But in his stories of the lowlife gangster milieu of the Roaring Twenties and the Great Depression — the snatchers and the shooters, the dimwits and the dolls, the potatoes and the players in Broadway’s “hardened artery” — Damon Runyon invented the main character of the late twentieth century: the good bad guy.

We’re so steeped now in anti-heroes that it hardly seems bold or daring for a writer to dive into the beating heart of a man who kills or kidnaps for money. Badly behaved men — and they are usually men — as the half-sympathetic moral centre of a story have been a staple of serious literature since the Fifties: amoral murderers like Patricia Highsmith’s Tom Ripley; everyman adulterers like John Updike’s “Rabbit” Angstrom; and distilled misanthropists like Joseph Heller’s Bob Slocum (“The world just doesn’t work. It’s an idea whose time is gone”).

The good bad guy moved from literature to film in the Seventies, and two decades later came into our homes on TV. You don’t have to look far to see the flowering of this quality in our culture. Indeed, it’s not going too far to say that without Runyon, there would be no Godfather, no Tony Soprano. Martin Scorsese would still be trying to think of something to make films about.

Suggested reading

Tony Soprano: villain or victim?

By Rob Henderson

But when Runyon wrote his stories in the Thirties and Forties, he was bringing us news, softening us up for the century to come. He made us fall for the guy who is dubious in business and negligent in his home life and his love life.

The stand-out quality of both Runyon and his characters is that they’re funny. Runyon’s anonymous narrator is a lower-rent, warier version of P. G. Wodehouse’s tireless storyteller Mr Mulliner, and indeed Wodehouse is the writer Runyon most resembles stylistically. His rhythmic patter fits Wodehouse’s description of his own work as a “musical comedy without music”.

Runyon’s narrator trades in nicknames, neologisms, mock-formality, a language devoid of contractions and a perpetual present tense. When he tells us that “when Dave the Dude takes a guy out for an airing, the guy very often does not come back”, the threat is softened by the stilted idiom — but not too much. The same goes for the cracking line, “I always take a gander at a doll’s feet and ankles before I start handicapping her”.

Comedy lowers the reader’s guard and enables the writer to slip in other things. We get unexpected moral complexity, in the story The Lily of St Pierre, in which a tragic woman suffers a death “that happens to a million dolls before and will happen to a million dolls again”. And there is a truly psychopathic viciousness in Sense of Humour, which begins with the aptly-named Frankie the Ferocious killing the family members of an associate who played a practical joke on him, and gets worse from there.

Suggested reading

How The Office ruined comedy

By Gareth Roberts

Runyon used comedy as a balance to danger, then; his inheritors developed this, using it as a source of danger, too. In the famous scene in Scorsese’s Goodfellas, Joe Pesci’s Tommy turns laughter — “Do I amuse you?” — into blood-chilling fear. Like Runyon’s stories, like any good portrayal of the good bad guy — like any good art — it operates in multiple registers.

Connected to this is another strength of Runyon’s good bad guy: he is real. Runyon certainly knew the world he wrote about, both from his work as a newspaper reporter covering sports, politics and murder (which he called “the main event”) and from personal connections: he knew, among others, Al Capone. His portrayal of gangster culture in his stories was an exaggeration, usually for comic purposes, but it’s the authenticity that provides the frisson: Runyon’s biographer said any decent New York detective would recognise most of the crooks in his fiction, from Harry the Horse to Nicely-Nicely Johnson.

And so reading about, or watching, a good bad guy is like a rollercoaster ride: a brush with danger within a safe environment, all the more so when we are strapped to his viewpoint. We can’t help but come round to his way of thinking when we watch the serial killer’s serial killer Dexter Morgan in Dexter, or read Alex’s own words in A Clockwork Orange. After all, to paraphrase one Runyon character, many legitimate guys like you are interested in the doings of tough guys.

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Why does the literary world mistrust success?

