A world on FIRE – Law News speaks to Professor Jane Kelsey
“FIRE” is shorthand for today’s economy where the main sources of wealth creation are finance, insurance and real estate. In her new book The FIRE Economy, prominent legal thinker and policy commentator, Professor Jane Kelsey of the University of Auckland’s Faculty of Law, pursues the thesis that the rise of “FIRE” and the “financialisation” of the New Zealand economy over the past three decades have “transformed our political, economic and social landscapes, supported by a neoliberal regime that celebrates markets, profit and risk”. Yet, despite signs that the model is deeply troubled, “it remains remarkably resilient, even resurgent, in New Zealand and abroad”.
In light of recent international and domestic economic turmoil, many organisations and commentators who were once proponents of neoliberalism are warning the current model is unsustainable. Professor Kelsey joins this debate, arguing that New Zealand is “in a state of denial” and has effectively returned to “business as usual” in the aftermath of the Global Financial Crisis (GFC). She points to the fates and different responses of countries such as Ireland and Iceland as cautionary tales at which we should be looking more closely, before considering some of the barriers New Zealand faces in moving toward a new model of economic life and governance.
Following on from her 1995 book The New Zealand Experiment, and post-GFC, Professor Kelsey received funding for the research from a Marsden Grant to look at the topic of post-neoliberalism. She says that the focus of the book on FIRE “evolved and brewed” over time: “In a way, I am grateful to the TPPA [the hotly debated Trans-Pacific Partnership Agreement – the movement against which she is very involved in] because it meant I had to take longer about writing the book. If I had written it straight after the GFC, it would have been a much less sophisticated work.”
“It seemed clear to me that there was a legitimacy problem for neoliberalism and the credit-based financial model. I was looking at the need to rethink the conceptual foundations of our economic model – the role of the state, the role of regulation, governmental obligations, questions of risk-taking, etc.”
“New Zealand is quite unusual in having a legalistic, contractual approach to neoliberalism – we rely quite heavily on statutes and contracts, whereas a lot of other countries rely more on institutions [such as Australia and its Productivity Commission]. These ‘pillars’ have remained critically important in this country, but their foundations are being questioned internationally.”
However, she says that the problems are not just with the economy but with the laws and regulation that supported it (and helped to recover when in crisis) over the years. Problems with leaky buildings, the housing bubble, finance company collapses and the insurance hangover from the Canterbury earthquakes are all “symptoms of a market fundamentalism that celebrates easy profits and risk”. “We can’t fix these things without fixing the neoliberal model itself,” she says.
Food for thought
Finance, insurance and real estate are obviously three areas with which the legal profession has much to do. Professor Kelsey suggests that lawyers (and other trusted professionals, such as accountants) should be thinking about in terms of how they might engage with the issues raised in the book. She notes that our profession, and others like it, have responsibilities which go beyond simply doing a client’s bidding and following the letter of the law without thinking about what is behind it:
“It’s not just about getting the law right – you can have principles-based legislation and regulations or legislation and regulations that are very detailed – but if those responsible for observing and implementing them don’t have a culture that considers the public good, then the underlying culture needs to change as well. This needs to happen from the top down, including in how we conduct our education in law schools and in the professional sphere.”
This, she considers, is particularly relevant given New Zealand’s traditional presumption in favour of “no regulation” or “co-regulation”. “That only works if those being regulated agree to operate in the spirit of the rules”, as well as to their letter. “I think we have been much too ‘hands-off’ in our approach in the regulation of finance. We have allowed the ‘capture’ of the advisory process by those being regulated and those who profit from the matters being regulated.”
More generally, and though she stresses that she is not offering “a blueprint for the future” in the book, Professor Kelsey does think New Zealanders need to confront some of the questions we avoided post-GFC. She says that international commentators, including at the IMF, have identified New Zealand as being at high risk of financial collapse because of our huge debt burden, now seen in issues plaguing the rural sector, the ongoing residential property bubble, the high proportion of household debt linked to the property market, high exposure by banks and Christchurch re-growth not meeting expectations.
“We need to start having that debate before we have a crisis. We need to stop dealing with domestic problems in ‘silos’ and look at the systemic issues behind them. We need to plan and think ahead, not just focussing on the individual risks that could arise. We need to look at what is being said internationally and how we could do things differently – both to pre-empt another crisis or if one was to happen.
“How can we better protect the vulnerable against third-tier lenders? What about people who are completely over-leveraged in their borrowing? What mechanisms can we look at to prevent these kinds of social disasters? We also need to have a sensible discussion about why New Zealand is the only OECD country not to have a minimum guarantee for bank deposits, let alone KiwiSaver.”
She also has some suggestions about other economies to which we could look for examples of how to deal with a possible financial collapse. Iceland is one such case which she mentions, in terms of social protections and economic measures including capital controls.
Impact of the TPPA
That leads us on to the other of Professor Kelsey’s “twin obsessions” – the potential negative impact of international trade agreements on our ability to re-regulate financial markets and take (or not take) appropriate corrective steps (such as the use of capital controls) during a financial crisis: “That is a question which has been somewhat overshadowed in the debate around the TPPA – it is easier to preoccupy ourselves with questions over medicines and tobacco packaging.”
Indeed, in Professor Kelsey’s view, many of the same issues canvassed in The FIRE Economy also play out on the international stage in the context of such agreements and the negotiations around them.
“These agreements have the effect of locking the government into a failing model – foreclosing the possibility of retreat and putting handcuffs on what future governments can do. My objection has continually been about constraints on domestic regulatory autonomy.
“The new generation agreements go further – not only do they set constraints on actual law and policies, but they also seek to influence how a country makes decisions and require the most light-handed regulatory approach to be taken, even if that is not the best way to achieve public policy objectives. And if you have a policy you want to implement or a desire to change the paradigm in the future, it becomes extremely difficult to do so.”
Professor Kelsey drew attention in a previous issue of Law News to proposed rights of offshore arbitration for affected commercial interests under the TPPA (see Law News Issue 35, 18 October 2013). But she also wants to shine the spotlight on another issue which has not had much air time – the question of the US “certification” of a country’s compliance.
“There was a letter signed by numbers of leading politicians internationally on this question [see http://tppnocertification.org/ for more on this]. The US will not bring the agreement into force itself until we have changed our laws to what the US understands they should be. The US has used this process in the past to rewrite agreements, vet another country’s laws, monitor their legislative process and to insist on US interpretations of vague wordings.”
Professor Kelsey says the concerns about certification among legislators are difficult to assuage because of the paucity of available information about the actual negotiations: “The countries who are party to the agreement will not release documents (aside from the final text) for four years after it comes into force, and Minister Groser refuses to release anything under the Official Information Act, which we are currently taking on judicial review. So how will we know what pressure the US is bringing to bear on the writing of New Zealand laws?”
Professor Kelsey notes that the window for finalising the agreement is getting narrower and narrower because of the political deadline of the upcoming US elections. So some of these questions could become moot, at least for the time being, if the TPPA grinds to a halt of its own accord.
THE FIRE Economy was published in July 2015 by Bridget Williams Books (RRP: $49.99, ISBN: 9781927247839). It is available in paperback and also available as an e-book. For more information, please visit the website for Bridget Williams Books at www.bwb.co.nz/books/the-fire-economy.