49 minuten

After the Great Complacence

Engelen and colleagues explain how the economic crisis was a debacle of the elites

We should also always keep in view the enormous economic benefits that flow from a healthy and innovative financial sector. The increasing sophistication and depth of financial markets promote economic growth by allocating capital where it is most productive. And the dispersion of risk more broadly across the financial system has, thus far, increased the resilience of the system and the economy to shocks. When proposing or implementing regulation, we must seek to preserve the benefits of financial innovation even as we address the risks that may accompany that innovation. (Ben Bernanke, Chair, US Federal Reserve, 2007a)

Yes, and in that story (The Thousand and One Nights) also the narrative is an object of exchange. Why do we tell stories? For amusement or distraction? For 'instruction', as they said in the seventeenth century? Does a story reflect or express an ideology, in the Marxist sense of the word? Today all these justifications seem out of date to me. Every narration thinks of itself as a kind of merchandise. In The Thousand and One Nights, a narrative is traded for one more day of life – in Sarrasine, for a night of love. (Roland Barthes, L'Express interview, 31 May 1970)

How and why was the crisis an elite debacle? The chapter makes the case for this framing in two key sections about miscalculation by policy elites and catastrophic consequences for the public at large. It then explains how we need a new and different politico-cultural approach to present-day capitalism if we are to understand the origins of the debacle in the operations of unregulated finance and the subsequent frustration of reform, analysed separately in the front and back half of this book.

The opening section focuses on the informal pre-2007 story about the benefits of financial innovation, which was told in the period of what we call the Great Complacence when central bankers, regulators, and senior economists in international agencies repeated the same reassuring but ill-founded stories about the benefits of financial innovation and the 'Great Moderation'. These stories mattered because they framed the purpose, intent, and tone of policies towards finance and they legitimated a gross failure of public regulation around securitization and derivatives in the 2000s. This followed on from the more general undermining of public regulation of finance which began in the 1980s and reflected a collective belief that (financial) market forces, left to their own devices, would allocate capital efficiently, improve the robustness of financial markets, and deliver socially optimal outcomes. The judgement that financial innovation was a beneficial process (and part of a new golden age) was then made by technocrats in the 2000s with hubristic detachment on the basis of very little supporting evidence and argument.

This is followed up with a second key section which justifies the term debacle by briefly presenting some political arithmetic about the form and nature of the catastrophe after 2008. Although policy elites generally operate on Evelyn Waugh's principle of 'never apologise, never explain', what happened in and after the crisis was a doubly humiliating defeat. The finance sector which was supposed to bring benefits, instead imposed huge costs on the rest of the economy by requiring expensive bailouts and triggering recession, leading to substantial lost output. Worse still, the policy elites failed in their public service duty of preventing capitalist business from privatizing gains and socializing losses; this mechanism is illustrated by calculating the division of costs and benefits amongst the different stakeholder groups around the five largest British banks after 2000. Before (and after) the crisis, high rewards in the City of London and Wall Street meant that gains were heavily concentrated on the elite workforce, even as their PR assistants emphasized the benefits for ordinary shareholders and the exchequer. Afterwards the costs of crisis were borne by ordinary citizens: taxpayers, public employees, and service consumers in a new world of austerity and distributive conflict.

None of this is unusual in benighted dictatorships or oligarchies, where the privatization of gains and the socialization of losses usually indicate the presence of an uncontrolled and predatory elite. But this drama is different in several ways. First, technocrats like Ben Bernanke and Mervyn King are implicated in the making of a catastrophe: if these public servants cannot be accused of venality, it is perhaps more alarming to find them trading opinion on the basis of their authority and expertise. Second, the drama of reactionary consequences and cuts is now being played out in democracies like the United Kingdom and the United States which have mass franchises, electoral competition, and traditions of intervention for progressive redistribution. Yet, the post-crisis political drama (so far) does not have a 'never again' ending: the moneymaking financial elites are not clearly subordinated and the technocrats and politicians cannot agree on how to change their management of finance so as to prevent further disaster. All this despite the size and scale of a finance-led catastrophe which made the supposed earlier costs resulting from the promotion of sectional interests like agriculture or organized labour look very modest. The book therefore raises questions that are overtly political because we wish to interrogate the power of financial elites, the social value of finance, and the possibility of democratic control.

If the first aim of this chapter is to explain how and why the elite political debacle frame is relevant, the second aim is to explain the approach and apparatus used in later chapters of this book to explore the operations of finance – operations which create both the underlying problem and the difficulties of political reform. Our politico-cultural approach is conceptually minimalist and empirically resourceful because we do not start from a reified concept of capitalism which tells us what matters and how before we have done the research. For example, we do not work from any a priori knowledge of which institutions matter and how they fit together, as in the varieties of capitalism literature. Instead, we combine a cultural concern with stories and a political economy concern with politics so that we can develop a broad overview of the frustration of reform in several jurisdictions including the United Kingdom, the U nited States, and the European Union (EU). All this is reflected in the organization of this chapter. Thus, Section 1.1 on Bernanke's story and the Great Complacence is followed by Section 1.2 on story-driven capitalisms, which helps explain why this kind of elite story is so important. Contemporary elites have made the Barthesian discovery that stories are not necessarily frivolous distractions or cynical ideologies, but rather literary assets which acquire exchange value under certain conditions. Section 1.3 on the privatization of gains and socialization of losses is then followed by Section 1.4, which introduces some of the new concepts and apparatus which we bring to analysing and understanding the operations of the finance sector and the difficulties of political reform.

Bernanke's story, illustrated in the opening quote, about the benefits of financial innovation was comprehensively discredited by events after 2007 and that provides us with our point of departure in the succeeding chapters of the book. If most of what was interesting about the economic and social consequences of financial innovation was completely undisclosed in Bernanke's story, what exactly was going on in the area of the undisclosed? Chapters 2, 3, and 4 offer the reader, first, an alternative conceptualization of financial innovation, then evidence of finance as a kind of conjunctural bricolage, before exploring banking business models and conceptualizing hedge funds and private equity as financial war machines. Then again, if what has happened since 2007 is so catastrophic for ordinary workers, consumers, and voters, why is it now apparently so difficult to bring finance under democratic control in order to secure effective protection against further finance-led crisis? The short answer to this question is that elites who, before 2007, agreed on the benefits of finance and light-touch regulation now find it much harder to agree on the nature and form of effective re-regulation which is strongly resisted by the lobbyists from finance. That is addressed in the second part of the book.

