Michael E Lewitt is that rarest of birds, an honest and public spirited Wall Street fund manager, and this book is his attempt to make sense of what happened in the 2008 financial crisis, and outline some steps to prevent it happening again.
The Death of Capital might seem like an ominous title, but Lewitt’s logic is that money is only worth anything if it is moving. In 2008 it stopped moving – those that needed it couldn’t get it, those that had it weren’t sharing. Despite poking it with the pointy stick of government intervention, capital did not respond. To all intents and purposes, it was dead.
It died for two main reasons. First, because too much money was being pumped into speculation rather than productive enterprise; and second, because we insist on believing that markets are rational, despite all the evidence to the contrary. Add in a move towards ever greater secrecy, a relaxed attitude to debt, and stubbornly pro-cyclical government policy, and finance was a disaster waiting to happen.
In some ways that disaster is a good thing, because it forces us to confront the underlying problems of the financial sector as it is currently configured. It gives us the opportunity to fix it.“The growth of finance has contributed to a deeply unfortunate trend in Western societies,” writes Lewitt, “in which an incalculable amount of brain power and economic power are devoted to activities that do not contribute to the productive capacity of the global economy or to the improvement of the human condition.” Finance was never meant to be an end in itself, it’s meant to resource business and development.
To analyse where things have gone wrong, the book re-reads four important thinkers who understood how markets function. From Adam Smith we are reminded that all markets are made up of relationships. From Marx we see how capital is a process, not a thing – it is a moving, fluid process, inherently unstable. Important psychological lessons are drawn from Keynes, who understood the herd mentality and recognised that “the primary objective of investors is not to determine the fundamental value of an investment; rather, it is to determine what other investors think the value is.” Hyman Minsky is less well known, but has been rediscovered post-crash. His work shows that every bubble is essentially a ponzi scheme, and he unashamedly dismisses much modern banking as ‘ponzi finance’.
On these foundations of the market as a network of human relationships, prone to emotional swings and far from rational, Lewitt offers some suggestions for making it more stable. These can be summarised in six headings, which bear repeating here:
- Taxing speculation
- Creating a unified regulator
- Addressing ‘too big to fail’
- Improving capital adequacy
- Reforming monetary policy
- Improving transparency
I won’t go into all the details of these, but it’s a compelling argument for common sense and honesty. There are excellent chapters on debt, and some useful explanations of how derivatives work, or rather why they don’t work. And there’s an underlying plea for socially productive and fair banking, an end to a system that “socializes risk and privatizes reward.” His honesty is also refreshing. The book discusses lobbyists and the huge obstacles to reform, and claims there are good reasons to tax speculation. “As someone who has worked in these markets for two decades, I can assure readers that Wall Street arguments to the contrary are both self-serving and false.”
The book is not without its flaws. Lewiit admits the possibility of climate change and resource depletion, but only in passing, in a box entitled ‘future black swans?’ Since a black swan is a low-probability high-impact even, the answer to Lewitt’s question is no, these are not future black swans. They are high-probability, extremely obvious high-impact events, and sooner or later they will rock his investment business if he treats them as anything less. In that sense the book lacks the bigger picture thinking and would build a truly sustainable financial system.
However, those oversights needn’t detract from what is an excellent book in its own field. We will need finance going forward, the productive kind that raises capital for business. We’ll need it to fund the radical changes that climate change and resource depletion demand. If it is run by people like Michael Lewitt, we’d be able to have a lot more confidence in its fairness and stability.