Watching for Polanyi's double movement

Reuters / Stephen Hird

Political Economist Karl Polanyi argued that the rise of the capitalist economy implied another social order and that whenever markets attempted to free themselves from their social moorings, one could expect the "natural" (and violent) return of society. Michael Thomas thinks its coming soon:

As 2011 slithers to its end, none of the major problems that led to the crisis point three years ago have really been solved. Bank balance sheets still reek. Europe day by day becomes a financial black hole, with matter from the periphery being sucked toward the center until the vortex itself collapses. The Street and its ministries of propaganda have fallen back on a Big Lie as old as capitalism itself: that all that has gone wrong has been government’s fault. This time, however, I don’t think the argument that “Washington ate my homework” is going to work. This time, a firestorm is going to explode about the Street’s head—and about time, too.

Middle class, SMEs and Democracy

Sergey Guriev and Aleh Tsyvinski bundle them alogether to argue the ineluctable democratization of Russia: 

In short, the third main lesson of Russia’s transition is that state capitalism does not work (at least not without a strong meritocratic political party, as in China). Indeed, recent events have shown the system to be inherently unstable. As market reforms have brought substantial prosperity (average annual per capita GDP, at purchasing power parity, is now $17,000), a large middle class, based mostly in small and medium-size companies and the service sector, developed beyond the reach of the state-owned behemoths. Most of this middle class also lives in large cities – where the battle for Russia’s future is now taking place.

Hence the crucial importance of knowing more about how Russian SMEs are financed. Family  and friends are not sufficient, big Russian banks tend not to lend to SMEs. Foreign banks are supporting international commerce, small local bank are very inneficient. The lending technologies available in Russia are not manyfold, because their use depends on the institutional structure (courts, credit bureau) in place. It also depends on social relation. It has been proven that social relations help to reduce interest rate on loan, which is an advantage of relationship lending. However, little is known on how the social context structures creditors - lenders relationships in transition countries.

The financial transmission belt

Supposed to allocate capital is clearly broken. From the FT: 

The amounts of cash being deposited by eurozone banks at the European Central Bank increased further on Wednesday, just days after the ECB provided unprecedented levels of liquidity in an effort to reduce tension in the financial system.

 Happy 2012. 

Weberian thoughts on Orthodoxy and economic development

The Economist reviews the sacrosanct Weberian argument of the influence of religion on economic behavior. To cut a long story short (and this one is centuries old) the relationship is not direct. Linking prosperous economies with faith runs up against exceptions. The Greek example illustrates the issue rather nicely: 

Similarly, contemplating Greece’s economic woes, it is easy to dream up some theory that connects Orthodox Christianity (and its comparatively charitable attitude to human weakness) with corruption or cronyism. Orthodoxy has a less pessimistic view of “original sin” than the Christian West—and its prayers for the dead emphasise “no man lives who does not sin”. Does that imply winking at misdeeds? Possibly—but then try explaining why Greek-Americans, who are at least as devout as their motherland kin, do so very well in business, education and public service. The plausible reason lies in America’s institutions which make it easier to prosper in an honest way.

But institutions is not only formal rules. Institutions seen as encompassing worldviews and habit can then in turn be greatly influenced by religion. The Russian case offers a telling example. Its disrespect for the rule of law - and the economic consequences it implies - can be traced back to Orthodoxy. Newcity M. in "The rule of law and economic reform in Russia, edited by Sachs and Pistor" writes: 

Russia never developed a legalistic tradition. The reason for this is that is was Christianized by Byzantium instead of Rome. Western Europe did not receive Roman legal culture directly. It was transmitted and refracted primarily through the Roman Church, which fostered a legalistic, rather than mystical, world view drawn from Roman culture. This contrasts sharply with the world view fostered by the Russian Orthodox Church. The [Roman] Church was intent on establishing a universal body of ecclesiastical legal principles that would bind Western Christendom together regardless of secular divisions. The origins of the Western notion of law as an autonomous body of principles to which secular authorities are subject can be traced to this period. The Orthodox church, however, rejected the independence and supremacy of the papacy and remained an integral part od the state. In this way, Russia missed the most important foundations of the Western concept of the rule of law.

If faith can influence indirectly economic behavior. The way a religion is institutionalized (and its relationship with secular power) can have deep long-lasting influences on economic development.

Time of markets and time of politics

Krugman's Eurovenn, or notes reading Martin Wollf

Barclay's math says italy's down. Tyler Cowen posted a summary of Barclays Capital Inst sales:

1) At this point, it seems Italy is now mathematically beyond point of no return
2) While reforms are necessary, in and of itself not be enough to prevent crisis
3) Reason? Simple math--growth and austerity not enough to offset cost of debt
4) On our ests, yields above 5.5% is inflection point where game is over
5) The danger:high rates reinforce stability concerns, leading to higher rates
6) and deeper conviction of a self sustaining credit event and eventual default
7) We think decisions at eurozone summit is step forward but EFSF not adequate
8) Time has run out--policy reforms not sufficient to break neg mkt dynamics
9) Investors do not have the patience to wait for austerity, growth to work
10) And rate of change in negatives not enuff to offset slow drip of positives
11) Conclusion: We think ECB needs to step up to the plate, print and buy bonds

12) At the moment ECB remains unwilling to be lender last resort on scale needed

13) But frankly will have hand forced by market given massive systemic risk

Hint:Not Good.Sell EUR, Buy Gold

Bullet point number 8 points at the difference markets' and politics' time. Markets dynamics are on a different time level than politics. It takes longer to reach politically acceptable solutions, and even more longer to build institutions. This crisis speaks about a mismatch between financial systems and institutions and so the intersection between the later and what would be needed to solve the crisis is zero. 

It is NOT about inequality

The mechanisms that make economies create value are not based on equality, but cooperation. These are nicely explained in E.D. Beinhocker's book. Cooperation is crucial to the functioning of institutions (N. Fergusson's killer apps). Yet researchs point that fairness is a necessary element of cooperation. If some players feel the game is rigged, they simply want to end the game. S.F. Brosnan and F.B.M. de Wall showed that capuchin monkeys react the same way too:

Monkeys refused to participate if they witnessed a conspecific obtain a more attractive reward for equal effort, an effect amplified if the partner received such a reward without any effort at all. These reactions support an early evolutionary origin of inequity aversion. [...] People judge fairness based both on the distribution of gains and on the possible alternatives to a given outcome. Capuchin monkeys, too, seem to measure reward in relative terms, comparing their own rewards with those available, and their own efforts with those of others. They respond negatively to previously acceptable rewards if a partner gets a better deal. Although our data cannot elucidate the precise motivations underlying these responses, one possibility is that monkeys, similarly to humans, are guided by social emotions. These emotions, known as ‘passions’ by econom- ists, guide human reactions to the efforts, gains, losses and attitudes of others. Clearly if these reactions evolved to promote long- term human cooperation, they may exist in other animals as well.

Islamic finance watch

A good explanation of what a sukuk is provided by the Economist: 

A sukuk is structured to avoid the Islamic prohibition on interest payments. It manages this by paying bondholders with the cashflows generated by specific assets, which are put into a special-purpose vehicle (SPV) as part of the deal. Many seem to have thought that the bonds were “asset-backed”, giving them a claim on the assets in the event of a default. Most sukuk, however, are “asset-based”, handing investors ownership of the cashflows but not of the assets themselves. “Many sukuk holders have a perception that they hold a security that is collateralised,” says Anouar Hassoune of Moody’s, a rating agency. “In 90% of cases, that is incorrect.”