Thursday, June 30, 2016

The Brexit Ponzi scheme

The shockwaves unleashed by the financial crisis of the late 2000s have finally swept away the established political and economic order of the UK. It took some time coming, but it turned out that neoliberalism isn't so resilient after all. This vote is a sweeping challenge to the model of open markets and deregulated finance that has governed us since the 1980s.

The problem is, the challenge is based on a fantasy. Brexit is a classic catch-all concept, that can mean almost anything. The basic appeal of the Brexit campaign was the notion of 'taking back control', which of course contrasts with the essential logic of the market economy, where nobody has control, and resources (including labour, ie people) are allocated in accordance with the signals we send when we buy and sell things. By 'taking back control', we supposedly allow ourselves to stop things happening that we don't like and that we feel we cannot choose to opt out of: immigration, externally imposed rules, competition for scarce resources such as housing, jobs, doctors' appointments, and so on.

These things are in large part incompatible or simply impossible, but the 'leave' campaign very successfully escaped any real scrutiny on how they were supposed to be delivered simply by leaving the European Union. Voters flocked to the stall offering free goodies.

This reminds me a lot of one the iconic events of the 2008 financial crisis: the collapse of Bernie Madoff's Ponzi scheme. As is well known, Madoff ran a massive, but strangely under the radar, hedge fund that offered remarkably consistent returns for investors, and grew to a colossal size, but which turned out to be a fraud. Madoff's returns were not profits from smart trading, but instead simply slices of the funds new investors provided, doled out to existing investors. When the credit crunch hit in autumn 2008, some investors were forced to pull out, and the flow of new entrants dried up. By December, Madoff no longer had the funds to pay off investors who wanted to cash out, and the game was up. The investors' capital, supposedly invested in various profitable assets, did not actually exist - it had been paid out in fictitious profits, and spent by Madoff himself in running the operation and making a pile of his own.

The basic structure of a Ponzi scheme is that people are persuaded of something that is too good to be true, and as more and more people pile in, the better it looks, encouraging others to suspend disbelief. Until something happens, the flow of new gullible 'marks' dries up, and the reality hits home: you've been had. The same logic drives the development of 'bubbles' in asset markets: valuations are hyped for some apparently plausible reason, more people pile into the market, thus validating the hype, and then at some point reality bites and it comes crashing down.

What happens next is that people get mad. Mad at themselves, yes, for falling for a scam. Definitely mad at the scammer, for stealing their money. But also mad at the authorities, for allowing it to happen. After the Madoff scam was revealed, officials from the SEC (Securities and Exchange Commission) were hauled before Congress and subjected to humiliating questioning as to why they did not see a gigantic multi-billion dollar fraud happening under their noses.

Who should we get mad at when Brexit fails to deliver the nirvana of low immigration, more spending on public services, and the freedom of the UK government to ignore the rules set by its main trading partners? This is what is worrying me. The authorities, of course, gave very clear warnings in this case: they were ignored, dismissed as out of touch 'experts'. Yet they may well be proved right in the end. How will Brexiters react?

My fear is they will cry 'betrayal', especially since powerful forces in the UK political economy will be trying desperately hard to stop Brexit actually happening, for the most part for good reasons. And betrayal is not a concept associated with the mainstream political centre. It is the language of violent extremism. We will not see the end of UKIP even if its dream of a UK outside Europe comes to pass. The poverty, stagnation and decline that is likely to result will stoke more fear and loathing. Will Farage, like Madoff, be the target of our wrath? Probably not. Instead the grown-ups in the room forced to deal with the consequences will be the first to be blamed.

Ponzi schemes in politics last until they have to confront reality, but given the very real constraints on political votes shaping political reality, they can survive for a long time before actually having to pay out. As with Trump in the US, the only true way to convince the punters that Brexit is a disaster is to allow it to happen. And at that point, the scheme brings down the rest of us with it.