The Great Complacence: Bernanke's story

If we use the framing of the debacle, informal pre-crisis stories told by policy elites are an obvious starting point. We therefore begin by analysing the pre2007 stories about finance and the economy told in the United States and the United Kingdom by central bankers, senior regulators, and their economist colleagues in international agencies. Collectively, we denote this technocratic subgroup the 'econocracy', following the introduction of the term by Peter Self (1976), because they had both a major role in the governance of finance and mainstream academic backgrounds in economics.

But there are many other ways to begin a report or a book on the financial crisis and most of them can be illustrated through the various British responses to crisis that followed the collapse of Lehman Brothers in September 2008. The most serious official response was the Turner Review, produced in 2009 by the chair of the UK's now-defunct Financial Services Authority (FSA) at the request of Treasury. Turner starts boldly with structure and impersonal forces represented by the 'explosion of world macro imbalances' (2009b: 11) which produced more money than good assets in every market. By way of contrast, the best of the popular business books was Gillian Tett's Fool's Gold which, in line with the conventions of the genre, emphasized agency and begins with a vignette of the bankers from the JP Morgan derivatives team rough-housing around the pool in a Florida luxury hotel (Tett 2009: 3–7). And such beginnings matter because they are often difficult to escape. Thus, New Labour's July 2009 Treasury White Paper immediately undermined the case for radical reform of finance when its opening chapter stressed 'the importance of financial services and markets to the UK economy, and the pre-eminence of the UK as a global financial' (HM Treasury 2009a) rather than analysing the causes of crisis. The House of Commons Treasury Select Committee had more radical intent but failed to deliver a synthetic analysis which could sustain radical prescriptions because it never really recovered from an initial committee decision to produce several different reports on aspects of the crisis.

Beginnings matter, then; and in beginning with stories by the econocracy, we can open with a focus on one individual, Ben Bernanke, Chair of the Federal Reserve, who was one of the heroes of the hour after the banking system collapse was averted in autumn 2008. Like Gordon Brown, Bernanke was feted as the man who had saved capitalism (until the bills for saving capitalism had to be paid by taxpayers and public service consumers). Time magazine chose Bernanke as its 2009 Person of the Year because he 'led an effort to save the world economy' (Grunwald 2009) by injecting funds into financial markets, rescuing financial companies, and averting economic disaster. Just as in the case of Warren Buffet, the media has constructed a back story about Bernanke as a brilliant and successful individual who lives modestly. A lower-middle class Jewish boy teaches himself calculus before collecting degrees and jobs from the Ivy League economics departments and then joining the Federal Board in 2002 and becoming chair in 2005. Yet Bernanke still wears cheap suits, takes out his own garbage, drives a Ford Focus, and his largest source of income and wealth remains textbook royalties (Grunwald 2009).

It is unkind but necessary to observe that there is another more interesting back story. Bernanke's mid-career move from head of the Princeton University economics department to the Federal Reserve is more than a personal history. It is emblematic of a historic change in the character of central banking and financial regulation. The elite of financial regulators and central bankers increasingly claim authority, as does Bernanke, from their academic credentials. Marcussen (2006, 2009) calls this the scientization of central banking and financial regulation: that is, those from mainstream economics backgrounds now monopolize senior positions in central banks, and the currency of argument within this group of econocrats is provided by economic data and the core concepts of the discipline. Our argument below focuses on one neglected consequence of this transition: those at the top of this econocracy, like Bernanke, used the authority conferred by their position and 'scientific' credentials to convert the assumptions of neoclassical economics into stories for laypeople about the benefits of financial innovation and deregulation. Such informal stories are not couched in the impenetrable language of economic 'science'. Instead, they offer broad-brush, 'commonsense' accounts in a vernacular, easily comprehensible to politicians and the lay public, and in a context where central bankers and finance regulators are managers engaged not only in making decisions but also in justifying actions.

One of the characteristics that distinguish elite econocrats like Bernanke is their commitment to this ambiguous kind of translation, whereby the technical language of economic 'science' becomes (or maybe authorizes) vernacular stories about markets in a language accessible to those without algebraic competence or an understanding of dynamic stochastic general equilibrium models of the economy. In this case, the important point is that leading members of this econocracy all told the same story about the benefits of financial innovation using the same arguments about the dispersion of risk and the increased resilience of financial markets as did Bernanke right up to the crisis. Bernanke's 2007 encomium for financial innovation is quoted at the beginning of this chapter but similar statements (with only minimal variation for local audiences) could have been cut from, or pasted into, any number of speeches by central bankers or authoritative reports from international agencies. Here, for example, are two quotations, one from Mervyn King, Governor of the Bank of England speaking in 2007, and the other from the semi-annual IMF Global Financial Stability Report of April 2006.

Securitisation is transforming banking from the traditional model in which banks originate and retain credit risk on their balance sheets into a new model in which credit risk is distributed around a much wider range of investors. As a result, risks are no longer so concentrated in a small number of regulated institutions but are spread across the financial system. That is a positive development because it has reduced the market failure associated with traditional banking – the mismatch between illiquid assets and liquid liabilities . . . (King 2007)

There is growing recognition that the dispersion of credit risk by banks to a broader and more diverse group of investors, rather than warehousing such risk on their balance sheets, has helped to make the banking and overall financial system, more resilient. . . . The improved resilience may be seen in fewer bank failures and more consistent credit provision. Consequently, the commercial banks, a core segment of the financial system, may be less vulnerable today to credit or economic shocks. (International Monetary Fund 2006a: 51)

Another common, collective theme was that financial innovation would 'democratize' finance because the efficient pricing and distribution of risk would result in an extension of credit to previously excluded firms and households. Bernanke took this line in a lecture in May 2007 when he argued that regulators should not overreact to emerging problems in sub-prime because 'credit market opportunities have expanded opportunities for many households' (2007b). On the same lines, a paper by Bank of England authors highlighted the way that, 'in recent years, there has been much greater scope to pool and transfer risks, potentially offering substantial welfare benefits for borrowers and lenders' (Hamilton et al. 2007: 226), including increasing 'the availability of credit to households and corporations' through a wider 'menu of financial products' (2007: 230). For Adrian Blundell-Wignall of the Organisation for Economic Co-operation and Development (OECD), 'sub-prime lending is a new innovation . . . the big benefit is that people who previously could not dream of owning a home share in the benefits of financial innovation' (Blundell-Wignall 2007: 2).

These positive verdicts on financial innovation were complacent rather than foolish because position statements in the International Monetary Fund (IMF) report of April 2006, like the Bernanke lecture of May 2007, often registered qualifications and caveats about how financial innovation was not entirely or risklessly beneficial. But the force of these qualifications was neutered when they were always cast in the language of 'challenge' not 'threat' against the background of an enduring policy presumption that such challenges did not warrant changing the permissive pro-finance policy stance of regulators. Thus, the April 2006 IMF report talked of 'new vulnerabilities and challenges' (IMF 2006a: 1) and fretted in the subsequent September 2006 report about whether new instruments might 'amplify a market downturn' (IMF 2006b: 1). Bernanke's May 2007 lecture similarly adds a parenthetical qualification about the benefits of financial innovation, 'thus far' (2007a). But, in the same speech, he later adopts the standard language about 'risk-management challenges' associated with complex instruments and trading strategies based on leverage. In his conclusion he emphasizes 'the role that the market itself can play in controlling risks to public objectives'.

