“How can they see with sequins in their eyes?” sang Richard Gere, who played the slick lawyer Billy Flynn in the film Chicago. During a spectacular song and dance scene the courtroom magically turns into a circus as Flynn belts out the song Razzle Dazzle ‘em. What follows is a trial in which Flynn successfully defends Roxy Hart (played by Renée Zellweger) on a murder wrap using every theatrical trick in the book to distract and mesmerize the jury. Justice may have been hoodwinked as guilty-as-hell Roxy gets off scot-free, but everyone is left feeling that they had been thoroughly entertained. What a show! And that Billy Flynn, what a showman!
In a transformation no less astonishing than the one conjured up by Billy Flynn, the once staid financial market, designed to keep money moving from investors to productive industry, has undergone a similar makeover. Behind the sequins the Billy Flynns of the financial sector have created the largest casino the world had ever seen.
Susan Strange, who was professor of international relations at the London School of Economics and the world’s leading specialists on international political economy, first noticed the appearance of the global casino in 1986. In her book Casino Capitalism, she observed,
The Western financial system is rapidly coming to resemble nothing as much as a vast casino. Every day games are played in this casino that involves sums of money so large that they cannot be imagined. At night the games go on at the other side of the world. In the towering office blocks that dominate all the great cities of the world, rooms are full of chain-smoking young men all playing these games. Their eyes are fixed on computer screens flickering with changing prices. They play by intercontinental telephone or by tapping electronic machines. They are just like the gamblers in casinos watching the clicking spin of a silver ball on a roulette wheel and putting their chips on red or black, odd or even ones.
As we have seen, while the music played fast and furious, the gaming tables were hot and everyone felt like a winner. No one wanted to miss out, even when they realized that markets could not support so many winners with no underlying reason for the boom (read bubble). As former Citibank boss Chuck Prince put it, “as long as the music is playing, you’ve got to get up and dance”.
For anyone not caught up in the euphoria the maths just didn’t add up.
At the beginning in 1970, profits from the financial and non-financial sectors increased at the same rate as the GDP. As the sole function of the financial sector is to channel capital efficiently to support the real economy, you would expect the two to grow instep. However, by the late 1990s, finance took on a life of its own with the value of financial products rocketing into the stratosphere. For example, the value of all financial assets in the US grew from four times GDP in 1980 to ten times GDP in 2007.
The story these figures tell is that the financial sector had overtaken the needs of the real economy and is now feeding off profits created out of inflated assets prices, speculation, clever footwork and cheap borrowed money. Its support for the real economy is now just a sideline. It is no exaggeration to say that the financial sector now master rather than servant to the needs of the economy.
The US was not alone. Around the world the addiction to the global casino ran far and deep.
Enjoying a long winning streak, in the twenty-five years leading up to 2006 those who had invested in financial services firms found that stock prices had increased fourfold.
But when their luck turned in mid-2007, with the global financial crisis, the normal rules that apply to gamblers were overlooked. Not only had investor’s used their own money but they had played the tables with borrowed money. But when they couldn’t make good on their IOUs, rather than finding Big Louie waiting for them in a dark back alley with baseball bat, ready to demolish some kneecaps, they found that taxpayers came to their rescue with billion dollar bailouts.
Now the fallout from the global financial crisis would make you think that governments would close down the financial casino. Considering they have had to cover the tab, and are likely to do so again if (should I say when) thinks go wrong again. There is little hope of that.
Just look at what happened to JPMorgan Chase gambled and lost $2 billion-plus in the global casino. Politicians stamped their feet, looked angry and told its CEO Jamie Dimon to return his $21.5 million annual bonus and incentives he had received as penance for his bank’s failures at the roulette wheel. What was missing was legislative reform to prevent a recurrence.