The EU-thanasia of the rentier
It was hardly a happy coincidence that the EC’s consultation paper on the long-term financing of Europe’s economy was published on the same day that the Cypriot bank ‘bail-in’ was agreed – but it was surely an instructive one.
The Green Paper has much to say on the problem of bank-financing of long-term capital formation. There are risks associated with “excessive leverage and maturity transformation”, it says, implying what Jeroen Dijsselbloem made explicit with respect to both Cyprus and SNS Reaal: when banks can’t meet the demand for the liquidity facilitated by maturity transformation the taxpayer steps in – and senior lenders know it. The rent that attracted that capital has taken a blow.
In response the Green Paper highlights the need to tackle the “risk aversion” that constrains the €14trn of assets held by institutional investors. The ECB has done its bit to bring rates down and the Green Paper offers tantalising hints that prudential rules like the proposed IORP II Directive might be re-visited.
So, the bank-rentiers are being squeezed-out, liquidity costs are sky-high, regulation could loosen. What could possibly hold pension funds back? Surely the answer is simple: nobody knows what the marginal efficiency of capital is for the sort of things in the Green Paper. That’s why capital-market maturity transformation always played a role. The volatility that is the cost of the liquidity these markets supply is absorbed as income starts to dominate the long-term total return – but the liquidity offers a way out should estimates of the marginal efficiency of capital change.
The Green Paper sends out mixed messages on this. It muses about “new trading venues”, “liquid project bond markets” and securitisation while promising to limit the “speculative trading” needed to make these markets. It laments that equity markets “increasingly play a role as providers of liquidity, rather than fresh capital”. Long-term equity is best for investments “with significant information asymmetries and moral hazard”, it says – without considering that that’s precisely why investors prefer to take a rent there than take a risk.
In a February speech foreshadowing the Green Paper Commissioner Michel Barnier opened with a quote from Keynes – who provided the classic account of this dilemma.
Liquidity gets the rentier-capitalist to invest, but monetary-policy is sometimes insufficient to make it expensive enough to offset fluctuations in the estimated marginal efficiency of capital. Notoriously, he concluded that the state should therefore form capital in such abundance as to cause the “disappearance of a rate of return on accumulated wealth”, to “euthanise” that rentier. Genuine risk takers remain welcome, but their “eagerness to obtain a yield from doubtful investments” will probably result in an aggregate loss.
The pensions industry wants to see the ‘finance gap’ as a great opportunity, and after the IORP II stick the Green Paper carrot inevitably looks attractive. But surely this is about real risk. Why would the EC replace one set of rentiers with another, rather than euthanising them, Keynes-style? Not that that sort of thing goes on in 21st-century Europe, of course.