The story about the benefits of financial innovation seemed plausible because it was articulated in the middle of a period of prosperity, which was itself explained and rationalized with a broader narrative which emphasized a secular shift towards stability within the macro-economy. The phrase 'Great Moderation' was first used by the Harvard economist James Stock and the Princeton economist Mark Watson in a technical paper about how and why the business cycle had moderated and national income growth had become less volatile in the period 1984–2001 (Stock and Watson 2002). Bernanke (then head of the Princeton economics department) is thanked in the preliminary acknowledgements to the paper, and later the term popularized across a number of his own speeches and papers. For the econocracy, their preferred policy mix of liberalized capital markets, light-touch regulation, and astute monetary policy had yielded a hugely benign low inflation, low volatility economy that was encapsulated in the phrase 'Great Moderation'. If such claims were validated by events for a period, the academic economists who originally coined the phrase were sceptical about the role played by Central Banks and had attributed most of the reduction in volatility to 'good luck in the form of smaller economic disturbances' (Stock and Watson 2002: 200). Against this, Bernanke argued that central bank policy was important in the moderation:

I have argued today that improved monetary policy has likely made an important contribution not only to the reduced volatility of inflation (which is not particularly controversial) but to the reduced volatility of output as well. Moreover, because a change in the monetary policy regime has pervasive effects, I have suggested that some of the effects of improved monetary policies may have been misidentified as exogenous changes in economic structure or in the distribution of economic shocks. This conclusion on my part makes me optimistic for the future . . . (Bernanke 2004)

The story about benign moderation was taken up elsewhere in slightly different language (with or without an assumed or asserted connection between moderation and policy). In the United Kingdom, we can once again cite Mervyn King who in his first speech as newly appointed Governor of the Bank of England (2003: 3–4) announced that the 1990s in the United Kingdom had been a 'non-inflationary consistently expansionary – or "NICE" decade' of above-trend growth, falling unemployment, and improving terms of trade which allowed real take-home pay to increase without adding to inflationary pressures. As a result, Britain had achieved a 'new found position of macroeconomic stability'. While King saw the need for further supply-side improvements in productivity in the United Kingdom, others (especially in the United States) thought that macro policy alone could underwrite continuing steady prosperity. Bernanke had encouraged this belief in an earlier lecture in 2002, delivered after Alan Greenspan as Federal Reserve Chair had cut interest rates in response to the tech stock crash. Bernanke, then a newly appointed Federal Reserve Board member who had made his name academically with studies of the policy mistakes after 1929, promulgated what became known as 'the Bernanke Doctrine': that 'a central bank . . . retains considerable power to expand aggregate demand and economic activity even when its accustomed policy rate is at zero' (Bernanke 2002).

Against this background, many authoritative commentators in 2006–7 began to believe their own publicity and could not admit the possibility of recession, let alone finance-led crisis. The prognosis of J.P. Cotis, chief economist in the OECD in May 2007, asserted that:

In its Economic Outlook last autumn, the OECD took the view that the US slowdown was not heralding a period of worldwide economic weakness, unlike, for instance in 2001. . . . Recent developments have broadly confirmed this prognosis. Indeed, the current economic situation is in many ways better than we have experienced in years. Against this background, we have stuck to the rebalancing scenario. Our central forecast remains indeed quite benign: a soft landing in the United States, a strong and sustained recovery in Europe, a solid trajectory in Japan and buoyant activity in China and India. In line with recent trends, sustained growth in OECD economies would be underpinned by strong job creation and falling unemployment. (Cotis 2007: 5)

There is much of interest here, not least the way in which the senior central bankers and public sector economists who repeated these stories were not sacked or disgraced after 2008, but confirmed in their jobs or promoted elsewhere. There is also the quite separate issue of the loose, informal nature of the stories told, and how their plausibility depended on economic context and repetition by all those in authority.

Bernanke was reconfirmed as Chair of the Federal Reserve by President Obama; Cotis, who signed off the OECD prognosis, was shortly afterwards recruited as Director General of the French National Institute of Statistics and Economic Studies. Of course, if Bernanke and Cotis had not been senior economists but junior social workers, one egregious misjudgement in a single case of probation or child welfare would result in an enforced resignation and the end of their career. There is no comparable punishment for central bankers, economists, or others in the upper managerial class, even though the welfare consequences of their misjudgements are hugely greater. Bernanke, King, and others show that obtaining an elite position is hard: to reach as high as governor of a central bank, it is nowadays necessary to acquire top 'scientific' credentials and to combine those with a mastery of vernacular storytelling about the virtues of deregulated markets. But once inside, standards of performance, competence, and accountability seem modest with few apparent consequences for mistakes.

We must also be queasy about the detached and imprecise character of the stories about financial innovation and great moderation. This is not just vernacular economics but also T. S. Eliot's 'mess of imprecision of feeling'.1 Intellectual objects were never precisely defined: Bernanke and others were hubristically vague on financial innovation because they commended it as a good thing without ever engaging with the specifics of what was going on in the markets; meanwhile, the story about macro moderation grew to encompass much more than reduced volatility on quarterly measures. Neither of the two stories was empirically based. The benefits of (wholesale) financial innovation through derivatives and such like were confidently asserted but these benefits were not (and probably could not be) measured to the satisfaction of sceptics like Paul Volcker who believed it was retail developments like the ATM cash machine which had larger and more tangible benefits. As for the causal connection between reduced macro volatility and the newfound innovation of markets and wisdom of policymakers, even Bernanke had to admit that mainstream economists differed on this point. But the claims about innovation and moderation were plausible in the economic context before 2007 with its rising asset prices, low defaults, and sustained growth rates.

Any doubts about whether the future would be like the present were allayed by the repetition of a stock account in standardized language across a range of sources with no significant dissent. Some authors, like Taleb (2007), have focused on the technical choices and mistakes of those inside finance who modelled the future from a small number of past observations, assumed normal distributions, and underestimated the probability and power of extraordinary black swan events which can overwhelm firms and markets. But this needs to be set in context because such technical misjudgements are sanctioned in an environment where the policy elites regulating finance cannot see the possibility of harm, let alone catastrophe. And the power of policy elites is here less technical than liturgical. Their financial innovation is a liturgy in the vernacular which recites the many benefits of financial innovation, such as the extension of liquidity, the distribution of risk, improved pricing, and the democratization of finance. Its force, as in any liturgy, comes from repetition by expert authority figures and its effect is the abasement of the political classes before financial innovation, rather like the Anglican congregation before the Lord in the 1662 prayer of humble access: 'We do not presume to come to this thy Table, O merciful Lord, trusting in our own righteousness, but in thy manifold and great mercies'.