By John Self

The guys and dolls come and go in Runyon’s stories, but his world is held together by that constant narrator, a bystander to the action (“I am known to one and all as a guy who is just around”) who rubs comfortably alongside the criminal underworld, even if he is not strictly part of it, and gently expresses theoretical disapproval of, say, kidnapping. “Snatching is by no means a high-class business, and is even considered somewhat illegal.” (Then again, we get the sense that he would help out if they were busy, and occasionally he provides a turning point in one of Runyon’s clockwork plots.) But the intimacy of the first person narrative makes us want Jo-jo and Spanish John and Dave the Dude to succeed — because reading is an act of empathy, but also because we see them within their own community, where they don’t seem so bad at all. They are, like Puzo’s mafiosi in The Godfather, bound by their own code of honour, however twisted.

The novelist Howard Spring summed up this appeal by describing Runyon’s people as “jungle-dwellers, hateful and horrible men and women, who yet please us because they are alive and completely integrated.” Fictional violence, in other words, is thrilling, and all the more so when we’re made to care about the characters dishing it out. In The Sopranos, the most simultaneously beloved and bloodthirsty of Tony’s henchmen was Paulie Walnuts, who murdered more people than anyone else, but was also a comic figure, cladding his furniture in plastic and forever repeating his jokes to impress Tony. In Scorsese’s Gangs of New York, when Daniel Day Lewis’s Bill the Butcher delivers a theatrical “Whoopsy-daisy!” as he “misses” while chucking his knives at Cameron Diaz’s Jenny, we feel the same sense of uneasily disrupted danger that Runyon detonates in his darker stories.

In capturing the Broadway gangster era, Runyon created it, just as Fitzgerald did the Jazz Age — which operated at the same time but in a different world. But Runyon’s influence goes even further: he prefigures the wisecracking Noo Yawk idiom of countless sitcoms. And by offering a gangster environment that was fundamentally comic in nature, he opened a gap between his creations and the traditional villain for others to fill, and fill it they did, forming characters who flatter our appetite for complexity by being good only in parts.

After Runyon’s death in 1946 — from a lifelong smoker’s throat cancer — a plane was flown above Manhattan and his ashes were scattered over Broadway, the avenue he dusted with his own peculiar genius. It was a tribute befitting either a city grandee or a legendary crime boss — and therefore perfect for the man who in straddling both worlds created his own, and laid the path for ours.

But it will be in southern Europe, in countries such as Italy, where the worst effects of the health crisis will allow the worst effects of the economic crisis to really do some damage.

The numbers are terrifying.

This week, Goldman Sachs said that while it expects France’s GDP this year to decline by just over 7%, and Germany’s by 9%, Italy’s will slump by nearly 12%. The signs of the looming catastrophe are there. Italy’s manufacturers have just recorded their sharpest drop since records began.

More than four million businesses have shuttered. Tourism has ground to a halt. And, in a cruel twist of fate, it has been Italy’s most productive northern regions where the full force of the coronavirus pandemic has been felt.

Some analysts have argued that this contraction and crisis will be short-lived; that Italy will ‘bounce back’ later in the year. But this raises a difficult question: bounce back to what? The country has, essentially, lost two decades.

As the economist Ashoka Mody has pointed out, Italy has been in an economic coma ever since it joined the Euro more than 20 years ago. Economic growth has flat-lined and living standards have stagnated; Italians have now spent all of the 21st century in a slow or no growth trap.

The country was heading into another recession at the end of last year. And it had already gone through three in the past ten years, without ever having really recovered from the last crisis. Before Covid-19 hit, Italy’s economic output was still 5% below the peak that was recorded more than a decade ago.

More from this author

Populism in Italy is far from defeated

By Matthew Goodwin

This is one reason why, last year, the International Monetary Fund forecast that even by 2024 Italy’s output will still be lower than it had been in 2007. The country’s public debt to GDP ratio has ballooned; for each of the past six years Italy has owed more than 130% of its annual economic output, a figure that will now almost certainly surpass at least 150%.

