Wednesday, 27 October 2010

If George Marshall had been a vampire...

A brief history lesson first, for no reason other than a scene setter, I figure most people who read this will know the broad details...

The Marshall Plan was the brainchild of US Secretary of State George Marshall. At the end of the 2nd World War the US had plentiful assets, and more importantly, currency. The state was relatively unscathed by the war, indeed it had help drive capital into American manufacturing. This left them in a good position to do something which was seen at the time as rather novel and groundbreaking. They would give it to other relatively well developed countries, who had suffered during the war, as aid.

There were plenty of good, pragmatic reasons to do so. Not least of which was if you are holding the pursestrings you can more or less dictate what the people on the recieving end do in the way of setting up favourable trade with your own nation. Whatever the case, it allowed to a renewal of Europe after the war on a scale which would not have been possible otherwise. It also firmly embedded in much of Europe the more capitalist system which the US was trying to promote even in those very early Cold War days.

That will do for history. And for the record, thats literally the most simplistic representation of the Marshall Plan that has ever been written. Please gloss over that.

What made me think of this was this fascinating extract from Matt Taibbi's book "Griftopia". The section speaks a great deal about Soverign Wealth Funds, effective large blocks of capital controlled by states and dispersed into (primarily) long term investments. This is often into infrastructure, but it also flows into industry, and the usual routes for large investments.

If you want to learn a bit more about SWF's take a look either here, at the FT's extremely good articles, or here, at the SWF Institute, who unsurprisingly have some pretty good facts and figures avaliable.

The article then goes on to talk about how, increasingly, American city governments (and States themselves) are having to consider selling off pieces of infrastructure, and major state properties to investors for long term leases, in order to deal with shorter term budget crises. The specific example he uses is the city of Chicago, leasing out its rights to collect money from parking meters.

He makes a not unfair leap that this is exactly the sort of thing that an SWF is intended to be used to purchase. He also notes the Morgan Stanley, although the "front man" for the deal, is clearly not the real purchaser, but represents large unknown entities who are hidden behind layers of legalistic red tape.

Following the line of the author's argument, it seems to me that what he is describing is the Marshall Plan, albeit a rather twisted and brutual one. State actors are clearly using huge amounts of avaliable money to invest in the infrastructure of other States, particularly America, but presumably other European states where it is possible.

The problem is that this is not money being given, nor is it "seed" capital to modernise or renovate the infrastructure. Or at least thats not what we're seeing at the moment. What is happening is that these major sections of infrastructure are sliding from the control of local Government and are being used to generate significant returns on investment for the unknown figures who put the money up in the first place. At about a quadruple return in the case of Chicago.

Now, as a relatively right wing gent I dont necessarily have a problem with third parties taking on responsibility for infrastructure. However, there has to be a provisio that I'm only comfortable with it if I think that the new controlling entity is going to do a good job, ideally better than the one the Government was doing before. Personally, it doesnt seem to me that these deals are being set up with that in mind.

It also raises the question of what happens when Morgan Stanley, acting on behalf of people who come from parts of the world which don't much like the USA, but which arent actively working against it currently, take on things which are actually of some day to day importance. Its pretty common for sections of road to be privatised for example. If this continues to happen, you end up in a situation where a country which could grow to hate you, has the ability to make it too expensive for the average citizen to use a motorway. And all the while the money they're making out of your motorways, is going back to fund their operations back home, operations which are working against you.

Over time there is the possibility of countries which are selling off national resources to be bled white by the slow consumption of selfish investments which serve only to benefit nameless individuals who hide behind banks and shell companies in parts of the world who treat privacy as something rather more serious than most.

I agree with the author, and others like Jonn Robb over at GG, who have made similar points, that these situations are reflective of societies which are growing, by necessity, more forgiving of the sort of moral bankrupcy which allows "soft" corruption. It is a selling out of the state with the sure knowledge that no one will notice, and people who are convinced that patching a hole today is better than fixing the roof itself.

You'll rarely hear me speak fondly of regulation, but this is one area where the world of finance has clearly outstripped the ability of national Governments to create sound regulatory systems which prevent a dangerous situation emerging.

This has happened before of course... tax farming. A system which has always been a good idea.
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