In France it’s hardly unprecedented for major capital spending to be directed by the state, whether under the Commissariat au Plan, through state-controlled or -influenced enterprises, or directly by the Ministry of Finance. Sarkozy always danced nimbly between the neoliberal and state-capitalist camps. If the last two decades were the neoliberal decades, the coming two are likely to consecrate the hegemony of state capitalism. Sarkozy has been quicker than most to draw that conclusion and try to get ahead of the tsunami.
In a sense, there have been two really interesting consequences of the crisis, one short- and one long-term. The short-term one is that the vast quantity of risk transferred into the shadow banking sector…well, was it?
What we do know is that a hell of a lot of risk was transferred off the banking system’s books, into the hedge funds, into SIVs, and through securitisation. However, we also now know that the banking system itself was a counterparty to much of this; the proprietary trading desks and fund management arms consumed quite a lot of the paper the investment banking groups produced from the loans the retail mortgage lending ones originated. I wouldn’t be very surprised if a bank turns up holding some hundreds of millions of its own mortgage securities that its mortgage arm thought were safely off the books. Let’s just say that the risks were moved into the twilight zone, where they didn’t officially appear on anyone’s books – rather like some of Enron’s special purpose vehicles, come to think of it.
Now, as the risks turn out to be real and greater than anyone wished to believe, this stuff is being brought back on the banking sector’s balance sheets. As human nature would suggest, of course, the stuff transferred into the Zone was preferentially the riskiest stuff, so this process is extremely painful and capital-sapping. So the financial sector’s fundamental role – intermediating the allocation of capital – is going to be paralysed for a while to come, as the Mortgage Pig makes its way through the pecuniary python.
The other, longer-term issue, is that the financial system’s validity in assessing risk and allocating capital is itself in question. Capital was more abundant than ever before, as were liquidity and demand; and the system misallocated it spectacularly, diverting a great river of money, the savings of all the world’s industrial exporters, into the single purpose of inflating housing markets in certain districts of California and Ohio. This function has to be carried out by somebody, and just as for some time the Eurozone’s wholesale lending market has been replaced by operations at the European Central Bank, perhaps a large fraction of the industrial capital market will be replaced by….what? It seems unlikely that it can all be state portfolio investment, but given the combination of plunging activity and the incredible appetite for treasury bonds, a hell of a lot will be.