In retelling the story about financial innovation and the great moderation, Bernanke donned the robes of a kind of clerisy led by experts – such as other leading central bank governors – who presented as technically founded analysis a story about the way markets and regulators had supposedly discovered a new economic alchemy that disposed of the problems that had historically afflicted market economies. The unexpected events which discredited the story after 2007 demonstrate conclusively that financial innovation was not as it seemed, nor as Bernanke represented it. This discrepancy between the reassuring disclosed and the dangerous undisclosed forms a main theme in our subsequent chapters. Still, this picture of a new clerisy ritualistically repeating stories itself raises a key question: why, in a world where debate between econocrats was conducted in an esoteric vocabulary of scientism, did a story like the narrative of the Great Moderation acquire such force? To understand that, we have to sketch some of the wider historical, structural, and cultural forces that have created story-driven capitalism. That is the purpose of the next section.

Story-driven capitalisms: elites and narrative exchange

This section attempts to provide a summary overview about how and why stories (especially informal and detached stories like Bernanke's) have become increasingly important in present-day capitalism. The argument here draws on and develops our earlier work, especially in books by Froud et al. (2006) on financialization and strategy in the United States and the United Kingdom and by Moran (2007) on the British regulatory state. The section brings together these accounts of business storytelling and political change and resets them in a Barthesian frame where the narrative is merchandise in a social transaction. What then appears is an account of the changing historical modes of narrative exchange in the twentieth century which shifted with democracy, the rise and fall of corporatism, and then the transition to financialized capitalism.

Stories matter in modern capitalist democracies: in market transactions, the voting booth, or in the kind of advocacy settings inhabited by econocrats, stories about actions, identities, histories, trajectories, and linkages are the springs of economic and political action which deliver a sale, an electoral majority, or a winning argument.

But this simple generic understanding needs to be set in a much more specific and changing historical context about various capitalisms over the twentieth century, especially if we are concerned with the raison d'être and context of elite storytelling. No doubt, elites have always told stories, sometimes to convince others, at other times because they were themselves convinced. But elite storytelling gains a new impetus in the early twentieth century, when mass democracy mobilizes new political and economic interests like organized labour, which potentially threatens unaccountable and self-serving elites. The question of whether and how elites will continue to escape democratic control is differently posed and answered in each new conjuncture. Hence, the insights of the past masters of elite studies, as in C. Wright Mills' analysis (1956) of executive elites in Cold War United States or in Bourdieu's analysis (1984) of haute bourgeois social capital in the French fifth republic, differ quite considerably. However, in both cases, they cannot easily be transposed or applied to different institutional and historical settings.

Storytelling became a more important device of elite power in the AngloAmerican world following the era of Reagan and Thatcher. Deregulation, liberalization, and – especially in Britain – institutional reform destroyed many 'old boy' club elite networks and undermined the old ways in which elite power had been exercised. Capitalism has been increasingly enveloped in narratives so that storytelling is now a key weapon in the armoury of business and political elites. If Noel Coward celebrated the potency of 'cheap music' in Private Lives, our political and business elites have in the past thirty years exploited the potency of cheap stories in public life. This potency is considerable because their stories have a powerful constitutive effect: as we shall see, their new post-1980s stories about business and the economy, like the earlier post-1920s constitutional stories told in Britain, are important because they provide templates for the design and redesign of old and new institutions and regulatory regimes as well as a heuristic on policy stances.

But it would be wrong to represent this narrative turn as an epochal change which dates from Thatcher or Regan in the 1980s, because elite storytelling had been politically important all through the previous fifty years. Change is not about more or less storytelling, but about how the contours of narrative exchange have shifted so that the storytelling parties and beneficiaries change according to time and place. For instance, in the United Kingdom, from the early twentieth century, elite storytelling was designed to contain democracy and maintain political privilege through a de haut en bas narrative about how things are best left to existing, established arrangements whose delicate functioning would only be upset by the intrusion of majoritarian democratic forces. Hence, in the United Kingdom, there is a venerable tradition of constitutional mystification about 'arms length control' and such like, as discussed in Chapter 7, which has traditionally justified the unaccountability of elites in major institutions, from the House of Lords via the BBC to the City of London (Flinders 2008). All this was maintained in the face of successive 'modernization' attempts from the late 1960s onwards. The rhetorical tide for the past thirty years has increasingly favoured accountability and good governance which, under New Labour, required reform of the Lords, the BBC's Board of Governors, and re-regulation of finance. But this resulted mainly in the empowerment of other members of the upper managerial classes in non-executive roles. Just about the only consensus on the FSA-led regulatory regime, created for finance in 1997 in the name of greater accountability, is that it never seriously hampered bankers.

These narrative justifications for elite self-management in key institutions were also found in mainland Europe where they were intertwined with corporatist storytelling by the representatives of organized capital and labour who, on both sides, had to convince their own supporters of the social justice and economic sense of their claims and settlements on wages and prices. In countries like Germany or Holland, the negotiating rooms of corporatism were elite storytelling forums with employers and trade unionists in the Scheherazade role, as they spun stories designed to avoid the unpleasantness of being sacked or bypassed by their members or the political classes. Of course, the United Kingdom and the United States had not developed functioning corporatist modes of exchange; thus Reagan and Thatcher faced limited resistance when they planned an anti-democratic revolution which would diminish the area of story-driven political negotiation that had empowered organized labour in mainland Europe.

The Thatcher revolution, consolidated by New Labour, was anti-democratic because it diminished the area of formal political control over everything from council housing to utility industries by shifting them onto the market and/or into the hands of expert regulators as in the case of utility privatization. Rule of experts in many ways strengthened under the Labour government after 1997. In finance, the new settlement on financial regulation, with an independent Bank of England Monetary Policy Committee setting interest rates, boosted the role of expertise in economic management. Elsewhere, 'New Public Management' was applied to the National Health Service and to schools, which now relied on audit, targets, and league tables where, as in utility regulation, the 'consumer' cause was championed by proxy. But the rise of such techniques was itself an index of new issues about the end of 'the club' and the growing diversity of elite groups which were recruited into new roles such as that of utility regulator. This did not end the storytelling but shifted it into new arenas which were also being created by the rise of supranational regulation and jurisdiction from the EU to the committees of bankers organized around the Bank for International Settlements in Basel. This was all condensed into a deficit of democracy, a small circle of expertise, and a greatly enlarged sphere of industry lobbying through stories. Parallel developments in financialized capitalism occurred across much of mainland Europe and North America.