Its financial system has remained weak, and there are still too many non-performing loans. The country, meanwhile, is grappling with one of the highest unemployment rates in the Eurozone which, at 10%, is basically what it was nearly a decade ago. Youth unemployment has been far higher — at nearly 30% —which is one reason why you hear so many Italian voices on the London tube.

In short, it is hard to make the case that the average Italian today is better off than when their country joined the single currency more than 20 years ago. Certainly, some of Italy’s problems predate its membership of the Euro: the poor education rates, ageing population, lack of industrial modernisation and heavy reliance on small family-run businesses have not helped.

But it is also true that Italy’s inability to breach Eurozone spending rules and invest seriously in its own economy has left it trapped in a doom loop. Which, in turn, has left Italians feeling frustrated, fed up and deeply pessimistic about their future. At the end of last year, 90% of the Dutch and 83% of the Germans described their economic situation as ‘good’. In Italy, it was 17%.

Italian enthusiasm for the European Union was also waning. Last year, as the Eurobarometer survey revealed, they were already among the least trusting of the European Union (only 38% trust it), were among the least likely to think positively about the EU (only 33%), were among the least likely to feel that their ‘voice counts’ in the EU (only 30%) and were among the least likely to feel satisfied with how democracy is working in the EU (only 45% did so).

Then, when Covid hit and Italians looked beyond their borders for help, European ‘solidarity’ was slow to appear — or did not appear at all.  Talk of unity, of learning from the mistakes of previous crises, quickly made way for nation-first approaches to closing borders and restricting the export of medical supplies.

More from this author

Populism in Italy is far from defeated

By Douglas Murray

Russia and China quickly filled the vacuum that had once again been left by the lack of leadership in Europe by sending supplies and workers.

When several states, including Italy, then asked their Eurozone partners to share debt, the more secure states in the north, notably Germany and the Netherlands, said no.  Anxious that a sharing of debt now might lead to the sharing of debt in the future, some in the north argued that financial assistance should come instead through the European Stability Mechanism (ESM).

But many in the south, shaped by the experiences of the past decade, and remembering the treatment of Greece, fear what strings will be attached to assistance. It is seen as a path to further austerity; last week, nearly half of all Italians rejected the idea of receiving help from the ESM because they see it as “a tool to impose Greek-style austerity”.

Meanwhile, the populist politician Matteo Salvini, who has been struggling in the polls, has taken full advantage of the situation. He’s now campaigning on the issue, stating simply: “No to the ESM”. Even if Salvini himself is not the beneficiary it is hard to see how Italy comes out of a renewed crisis with less rather than more populism. After all, it was the previous financial crisis that set the stage for the rise of both the ‘neither Right nor Left’ populist Five Star and Salvini’s League.

Their abandonment by the EU is clearly being felt by Italians as they sing to one another from their balconies. In recent weeks, nearly nine in ten said that the ‘EU is not helping us’, more than seven in ten felt that the EU ‘has not contributed in any way to addressing the crisis’ and nearly eight in ten resigned themselves to the view that the EU is unlikely to change

Other polls have recorded an increase in public support for leaving; today, more than one in three Italians say they would leave while less than half think this is a bad idea. Feeling abandoned, Italians have also become less trusting of the EU —with just one in four doing so — and more likely to say that their membership of the EU is a ‘disadvantage’, with 67% doing so.

All of this is raising big questions about the ability of the European Union to revive public enthusiasm in the broader project. As even the New York Times noted this week: the question to ask is not whether the EU will survive — because it will — but rather what is the point of any union if it cannot find unity when unity is needed most.

Passionate pro-Europeans routinely begin their columns and tweets with the famous quote by Jean Monnet: ‘Europe will be forged in crises and will be the sum of the solutions adopted for those crises’.  But many other things can be forged in crises — including Euroscepticism and a belief that, when it comes to the crunch, you really can only rely on your nation.

We tend to forget this now, but it was the EU’s fumbled response to two earlier crises — the Great Recession and refugee crisis — that convinced Britain’s Leave voters that being in this organisation was not in their longer-term economic interests.

