for transatlantic financial elites? Perhaps, but elites cede power reluctantly and there are signs of an effort to stave off decline. There is now a recognition of the need to accept some global market reforms to avoid more invasive legislation. ... Institutional investors could play a role by demanding more sensible pay packages from money managers. The rise of Asia probably cannot be resisted. But by recognising that there are public interests to which they must respond, the financial superclass can stall the fate of previous elites. To succeed at that they must shun their arrogant “leave-it-to-the-market” explanations for the inequality they have helped foster.

Is it different this time? [See also Fed Chariman Bernanke's speech today, Risk Management in Financial Institutions. Update: See also How Should We Respond to Asset Price Bubbles? by Fed Governor Mishkin. There's been a lot written about how the Fed's recent communication on bubbles represents a change in policy for the Fed where bubbles will be attacked more aggressively, but they've always said regulatory and supervisory steps were needed to moderate financial markets, the big change would be for the Fed to use interest rate policy to manage bubbles, and I don't see much change in the way the Fed intends to conduct monetary policy.]

    Posted by on Thursday, May 15, 2008 at 02:34 PM in Economics, Financial System, Regulation | Permalink  TrackBack (0)  Comments (60)

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