Illustrative image of a commemorative Bitcoin in front of the Tesla car logo. Tesla led by Elon … [+]
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One of my favorite descriptions of globalization comes from JM Keynes, who wrote at the end of the first wave of globalization (in Economic Consequences …).
The resident of London could order by phone and drink his morning tea in bed, the various produce from around the world, in whatever quantity he saw fit, and reasonably expect delivery to his doorstep soon. in the same moment and in the same way he could experience his wealth of natural resources and new businesses in any quarter of the world. ‘
In a modern version, Keynes could drive a Tesla, speculate about Robinhood and use Bitcoin to pay for a new house, while of course complying with the detention rules. It might not be as effortless, the Tesla could catch fire, the Robinhood account could crash or be exposed to a margin call, and Bitcoin could prove too volatile to do anything with.
The confluence of these finance-oriented ecosystems has led many people to believe that we are in an age of democratization of finance – where platforms, tools and products are emerging that give men and women access to the financial opportunities they have previously used of billionaire hedge fund managers.
That’s not the case. Instead of the democratization of finances, we find ourselves in an age of democratization of risk, in which a number of risks, mostly arcane financial market risks, are increasingly distributed among private investors. The problem is that the man or woman on the street is unprepared for these risks. The other, more subtle, point is that if many people in a population find that they are at “the same” risk and they all react to it at the same time, a dislocation occurs.
Amsterdam overtakes London
The news that Amsterdam has overtaken London as the hub for financial trading reminds me that in the 17th century it was a hub for financial innovation (William Goetzman’s book ‘Origins of Value’) and that financial innovation follows a pattern in which early investors and pioneers (especially those who own the infrastructure) are doing very well, asset prices are rising parabolically and this attracts the larger investing public (democratization phase), a crash or scandal occurs, and regulators arrive too late at the scene of the accident.
The derivatization of the US real estate market in the early 2000s is a good example. Thanks to cheap financing, people could afford more and bigger houses until the entire market collapsed.
The risk study is a big field today. Institutions like the OECD are creating a risk scorecard that countries can use in risk assessment, while large numbers of institutional and hedge fund investors have become very good at risk management. The coronavirus crisis offers a special lesson in terms of risk assessment, crisis management and risk absorption (through tax incentives, the organization of public services such as healthcare and vaccine delivery, and human adaptability.
The tragic and dramatic experience the world has had with the coronary virus may – after a chaotic Trump presidency, Brexit and other disasters – convince many that the risk in the world has increased. I would say that although there are two very great risks, there is no such thing as climate damage and indebtedness – and the factor that distinguishes them is that they are “democratized” or that they affect more and more people.
If there is a lesson here for policymakers and decision-makers, then it is not permissible to democratize the dual risks of debt and climate damage (if you plot global average temperature versus long-term average and global debt versus average, the two lines do well fit on top of each other).
The telling example was the reaction of the eurozone countries – Spain and Ireland in particular – to their respective financial crises in 2011. In both cases, bond market investors and the eurozone itself could have borne the risks associated with increasing indebtedness, but ultimately these risks were borne by the state balance sheets and the expansion budgets.
Specifically, I might think of two principles. These policy makers think not only about the likelihood of specific risk event outcomes (ie, from floods to war) and their potential risk appetite, but also about the distribution of those risk outcomes. Markets work like this – risks never go away, they are simply continuously spread across different investors and time frames.
The second element is that the policy is more focused on balancing the risk of an event (e.g. polluters) with the assets of those who “produce” that risk. In China, the former chairman of Huarong Asset Management was recently sentenced to death for gigantic corruption. This is extremely high accountability, but for the Biden government and many governments in Europe anticipating belief in “resets”, “stakeholder capitalism” and “ESG”, democratizing risk is something to fight against .