The process of financialization since the mid-1970s is often described as one which has given financial markets and motives greater influence over corporations and households. This process can be measured in terms of the rise of debt or financial assets and it can be conceptualized as epochal or as conjunctural (Ertürk et al. 2008). However, what happened after the 1970s brought a reinvented form of financialized capitalism that was differently organized and differently storied. In pre-1914 financialized capitalism of the German kind, as described by Lenin (1917) and Hilferding (1910), the dominant corporate players were banks and insurance companies which were individually connected at the board level with the industrial trusts that monopolized product markets, so that elite communication and negotiation went on informally in the boardroom and the club, and hence the 'interlocking directorates' of yesteryear which needed to include a banker and someone with political connections (Scott 1997). When the rise of pension funds and insurance companies gave intermediary fund managers a key role, much of this was rendered obsolete because fund managers had generalized, arms-length shareholder value objectives for all companies in their portfolio. There was then a new requirement for publicly listed company managers, in France or Germany as much as the United Kingdom, to make public promises about how they would deliver value and excuses about why they had not done so (Froud et al. 2009).

Other developments also increased the importance of business storytelling in a world where narrative increasingly holds open the space in which business operates. As Moran (2006) has emphasized, the end of British-style corporatism under Mrs Thatcher not only displaced organized labour but also threatened organized business and the traditional trade associations in the United Kingdom, which now had no negotiating partners. The Tory or New Labour default in favour of the market did not automatically deliver sector-friendly regulation and appropriate tax regimes which had to be defined case by case. Business in the United States and the United Kingdom has become increasingly detached from principled support for the party of the centre right and switched support to whoever it believed would win the next election (or placed an each way bet by offering financial support to both sides) in the hope of more favourable treatment afterwards. But stories were still necessary to motivate appropriate regulatory decisions by business-friendly politicians.

Furthermore, as Thomas Frank (2002, 2004) argued about the United States in the 1990s, the democratization of finance required the narrative co-option of the masses into elite-led financial processes (just as political democracy 100 years earlier had required the co-option of the masses into elite-led electoral processes). Again this was not about creating financialized capitalism but reinventing a different kind of financialized capitalism. When Bukharin (1927) and Tawney (1921) criticized financialized capitalism in the interwar period, they focused on upper-middle class rentier claims to unearned income. Now finance has been democratized by the inclusion of the masses as consumers of savings and credit products: 70 per cent are homeowners in most capitalist countries except Germany, and everybody is credit-dependent in ways which provide feedstock for the wholesale financial markets. But wealth and income are increasingly unequally divided, partly because the major financial centres like London and New York have turned into machines for the mass production of millionaires from amongst the working rich in investment banking and fund management. Here, again, a story about effort and desserts is required.

Together, all these heterogeneous developments produced an explosion in business-led elite storytelling. That is an important part of the history of the explosive growth in lobbying and public relations, for the new lobbyists and PR professionals did not only – or even primarily – rely on suborning or manipulation, they specialized in providing stories that put their clients and their interests in the most favourable light, and preferably told stories that aligned clients' interests with some accepted notion of the public interest. Storytelling was no longer simply about these elites interpellating the masses to excuse and explain their entrenched power – as was the case in the first half of the twentieth century – because the new narratives were now just as importantly about different fractions of the elite signalling and trading with each other in a new kind of story-driven capitalism.

Developments were rapid for two reasons. First, since 1980, business and financial elites have made the Barthesian discovery that stories have exchange value at particular historical moments and that, after Thatcher and the increased pressure for shareholder value, this value can be cashed out as increased company profits, CEO bonuses, and such like. In this new order, stories were not so much merchandise but the new capital from which corporate reputations and individual careers could be constructed. Second, developments were rapid because the organizational preconditions for business storytelling were fairly minimal: any giant firm can buy in PR and corporate communications, while industry stories can be put together by loose distributive coalitions interested in regulation or tax regimes, without the expense of command and control organization. New business and financial elites do not need an executive committee of the plutocracy. Indeed, it is the absence of an executive or a club smoking room which necessitates much of their storytelling.

Behind the narrative explosion, the giant firm and industry response was complex as Froud et al. (2006) and Moran (2006) have argued. At the enterprise level, individual giant firms (especially in regulation-dependent sectors like finance and pharmaceuticals) increased their spending on 'do it yourself' lobbying and PR which bypassed trade associations, the traditional source of collective lobbying muscle. In pharmaceuticals, companies like GlaxoSmithKline needed one story about the patient interest in shorter testing times and the social benefits of patent protection for Whitehall, Capitol Hill, and Brussels, and quite another for the stock market. Single-firm activity was backed up by collective industry efforts which involved loose coalitions of firms which did not so much negotiate outcomes as try to legitimate their sectional demands for business-friendly regulation with stories about their activity's social value. This was the model for sectional lobbying by finance in the United Kingdom, where organizations like the BVCA pressed the sectional interests of private equity while the City of London Corporation articulated the joint positions of private equity and others including hedge funds and banks on tax and regulation.

The shareholder value stories told to the stock market were inherently fragile, while the political stories about social benefits were always open to challenge. The single-firm's capital market story is about how value will be created by the firm going forward. As Froud et al. (2006) emphasize, the promises are often unrealizable and occasionally devalued by the fact that most giant firms have mixed financial performance, and all firms cannot produce supernormal profits all of the time. As for stories about the social value of the firm or industry, they share some general characteristics which make them vulnerable in different ways to charges of hypocrisy (Vilella Nilsson 2010). In social value stories, businesses (individual management and corporations) present themselves as the virtuous heroes at the heart of the processes of social change and progressive problem solving, which are often defined opportunistically to meet the current agenda of government. This kind of positioning leaves them exposed to NGO attacks on the hypocrisies of a sector like pharma whose 'for people not profits' narrative emphasizes research but whose cost composition suggests the primacy of marketing and predatory pricing, or it induces scepticism about integrated oil companies which are not beyond petroleum as much as one might suppose from their advertising campaigns.

The result is that business and politics become an endless pursuit of closure through mobilizing narratives which seldom obtain closure for long. This is different from the idea of 'capture' promoted in public choice economics which supposes that self-interested, rent-seeking special interests usually win at the expense of an indifferent public. With narrative 'closure', we have a more complex and cultural world with uncertain outcomes. Here business stories are used to motivate political action and inaction, but narratives compete, so that closure is a kind of temporary special case and not an inevitable permanent result. In story-driven capitalism, the normal activity of capitalist politics is interfering with another's narrative so as to secure action or inaction. Organizations, institutions, and positions provide location and partition which set limits on the authority, endorsement, or circulation of stories in a world where sectional agendas usually compete. For example, in turf wars between central bankers and non-bank regulators, where you stand usually depends on where you sit.

