If neoliberal economists used to love going on about the 'tragedy of the commons'
(ie no point sharing collectively enjoyed resources cos no one assumes responsibility
for their maintenance, the common becomes a waste land), it seems the time is coming
for a bit of a tragedy of capitalist commoning, as Peter Linebaugh might say. The
distributed and decentred model reigning in finance, as perhaps the Enron story
foreshadowed, points to an intensified and more generously spread array of disaster
when the bubble bursts. This is from the ever-trenchant John Plender in the Financial Times,
12 October 06. (ps anybody know a replacement for bugmenot?)

The losses of the troubled Amaranth and Vega hedge funds have led to predictable calls for more hedge fund regulation. So, too, 
will the decision by Philippe Jabre, heavily fined by the UK¹s Financial Services Authority, to set up a hedge fund in Geneva. 


Yet whatever the faults of hedge fund managers, the critics are shooting the messenger. If the real worry is systemic risk, a more 
fundamental threat comes from the change in the structure of banking whereby credit risk is packaged into tradeable IOUs or 
hedged via credit derivatives and shunted off bank balance sheets. Not all central bankers worry about this. Some see financial 
innovation as a boon, arguing that transferring risk from banks to non-bank investors makes the system more robust since the 
risk is diversified and better managed. Up to a point they are right. Yet there is an immutable law of insurance that says that, 
ower. This is because banks no longer retain the credit risk in much of their lending. They originate and distribute; and where 
the intention is to distribute, the lender is inevitably less bothered about loan quality. As Raghuram Rajan of the International 
Monetary Fund argues, bankers now feed rather than restrain the appetite for risk. In a relatively benign monetary policy 
environment the markets remain stable, leading to an intensification of moral hazard: the longer the market¹s superstructure 
proves reliant, the more reliance will be placed on it, even though it has not been tested in really difficult times. Mr Rajan adds 
that the incentive structures governing hedge fund behaviour encourage the taking of risks with a small probability of 
severe adverse consequences. This contributes to financial system stability most of the time, but with the possibility of huge 
instability in bad times. In fact, the new financial system is increasingly a game of pass the parcel. At some point the music will 
stop, because in finance it always does.  

The interesting question then will be whether a co-ordinated bailout of the kind mounted for the Long-Term Capital Management 
hedge fund in 1998, or a lifeboat operation such as the secondary banking rescue in Britain in the 1970s, would be possible any 
more. The answer is probably not. Crispin Odey, a London-based hedge fund manager, points out that banks are now smaller 
than the securitised loan market. Having expunged so much risk from their balance sheets, he adds, bankers have little equity 
in the bad debts they originated. It follows that being invited by central banks to throw good money after a small amount of 
potentially bad money in a protracted workout will be a less than compelling proposition. Especially if the lending 
banks¹ proprietary traders are taking aggressive positions to exploit the vulnerability of the failing financial institution.  

The conflicting interests of competing banks have always made it difficult for central banks to corral people into bailouts. 
Today the collective action problem is likely to be supremely difficult because most, perhaps even all, banks will feel their 
interest lies in walking away. There is also a widespread assumption among bankers that the so-called London Rules for 
ring pain in private-sector workouts are largely history for the same reason. 

This problem of crisis management will be even more difficult because of the globalisation of banking. Financial stability 
can no longer be managed at national level. Yet it remains to be seen how well any memorandum of understanding for 
international crisis co-operation of the kind adopted in the European Union between central banks, finance ministers and 
regulators will stand up to a financial hurricane. It is easy enough to share data. Fiscal burden-sharing is another matter. 

If, for example, an insolvent bank that poses an EU-wide systemic threat has more deposits outside its home country 
than in, few local politicians will want to spend taxpayers¹ money on voteless foreigners, including global banking giants 
in London¹s financial adventure playground. Lenders of last resort will in future be more elusive. And banking crises will be messy.