Thu Oct 8th, 2009 at 04:35:47 PM EST
One consequence of the financial crisis is that fund managers are increasingly going to come into conflict with governments. Actions taken in the best interest of fund managers' clients are likely to be considered against the national interest.
A transaction tax on financial instruments is very likely. This will raise revenue for governments and make shareholders behave more like owners. Shareholder failure to police risky management activities was largely due to the very short holding periods for equities. A suitably high transaction tax would force investors to hold shares for much longer periods and to engage management to control risk. This would reduce the need for governments to police risk-taking in corporations. What could be more laudable than a tax that turned everybody into Warren Buffett?
Capital controls are also more likely than investors believe. The recent G20 meeting has put the world on track for higher savings rates in the west and higher consumption rates in the emerging world. There is an inherent conflict between western governments' need for finance to sustain living standards and capital's need to seek out the greater growth opportunities in emerging markets. Whatever the long-term benefits in boosting returns on savings, the short-term political necessity of public financing is likely to necessitate slowing capital outflows.
Capital controls seem impossible to many, but when a choice has to be made between economic principle and government bankruptcy, they are a likely political response.
In the West's long boom, capital and the public interest were largely aligned. That alignment ended in 2008; now, conflict between government and capital is the future of investment.
If the FT
says it, it must be true, so better strap yourself in, because the shrill a-howlin' and the a-moanin' will be 100 times that which we got after the Hong Kong intervention of 1998... Add to this the anti-Fed raging
from the Austrians, gold bugs and other assorted tin-foil hats, and you'll get a concentrated soup of pure crazy.