This point reminds us that we should recognize that there are many things in capitalism other than stories and, by implication, even a sophisticated Barthesian view of capitalism as narrative exchange is one-sided and partial unless it does justice to these heterogeneous other things. Hence, the analysis in our next section considers the redistributive impact of the finance sector before and after 2007, and our final section presents the fairly minimalist original conceptual apparatus about business models, political agendas, and such like which frames our argument.

Debacle: privatization of gains and socialization of losses

In later chapters of this book, we turn to the task of analysing what was going on inside the finance sector under the rubric of financial innovation. This section takes up the simpler task of replacing Bernanke's assertive pre-2007 story about the benefits of financial innovation with a very different post-2008 account of the costs of finance, which is more clearly evidenced and conceptualized. The term debacle is then justified for several reasons. First, and humiliatingly, while the leaders of central banking had asserted the benefits of finance before the crisis, their keen middle rankers were soon doing the political arithmetic on the huge costs of finance after the crisis. Second, and more fundamentally, the technocratic and policy elites had failed totally in their public service duty to prevent the exploitation of the state by capitalist business because banking privatized its gains before socializing huge losses. In consequence, ordinary taxpayers, public service employees, and public service consumers must now live in a new conjuncture defined by public austerity and distributive conflict within and between nations. Third, as we will argue in the second half of this book, this is a debacle because this defeat is not easily reversible, avoidable, nor fixable.

After the crisis, in all the major central banks and international financial institutions, liturgy about the benefits of financial innovation was replaced with technical calculations about the costs of finance. This was part of a shift towards questioning within these institutions because defeat or pyrrhic victory generally encourages unorthodox thinking amongst bright middle-ranking staffers. The unorthodoxy of Andrew Haldane at the Bank of England after the crisis parallels that of the military theorists of mobility like De Gaulle at the Staff College and Liddell Hart at the Telegraph after the First World War. We will consider Haldane's significance more broadly in Chapter 7, but here our focus is more narrowly on the political arithmetic about the post-crisis costs of finance. One of the more interesting aspects of this shift from liturgy to technical calculation is that the results of technical calculations are indeterminate and authors generally indicate ranges of costs depending on the assumptions and boundaries of the calculations. This makes little difference here because the numbers on costs vary only between the very large and the nearly unfathomable.

In an initial phase, after the major bank bailouts of autumn 2008, the technical calculations focused on how different national governments had paid large costs to bail out banks and markets after the failure of Lehman. By the middle of the following year in 2009, an authoritative estimate of bailout costs had been provided by the IMF in the July 2009 report by Horton et al. (2009) whose calculations are summarized in Table 1.1. In the case of the United Kingdom, the IMF calculates the 'direct up front financing' cost to the UK taxpayer as £289 billion, including here the cost of the Bank Recapitalization Fund, the Special Liquidity Scheme, and the cost of nationalizing Northern Rock and Bradford and Bingley. But if we add all the other Bank of England and HM Treasury loans and guarantees to the banking system, the IMF calculates the potential cost as £1,183 billion. On this basis, the cost of the 2008 bank bailout in the United Kingdom was somewhere between £289 and £1,183 billion, depending on whether and how the guarantees were drawn down. This cost would be ultimately offset by revenues from the sale of government stakes in nationalized or part-nationalized banks. Meanwhile, the direct costs were so large that public sector debt was set to double in relation to national income in several high-income countries (Reinhart and Rogoff 2009a, 2009b): in the United Kingdom, public debt rose from 36.5 per cent of GDP in 2007 to 63.6 per cent in 2010 and the public sector deficit rose from £634 billion to £890 billion. This is a huge unexpected cost arising from what Bernanke and King had a couple of years earlier represented as a beneficial process.

By 2010, most major high-income economies had moved into recession. It then became increasingly clear that finance (plus innovation) was effectively a violently pro-cyclical force determining the growth trajectory: the finance sector which had, through unrestricted credit growth, boosted output before 2007 would now, through deleveraging, damp output growth for the foreseeable future. Those who were making technical calculations of the costs of finance saw that the very large direct costs of bailout were dwarfed by the hugely larger indirect costs in loss of output induced by crisis. Haldane at the Bank of England now led the way in two key papers which presented the new arguments and some startling political arithmetic. One aspect of Haldane's argument was that the part of the increase in output before 2007 was itself illusory, insofar as the growth of financial output reflected increased risk taking by the financial sector (Haldane 2010b, 2010c). But Haldane's truly spectacular result (2010a: 3–4) was the calculation that, in terms of foregone output (now and in the future), the net present value cost of the crisis was somewhere between one and five times annual world GDP in 2009. In money terms, this is an output loss equal to $60–200 trillion for the world economy and £1.8–7.4 trillion for the United Kingdom.

It is quite hard to comprehend the costs which banks have imposed on the larger economy when these lost output costs are, on Haldane's calculation in the UK case, anything up to fifteen times larger than the costs of the bailout which have wrecked our public finances. The numbers are so astronomically large and come in range form so it is worth emphasizing that the calculation is not an extreme one (Haldane 2010a: 3–4). The two key assumptions (of a trend output growth of 3 per cent and a discount rate of 5 per cent) are both arbitrary but moderate. The range of variation of between one and five times world GDP is obtained by assuming different fractions of the 2009 output loss are permanent: the worst case and highest loss is where 100 per cent of the output loss is permanent and the best case is where only 25 per cent of the output loss is permanent. Put simply, the implication is that on reasonably moderate assumptions and, if 75 per cent of the 2009 output loss is recovered, the costs of crisis are equal to world GDP. We can only agree with Haldane's own verdict that 'the scars from the current crisis seem likely to be felt for a generation' (Haldane 2010c: 87).

Worse still, the financial crisis is a debacle not simply because of its scale but because of its form. The technocrats and their political masters failed in their first duty as public servants, which was to protect citizens from the depredations of capitalist business which privatizes its gains to the benefit of employees and owners and socializes its losses at the expense of taxpayers and public service consumers. The idea that the banking crisis is about privatization of gains and socialization of losses has been in circulation since the bailouts of autumn 2008. But, interestingly, this is more the perception of independently minded outsiders rather than the staff officers at the Bank of England or IMF. The popularization of the phrase is probably most strongly associated with Nicholas Taleb, whose ten principles for a new order include 'no socialisation of losses and privatisation of gains' (2009), and it has recently been used by Mohamed El-Erian of Pimco when he returned to the IMF to warn about 'privatization of massive gains and socialization of enormous losses' (2010).

