Ekonomi 01 (2019) 49–83

Journal of Ekonomi 01 (2019) 49–83 EKONOMİ journal homepage: https://dergipark.org.tr/ekonomi hghjhwwwwwwwhttps://dergipark.org.tr/ekonomi The conundrum of neoclassical economic theory and quantitative finance induced 2008 financial crisis and the great financial crisis enabled transition from cheap oil based mass-production economy to the emergence of cheap microchip enabled information economy [attention merchants’ surveillance capitalism] Tunç Özellia,,* aNew York Institute of Technology, New York City, New York, United States. ARTICLE INFO ABSTRACT Keywords: The text examines the main insights of the new sciences and disciplines, and shows how they reveal the flaws Asset manager capitalism of NEWTONIAN orthodox NEOCLASSICAL ECONOMIC THEORY, in explaining and predicting the catastrophic Managerial capitalism events of the near economic history of the Unites States, and provides new ways of understanding the role of Attention merchant’s capitalism monetary policy in the emergence of information economy of ASSET MANAGER CAPITALISM. A brief history Chimarica of the transition from MANAGERIAL CAPITALISM of nation states of the post-World War II institutionalized with the BRETTON WOODS AGREEMENT, to global ASSET MANAGER CAPITALISM, is presented to enlighten the emergence of CHIMERICA [China+America], and President Trump’s recent attempts to dismember it by enabling the emergence of a bipolar world - TECHNOLOGIC COLD WAR - by weaponized global interdependence. The globally interdependent techno-sphere is shown as an enabled outcome of the implementation of WASHINGTON CONCENSUS of Anglo-American ASSET MANAGER CAPITALISM, that survived a comatose near death experience in 2007-2008. The major warriors and battlegrounds of THE TECHNOLOGIC COLD WAR are identified. The text shows how GAIA THEORY sheds new light on economic growth, how fuzzy logic affects the national accounts, how accounting systems over-value the assets of publicly traded multinational companies balance sheets, and how network theory reveals the value of relationships, and argues that the economy needs to be viewed as a complex, chaotic system, as scientists view nature, not as an equilibrium seeking NEWTONIAN construct. 1. Introduction and the FED lacked a financial sector. The assumption that future prices In the self-regulating banking system, put in place with GRAMM- would move in line with current expectations removed any need to take LEACH-BLILEY FINACIAL SERVICES MODERNIZATION ACT that with precautions against financial collapse, despite a continuous history of PRESIDENT CLINTON’s signature in 1999 repealed GLASS-STEAGALL financial manias and panics. Aiming to minimize regulation, DYNAMIC BANKING ACT OF 1933 with FED’s CHAIRMAN, ALAN GREESPAN’s STOCASTIC GENERAL EQUILIBRIUM models of the economy ignored the enthusiastic lobbying, 97% of money that were in the hands of the public financial sector. consisted of bank deposits, and in the absence of a state-issued debt-free GREENSPAN with the enthusiastic lobbying of LAWRENCE money, money needed for an economy to function, had be borrowed from SUMMERS, ROBERT RUBIN and ARTHUR LEVITT was able to convince the the banking sector, and hence the lender of last resort, THE CENTRAL BANK. law-makers to liberate finance from regulations and down-size whatever After the implosion of NASDAQ’s dot.com BUBBLE in March 2000 regulators were left, and within a decade liberated finance span out of that the GREENSPAN PUT was instrumental in inflating, GREENSPAN kept control, and imploded. But few months before the 2007-2008 implosion, the benchmark price for money at 1% for too long at the beginning of 21st DICK CHANEY’s and GEORGE W. BUSH’s WHITE HOUSE, with impeccable century, and thus enabled the residential real estate bubbles in the United prophesy, put a very competent economic historian schooled in Milton States and in different scales in various parts of the world, and in 2007 the Friedman’s and Anna J. Swartz’s A MONETARY HISTORY OF THE UNITED real estate bubble collapsed in the United States ushering in a full blown STATES SINCE 1867-1960 (Friedman Swartz, 1971), a play book for central global financial crisis in 2008, and that led to massive bailouts of the global banks on how to manage financial crisis, showing the central bank’s financial system by their central banks and their governments. management of the 1929 implosion as the wrong play-book, in charge of FED, During the 19 years [1987-2006] ALAN GREENSPAN was at the helm BEN BERNANKE. of monetary policy, at every opportunity he had to address the law-makers The 2007-2008 FINANCIAL CRISIS started with some homeowners at the CAPITOL HILL, he lectured them on how unimpeded competitive having bought homes they could not afford found it hard to make their markets deliver optimal welfare, and that the financial institutions which monthly mortgage payments in some locations in the United States, and create money, and through which money is allocated, have no independent graduated into a first run on a British