Most Italians have not yet reached the same conclusion. But if you put Europe’s bungled response to Covid alongside Italy’s worsening economic picture then it is not hard to see how the different impact of the current crisis and the recovery to come might push them further in this direction.

When Italy eventually emerges from this crisis it will not only be a poorer country but will also be a more Eurosceptic one, too. And who knows where that will lead.

We are at a watershed moment: the coronavirus Covid-19 is a catalyst fast bringing many long simmering problems to the boil. It is exposing the creaking financial systems around us and it will change the way economies function. Economic and financial pundits, however, have been focusing almost exclusively on the short-term effects of coronavirus and so are missing the much bigger themes at play.

Epidemiologists tell us that when it comes to the virus, we are looking at a once in a century event. It is highly contagious and highly lethal. Experts are not comparing Covid-19 to SARS or Swine Flu, but to the Spanish influenza of 1918 that killed between 50 and 100 million people worldwide.

We do not have good data on what the stock market did during the 1918 flu, but we do know that it led to a severe recession. The connection between influenza and recessions is well documented. Going as far back as the Russian flu in 1889-90, the Spanish flu in 1918, the Asian flu in 1957-58 and the Hong Kong flu of 1968-69 — they all led to recessions. This one will be no different.

But this recession will not only be driven by the economic loss of able-bodied workers, it will be helped along too by the steps political leaders take to avoid the spread of the coronavirus. In medicine, the immune system’s response can often be worse than the disease. When the body goes into septic shock, the immune system overreacts, releasing what doctors refer to as a cytokine flood, which can reduce blood to vital organs and lead to death. Sepsis is common and kills more than 10 million people a year. Today, the political reaction to Covid-19 is causing something akin to a septic shock to the global economy.

The recession is likely to be very sharp but brief. Recessions are self-regulating. De-stocking of shelves and warehouses leads to re-stocking. Collapsing low interest rates and oil prices eventually spur spending and borrowing. Government spending and central bank easing eventually feed through to the real economy. While there will be massive panic and bankruptcies today, there is little doubt that markets will be better in a year, and certainly will be in two to three years,

But the structural changes to how our economy operates, however, will be felt for decades to come. And this is in large part because we didn’t learn the lessons of the last crash.

—

Over the years since the 2008 crisis, central banks have been trying to stamp out every single small fire that flares up (the European crisis in 2011-12, the Chinese slowdown in 2015-16, the slowdown last year); but suppressing volatility and risk only creates bigger fires. Risk is like energy and cannot be destroyed. It can only be transformed.

Forest fires are a useful analogy. California has infrequent, devastating forest fires; the Mexican state of Baja California has many small frequent fires and almost no major catastrophic fires. Both states have a similar climate and vegetation, yet they have vastly different outcomes. That’s because when there are very few small fires, underbrush grows, vegetation increases and creates greater kindling for the next fire. Suppressing small risks only makes them emerge eventually as very big ones.

In politics and economics, massive change events tend to happen not in orderly sequences, but in sudden spasms, like the Arab Spring, or the collapse of the Eastern Bloc. Watching events unfold is often like watching sand grains pile slowly on top of one another until a final, random grain causes the entire pile to collapse. People knew the Arab countries were fragile and that the Eastern Bloc might eventually fall, but predicting which grain of sand would do it precipitate either was impossible.

Further reading

2011 birthed the mother of all protests

By Christopher Rhodes

Physicists call these transitions critical thresholds. Critical thresholds are everywhere in nature. Water at moderate temperatures is disorganised and free-flowing, yet at a given critical value, it has an abrupt transition to a solid. It’s the same with the sandpile: one grain too many can trigger collapse — but which one?

In 1987 Per Bak, Chao Tang, and Kurt Wiesenfeld found that while sandpiles may be individually unpredictable, they all behave the same way. The critical finding of their experiments was that the distribution of sand avalanches obeys a mathematical power law: The frequency of avalanches is inversely proportional to their size. Much like forest fires, the less frequent they are, the more catastrophic they are.

