Policy on the Asset side March 5, 2011 at 12:13 pm
The standard account of the financial system is about capital allocation. It starts from the premise that there are people who need capital – companies, individuals, whoever – and the job of the financial system is to give it to those who (in some sense) deserve it at the right price. In other words, it concentrates on the liability side: the assets available are simply those that result from capital being given to those that want it, and there is no attention given to whether those assets are in some sense the right ones.
One of the good things about the Marxist analysis of capitalism (and reader beware because I haven’t actually read any Marx) is that it also has something to say about the asset side. In particular Marx (at least as he is construed these days) identifies the problem of over-financialization. One way of reading this is an excess of investable capital versus the opportunities available. In other words, hot money looking for a home.
This suggests that a legitimate goal of economic policy is not just to ensure that those that want money can get, but also that there are assets available for those that want them. To some extent, the UK is ahead of the curve here: at least we issue a significant amount of inflation-linked debt to help meet the needs of pension funds. But we could certainly do more. Willem Buiter has argued in the past that one of the causes of the credit crunch was a wave of money from the fast-growing BRICs countries and from baby boomer generation pensions investment looking for a safe home. The structured finance industry diligently provided one; AAA rated ABS. Now, that didn’t turn out to be so safe, so we certainly cannot rely on the markets alone to generate the types of assets that investors want. Indeed the situation today is even worse: few feel good about equity valuations, many commodities are clearly overbought, emerging markets look seriously bubbly, and long term bond yields in major currencies seem rather likely to go up. So what’s left? Private equity? Utilities? Short term bonds while you wait for yields to rise?
So… why not a massive extension of National Savings? Instead of simply providing small investments, this new, beefier National Investments and Pensions organisation (‘Be Nippy with your Money’) would offer a pension wrapper too, with products including term deposits, inflation linked bonds, government underwritten equity participation products, and such like. It would be illegal not to offer its product as an alternative to a private pension scheme, and due to its massive size, it could offer a very low fee structure. It would keep it simple – index tracker products, bond plus call structures, that kind of thing – and of course it would provide tax advantaged accounts like ISAs. Whatever money it raised would replace capital markets gilts issuance, and it would have the mandate to offer the products that savers wanted.