ETF Is Ruining Capitalism; Liquidity, Judgment and Friedrich Hayek
Global capitalism is beset with problems, but a lack of liquidity is not one of them. More money flows through an ever bigger pool of investments each day.
The Global Financial Crisis of 2008 was barely even a speed bump. Twelve years later, Covid-19 did stem financial market activity for a while, but that is also now a thing of the past.
The raw numbers of the most liquid markets are breathtaking.
The Bank for International Settlements recently published its latest three-yearly survey of trading in foreign exchange and interest rate derivatives — which are vital in keeping financial markets moving.
Trade in interest rate derivatives this year is averaging $7.9 trillion per day. ‘Twas not ever thus. In 1998, when the BIS did its first triennial survey, it was $265 billion.
Trading in currencies is $9.6 trillion per day, this is triple the FX volume that the BIS recorded in the spring of 2007, on the eve of the GFC.
Counterintuitively, he argues that Friedrich Hayek, the great apostle of free-market economics, would have been totally opposed to the form modern markets have taken.
The problem, Bhide says, is that the act of financialization — taking an underlying financial agreement like a mortgage, bundling it with others and imposing standards so that it can be traded on financial markets — requires crude and arbitrary judgments no subtler than would have been made by a communist planner.
His argument, which seems ever more pertinent, is that the jobs of bankers had been industrialized, excluding any role for personal judgment, or for individuals and institutions to build up the mutual trust that was the backbone of the laissez-faire era when J.P. Morgan and others were building their fortunes.
Amid a rash of books by capitalist thinkers analyzing a crisis in contemporary capitalism (the weightiest, the recently published 1,000-page tome Capitalism by Harvard University’s Sven Beckert), financialization has emerged as one of the key problems.
Exchange-traded funds have only existed for a little more than three decades. The first US ETF launched in 1993. By the end of 2008, the year of the crisis, US-based ETFs held $538 billion.
That is now above $9 trillion, far exceeding the gain for Wall Street equities, and up some sevenfold over the period.
Inigo Fraser Jenkins of Sanford C. Bernstein famously described passive investing as “worse than Marxism” in a paper whose title also invoked Hayek to indict modern capitalism: The Silent Road to Serfdom: Why Passive Investing is Worse Than Marxism.
Viktor Shvets of Macquarie Capital, whose book The Twilight Before the Storm
warns of the parallels between capitalism’s current difficulties and the crisis of the 1930s.
John Authers, a senior editor for markets and Bloomberg Opinion columnist. A former chief markets commentator at the Financial Times
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