These assertions by contrarians and celebrities of the investment world have not been backed by calculations. So, Table 1.2 presents an illustrative calculation of stakeholder gains and losses in the five largest British banks from 2000 to 2009. This calculation illuminates the mechanisms and brings out the point that, in this case, the phrase about privatization of gains and socialization of losses is not hyperbole but sober description.

As the notes to Table 1.2 outline, the state receipts column excludes emergency loans, special liquidity schemes, state guarantees, and other financial support provided to these five banks. Nonetheless, the cumulative result after nine years from 2001 to 2009 (after allowing for all tax receipts) is that a huge (net) loss of more than £50 billion has been charged to the state by these five banks. Meanwhile, the cumulative private gains of employees are much larger at £242 billion, with shareholders seeing a positive cumulative return by 2009 of nearly £40 billion: in short, the private gains over nine years are more than five times as large as the huge loss charged to the state. The year-by-year totals are also interesting because they illuminate the mechanisms which underlie this result. The net receipts of the state are negative because of an offset cyclicality. The British banking sector's capacity to generate losses in a crisis of liquidity and solvency is significantly larger than its ability or willingness to pay taxes in the previous credit fuelled upswing: huge subsidies and a (net) loss of approximately £105 billion in just two years of 2008 and 2009 therefore outweighed the cumulative tax receipts of £54 billion in seven years on the upswing.

Shareholders and employees benefit because, first, their separate private gains are year by year much larger than tax receipts and, second, in the absence of any clawback mechanisms, they never lapse into offsetting losses. Shareholder receipts increase to a cyclical peak in 2006 and then are more or less suspended for one year only before being generously resumed. As for payments to employees, the growth of the wages fund is more damped than that of profits over the 2000s, but wages start from a higher level and the pattern is one of ratchet growth so that they increase continuously every year from 2001 to 2009. Quite remarkably, the huge crisis in 2008–9 is not reflected in a downward shift in the wages bill, which actually increases from £32 billion in 2007 to nearly £37 billion in 2009.

This is quite unprecedented. In a sector which is initiating crisis and requiring massive subsidy we would ordinarily expect downward pressure on both the wages bill and on numbers employed: in this case, the wages bill increases and the numbers employed decline only marginally from 1,046,000 in 2007 to 1,060,000 in 2008. It is also true that, from this stakeholder perspective, some £20 billion of losses are being socialized just to cover the (wholesale) workforce's expectation of increasing wages.

This account of socio-economic costs and benefits is important because it encourages a problem shift towards a much more explicitly political analysis. The issue is not simply about the huge costs which banking passed on to the rest of society after the crisis but also about the distribution of costs and benefits between stakeholders before and after the crisis. The phrase 'power without responsibility' was originally used by Stanley Baldwin at the beginning of the 1930s in attacking newspaper proprietors like Beaverbrook or Hearst, whose irresponsibility had political repercussions. After the 2007–8 crisis, such savagery has been turned against investment bankers like Lloyd Blankfein and firms like Goldman Sachs whose irresponsibility takes a purer financial form. Most famously, the Rolling Stone magazine described Goldman, 'the world's most powerful investment bank', as 'a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money' (Taibbi 2009).

If we avoid such rhetoric, and look back at the political arithmetic in this section, we nevertheless have a more sober problem definition about a pattern of costs imposed and losses socialized which would ordinarily be associated with the depredations of corrupt and uncontrolled elites in unfortunate thirdworld countries. How did this debacle happen in first-world democracies with honest technocrats in charge and why are we making such slow progress in dealing with the consequences and making sure it never happen again? This is surely the absolutely critical question of 2011. The central twentieth-century achievement of the high-income societies was, one way or another, to use democracy to secure mass social welfare in various post-1945 settlements. The twenty-first century issue we now face is whether we can use democracy to control and redirect the finance sector.

This question deserves a serious and extended answer which illuminates the undisclosed part of financial innovation and present-day democracy. The next section introduces the concepts which frame our argument in this book.

Apparatus: business models and agendas

Empirically resourceful and conceptually minimalist research can often produce interesting investigations that do not depend on a complicated apparatus. Such minimalism can be useful because concepts and a priori can easily become a procrustean device. But, in this case, the intellectual object in front of us is large, complex, and easily misunderstood. So, we need some apparatus for answering our questions about how financial innovation went wrong and why political reform of finance is apparently so difficult across a variety of political jurisdictions.

In answering our questions about financial innovation and the politics of reform, we prefer not to invoke concepts like 'Anglo-American capitalism' or 'neo-liberalism' which emphasize trans-Atlantic similarities of process or outcome, while suppressing or eliding differences between promise and outcome which are an important part of the explicandum. The conditions and changes around regulation of finance after the 1980s undermined three very different regulatory traditions of adversarialism in the United States, comitology and open methods of coordination in the EU, and regulation by consent in the United Kingdom. If we consider the slow pace of reform, different processes with various rhetorics, actors, and settings can produce apparently similar, reform-frustrating outcomes in the United States, the United Kingdom, and Europe. In the United States, the Obama administration had reforming intentions but the only policies which the administration can get through the legislature are full of compromises and loopholes which will be widened at the subsequent regulation writing stage. By way of contrast, the United Kingdom has a powerful executive, but the New Labour government did very little in 2009–10, and the Conservative/Liberal Democrat coalition has in effect postponed decision and sidestepped broader issues by setting up a banking commission, discussed in Chapter 6; the commission is most likely to do nothing except recommend breakup of the (state-owned) high-street banks. Both US and UK systems have so far failed, albeit in different ways, to deliver reform.

Something can be done by distinguishing between different kinds of stories which can be more or less memetic (Dawkins 1976) or instrumental. Bernanke's story about the benefits of financial innovation and the Great Moderation was mainly memetic: these narratives were simultaneously repeated in academia, by non-university economists, and within the finance sector so that they spread organically via repetition and were given credibility by contextual economic events and the broader backdrop of mainstream economics. Moreover, they were believed (in most cases genuinely) by practitioners, regulators, and others who often derived no direct benefit and hoped for nothing except understanding. In the second half of the book, we consider the finance sector's own 'social value of finance' narrative which centres on jobs created and taxes paid. This was, and is, more instrumental insofar as this story was formed and articulated by a small group or coalition with clear motives of furthering their interests. Their work on, and with, stories is rather like mass TV advertising with its endless repetition and simple updating of the same message in search of a suggestible but rather amnesiac target audience. But distinctions between different kinds of stories will not do much unless they are connected with other concepts about how narrative elements can be variably integrated into political processes. Our key concept here is that of 'agenda' which can be either liturgical and consensual or political and divisive. In thinking about agenda, we do not have in mind the standard bureaucratic usage of agenda as the 'list of things to be done', a usage that dates from the late nineteenth century. If we consider the incantatory quality of Bernanke's story before the crisis, discussed earlier in this chapter, this links to an earlier liturgical usage and is distinct from later political usage of the term. In liturgical usage, agenda denotes matters of ritual or a prescribed set of forms for public worship (as in the Latin Mass). This was carried over from Catholic into Lutheran usage with the German concept of Agende or Kirchenagende (Schaff 1951). There is also a later political usage of agenda as 'a campaign, programme, or plan of action arising from underlying principles, motivations etc'. This usage is surprisingly recent and was included in the Oxford English Dictionary for the first time in the December 2007 additions, which give 1976 as the date of first usage.

