What is the distinctive feature of thepost-war economy? Perhaps it is the one that describes the – non-parallel – paths of the financial economy and the real economy, of paper and sheet metal. The graph refers to the whole world: the symbol of the card is the debt total – non-financial businesses, families, the State… – and as a symbol of sheet metal the Nominal GDP, which measures the value of final goods and services produced in a year.
As you can see, paper has grown much faster than sheet metal. Is it good, is it bad? Debt and GDP trends began to diverge in the early XNUMXs. And the cause lies in the combined provisions of thefinancial innovation and deregulation of financial markets. This 'push' originated in America, but quickly spread to other parts of the world: the vessels of finance are communicating. What happened?
Savings choices and the risk/return combination
In an underdeveloped financial system the choices available to savers they are all in all limited. You can keep money under the mattress, you can keep it in the bank, you can keep it in government bonds, you can keep it in bonds of some large corporation or you can keep it in stocks. With a little more risk (or less, depending on your opinion) you can diversify by currency, by geographical areas, by sectors... Each of these choices corresponds to a different combination di risk e return.
Now, let's consider all the possibilities risk/return combinations: they are practically infinite. But financial markets offered only a handful. The innovation consisted in inventing securities that occupied, almost without interruption, all or almost all the possible 'niches' of risk/return ratios: savers were offered, in what was now a financial supermarket, a greater variety of products.
The dark side of securitisations
Not only that: there were other 'good ideas' from the innovators: the securitizations and easy mortgages (those that caused the 2008-2009 financial crisis which then spilled over into the Great Recession). Securitizations were a kind of 'multiplication of loaves and fishes': let's take a bank that has in its assets the money it lent for mortgages. To get back into the capital early, it can package those credits into securities that it sells to savers, securities guaranteed by the underlying mortgages. The risk is transferred to the buyers of the securitized securities and the banks realize humanity's ancient dream: their cake and eat it too.
Paper should be the handmaiden of sheet metal, but this was not the case. As real wealth has increased, its nominal representations have multiplied, as in a game of mirrors, and have acquired a life of their own. At the first level, the paper was simply sheet metal with an interposed title: the action is a small piece of society, almost a tile from a shed or a panel from a lathe. At the second level - the "derivative" level - the card becomes a title representing a title; and further on, from options to futures and futures on options, not to mention many other devilments of the low cuisine of high finance, the link between reality and finance frays to the point of evanescence.
Financial innovation: handle with caution
Like all innovations (including dynamite), even thefinancial innovation, when used with caution (as we would use dynamite), it is something supremely useful. If it allows capital to flow more freely into all the nooks and crannies of the productive sector, if it allows risk to be distributed across a wider audience, if it allows more families to obtain credit for a home or business, that innovation it provides nothing but benefits. But…, there is a but. The innovative fervor of finance has often cheerfully and deliberately ignored the warning signs: hic sunt leones! Anyone who looks at both paper (and among paper we also include the world of the media, which acts as an amplifier for the agitation of the markets) and sheet metal notices a discrepancy between the cacophonous noise of paper and the rhythmic clang of sheet metal.
It prevailed, until the outbreak of the crisis of 2008-2009, the idea that financial markets regulate themselves – an idea that originated, as mentioned, in the XNUMXs. But, when the prices of the securities - such as those of the securitized securities that had (too) easy mortgages behind them - collapsed (Bertoldo said: what goes up comes down) the houses of cards came down and actions and feedbacks were triggered. From paper to sheet metal (loss of confidence which dulls the desire to spend) and from sheet metal to paper (weakness in demand, bankruptcies which increase the banks' bad debts).
In the twenties Winston Churchill he said: "I would like to see finance less haughty and industry happier." In the XNUMXst century all that remains is to reiterate the same hope: the hope that paper will be effectively regulated and finance will once again become the handmaiden of the economy instead of a carefree sorcerer's apprentice.