bank, NORTHERN ROCK, in 150 years. effect on the real equilibrium of the economy, but are only acting on behalf This inherent market instability was compounded by the financial regulators’ of well-informed sovereign consumers. And most of the law-makers, from failure to understand the built-in dynamics of banking networks. Before the the ways they voted, seemed to have bought in GREENSPAN’S storyline. crash, those regulators with ALAN GREENSPAN’s assurances worked on the During GREENSPAN’s reign, the forecasting models of the TREASURY assumption that networks always serve to disperse risk, and so the ∗ Corresponding author. E-mail address: [email protected] (T. Özelli). Receieved: 02 May 2019; Received in revised from 21 June 2019; Accepted 6 July 2019 49 Ozelli Journal of Ekonomi 01 (2019) 49–83 regulations that they devised only monitored the nodes in the networks - billion a month from October 2017, and smoothly pick up pace. By October individual banks - rather than overseeing the nature of their interconnections. 2018 it had quickened, as planned, to $50billion. That coincided with the But the crash made clear that a network’s structure can be robust- start of a bout of market turbulence. The S&P 500 INDEX of leading shares yet-fragile, as Nassim Nicholas Taleb explained in ANTIFRAGILE: THINGS fell by 14% in the final 3 months of 2018. THAT GAIN FROM DISORDER (Taleb, 2018). Network structure usually BERNANKE’s FED’s expansion of balance sheet, in 2008, was behaves as a robust shock-absorber, but then its positive feedback - as the announced to provide banks with liquidity they desperately needed; to signal character of the network evolves – switches it to become a fragile shock- to markets that monetary policy would remain loose for some considerable amplifier. And, that caused 5 pillars of American finance to vanish in 2008. time, and to reduce the bond yields, encouraging investors to buy riskier GREENSPAN’s predecessor, BEN BERNANKE’s first step was to lower the assets. interest rate and lengthen the term on direct loans to banks from the FED’s Recently, in addition to loose monetary policy, there has been a DISCOUNT WINDOW. As commercial banks were slow to respond, and as the significant growth in corporate cash hoarding in tax havens. In the United liquidity situation worsened, FED announced the creation of TERM AUCTION States, as of January 2016, $1.9trillion was held by companies in cash and FACILITY to make loans at its discount window cheaper and anonymous. cash like assets mostly in tax havens. In the wake of the crisis, offshore wealth Institutions that posed systemic threats included not only grew by 25% between 2008 and 2014, which resulted in an estimated commercial banks but also, if not primarily, investment banks as well as $7.6trillion of household financial wealth being held in tax havens. APPLE, mortgage and insurance groups. They were desperately short of capital. FACEBOOK, AMAZON, and UBER seem to be the leaders of tax evasion Investment banks’ funding base has been most volatile without access to retail schemes that give them use of the cash saved from the tax collector for deposits last two decades before 2008. Their assets tended to be very risky mergers and acquisitions, that mostly centralizes existing capacity rather while engaging in huge volume of transactions among themselves, with hedge than building new. funds, and with commercial banks. In 1980 financial sector debt was only 10% Tax evasion, austerity, and extraordinary monetary policies were of non-financial debt. In 2008 it stood at 50%, turning investment banks into all mutually reinforcing. The outcomes of bailouts a decade later seem as machines that trade heavily with each other and reported handsome profits losses of bad financial bets got nationalized, and profits of good bets got that justified the bankers’ astronomical bonuses, bankers kept. privatized, causing the public debt of rich economies to implode. Risks got Leverage ratios in the banking industry competed with those of socialized and rewards privatized as the global economy had begun a long- hedge funds. Neither were governments themselves, and for that matter the term transition from a mass-production economy based on cheap oil to an national economy, free of leverage. Summing up federal, state, local information economy based on cheap microchips. government, company and household liabilities: for every productive $1 there Microchips are ubiquitous, embedded into most manufactured were $3.7 debt in 2008. Emergency lending was made to banks, and currency products from toasters and to ballistic missiles. WORLD SEMICONDUCTOR swap agreements were drawn up with 14 different countries in order to ensure TRADE STATISTICS, a data provider, recons that the market for chips was that they had access to the dollars they needed. worth $421billion in 2017, a rise of 1.6% on previous year (The Economist, The most important outcome, however, was that key interest rates across the 2018).

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