On this basis, the book develops an argument about how the governance of finance was different before and after the financial crisis. It does so by playing between these two non-standard usages of the term and focusing on the changing role and balance of stories and interests. Immediately before the crisis, the governing agenda was narrowed by shared stories about the Great Moderation and the benefits of financial innovation. These reassuring liturgies operated in a frame of ideologies and interests that had for several decades increasingly undermined political questioning of, or resistance to, finance. After the crisis, the old familiar liturgies are replaced by competing stories from bankers, politicians, and regulators so that multiple political agendas conflict in a new conjuncture where the clash of interests, institutions, and ideologies becomes much more important.

Within this frame, the back half of the book offers a contemporary political history of the crisis as it has so far played across the United States and the United Kingdom, with some reference to the EU. It describes how overlapping elite groups – elected politicians, bankers, financial market intermediaries, agency technocrats, bureaucrats, and elite media commentators – responded to a crisis which suspended normal politics and, after Lehman went under, required extreme intervention whose outcomes are still uncertain but include the wrecking of public finances and a second phase of sovereign debt crisis and intraand international distributive conflict. In Chapters 5 and 6, we also distinguish between overlapping moments of the crisis when different elite groups were in the ascendance, and where the efforts of the ascendant groups in one period become the basis for a different group project in the next. Thus, in the UK case, the extreme intervention of autumn 2008 empowered elected politicians who had forty-eight hours to prevent a global financial meltdown, but within the year it was business as usual for the banks who were making sizeable profits again by the summer of 2009, all with the tacit support of the Treasury even as they faced a new pushback from the Bank of England and FSA technocrats who tried to initiate reform.

The problem the technocrats faced was to understand the complex and multidimensional nature of what was going on in the area of the undisclosed under the rubric of financial innovation. Here, we develop four key concepts which allow us to think divergently in the front half of the book about the drivers and consequences of the antisocial structures and behaviours in finance. First, the concept of business model explains how and why financial innovation was so powerful in the stock market-quoted, corporate banking sector where profits were volume-based in a joint venture, profit-sharing arrangement between shareholders and senior investment bankers under the compensation (comp) ratio system (Augar 2005). Second, the Deleuzian concept of war machine helps us to understand the mobile opportunism of noncorporate finance organized into private equity and hedge funds which were, like most irregulars, less separate from constituted authority than they appeared to be. Third, the key concept of bricolage, in the strict Lévi-Straussian sense, highlights the inherent and unpredictable fragility of improvised latticeworks, which were smart at the links where bankers earned fees but dumb about the structural implications of changing values or behaviours. Fourth, we add the idea of a changeable conjuncture (i.e. a combination of asset prices, flows of funds, and legitimating stories) which makes some kinds of calculations and actions easy and profitable in one period but absolutely impossible in another. By putting these concepts to work, as we do in the first half of this book, we can present a differently conceptualized and better-evidenced account of the undisclosed of financial innovation.

The end result is a much clearer understanding in the front half of the book about the technical intractability of finance as an object of regulation. This intractability has not so far been intellectually registered or politically engaged because the integration of narrative into political processes so far deflects any attempt to cage finance. The complacency about ineffective regulation pre-2007 was rooted in the story about the benefits of financial innovation, and several other kinds of mystification, which all elites accepted and turned into an agenda. These other mystifications included constitutional mystification, which insulated the system of market regulation from democratic forces, and economic mystification, which presented narratives about the social value of finance so that sectional interests of finance could be presented as the national interest. The inability to impose effective re-regulation after 2008 was rooted in the general failure to construct any widely acceptable narrative which made sense of the crisis. A shift from pre-2007 liturgies to competing elite political agendas by 2009–10 was preceded by political default onto scapegoating and show trials of bad bankers like Dick Fuld and Fred Goodwin. This of course needs to be read in the context of the business model analysis in the first half of the book. The various elites were inevitably without an agreed agenda because they lacked the concepts to analyze financial innovation as fragile circuits embedded in shareholder value banking, which needs to be recognized as a transaction-generating machine.

Conceptual apparatus is not an end in itself and does nothing without supporting empirics and development; these are what the next six chapters provide. If we had been simply concerned with hanging the label of elite debacle on recent events, we could of course have been more economical with the development and written a shorter book. But we had a larger and more constructive aim of preparing the way for reform and in doing so by providing something other than a list of fixes because, if there will always be elite debacles, we do believe that we can collectively learn from events and prevent further debacle in finance. On the prospects for reform, after six chapters, we are able at least to indicate the two (surmountable) difficulties that stand in the way of effective reform. First, financial innovation, before 2007 or currently, is beyond any known technical mode of regulatory control because innovation takes the form of bricolage that creates complex latticeworks which are inherently fragile and fail in unpredictable ways with each new conjunctural change. Second, finance is presently beyond political control because criticism has not been turned into a relevant and politically actionable story to create a different kind of finance. We hope that these arguments and their implications will contribute to a future where rule of experts is less important than parliamentary democracy, which is absolutely crucial to the restraint of unaccountable finance.

In the first half of this book our question is about how crisis was generated. Chapters 2, 3, and 4 develop our answer, which is that innovation in and around the financial markets took the form of bricolage which did not consider the risks, uncertainty, and unintended consequences of volume-based business models and complex circuits. The direct implication is that finance needs to be simplified, rather than regulation made more sophisticated. In the second half of the book, our question is about why democratic political control both before and after the crisis has proved so difficult? Chapters 5, 6, and 7 develop our answer, which is that self-serving financial elites are not easily controlled by technocratic elites who are themselves recovering from knowledge failure, or by the rest of the governing classes concerned with political positioning for electoral advantage on issues which are technical, opaque, and illegible to the electorate at large. 

This is chapter 1 the upcoming book After the Great Complacence by Engelen et al. These are the uncorrected author proofs, pre-published with permission of the author.

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