It’s the same with financial markets and the economy. We will experience years of quiet, interrupted by sudden avalanche. Years of slowly adding grains of sand can end abruptly — to our great surprise. Today in financial markets, many unsustainable trends have been building, and the coronavirus is merely the grain of sand that has tipped the sandpile.

—

It would be controversial to say that the stock market reaction to the coronavirus would not have been very big had we not been in the middle of an orgy of borrowing, speculation and euphoria. Of course, stocks would have fallen with coronavirus headlines, but it is unlikely they would have crashed the way they did without those exacerbating factors. Furthermore, without enormous underlying imbalances of high corporate debt, the prospect of poor sales would not have driven so many stocks to the verge of collapse.

This aspect of the current crisis has so far gone unreported. But not unmentioned. A few weeks before the crash, Charlie Munger, vice chairman of Berkshire Hathaway and Warren Buffett’s longtime business partner, issued a dire warning, “I think there are lots of troubles coming,” he said at the Los Angeles-based Daily Journal annual shareholders meeting. “There’s too much wretched excess.”

Speculative euphoria was at record highs. As Sir John Templeton once said, “Bull markets are born in pessimism, grow on skepticism, mature on optimism and die on euphoria.” Investors were all on the same side of the boat, and it capsized, as happens in market crashes.

• Investors were buying a record amount of call options, or bets on stock prices rising further. According to SentimenTrader, by early February, “We’ve never seen this level of speculation before. Not even close.”
• Asset managers were betting in record quantities on stock futures, which are instruments to bet on underlying indices. Positioning in S&P futures hit a new high as of February 11.
• Hedge fund borrowing to buy stocks was at a 24-month high. They were highly confident markets would keep rising.

Asset Manager positioning in S&P futures hit a new high as of February 11 in both net contracts and value. S&P futures comprises the bulk of equity futures positioning by these funds.#SPX #NDX pic.twitter.com/OA744Dxzsc

— QF Research (@ResearchQf) February 14, 2020

It was not a coincidence that there was such euphoria. Retail brokerages had announced over the past few months that they were eliminating all commissions on trading activity. Buying and selling stocks was suddenly “free”. It was like pouring truckloads of kerosene on a blaze. At Charles Schwab, daily average trading revenue exploded 74% after the change.

In scenes reminiscent of the dotcom boom, stocks were doubling overnight. Virgin Galactic Holdings, with no revenue, was worth over $6 billion dollars. Tesla, which has never made money selling cars, had a market capitalisation greater than any other car manufacturer. Its stock price quadrupled in less than three months. The market was so stretched that it would have crashed due to its own absurdity — with or without coronavirus.

The source of this “free” trading came from high frequency trading firms that are supposed to act as market makers, executing buys and sells for clients. Except that they are not really disinterested middlemen; they are running their own trading strategies to make money off retail investors. They execute the order flow of so called mom and pop investors and profit from these “dumb money” retail traders, in the words of Reuters.

The brokerages which sell retail orders receive hundreds of millions of dollars in return from the market makers. This means that, essentially the market makers are bribing the brokerages to profit from retail traders. For example, E*Trade received $188 million for selling its customer order flow last year, while TD Ameritrade made $135 million in the fourth quarter alone. The market makers are willing to pay so much because they almost never lose money — they trade fast and know where the market is going.

As Warren Buffet once said, “As they say in poker, ‘If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy.’” Retail is the patsy.

Ken Griffin is the owner of Citadel Securities the biggest market-making firm, and his business is so profitable that he has gone on one of the greatest property buying sprees of all time. In 2015 Griffin paid $60 million for multiple condo units in Miami. He paid a U.S.-record $239.96 million penthouse in New York City, a $122 million mansion in London, and over $250 million in Palm Beach properties. Market making against “dumb money” is a fabulous business.

Further reading

The three myths about free markets

By Jesse Norman

As the mania deflated in late February, though, mom and pop were abandoned. As the crash started, market makers pulled back and provided less liquidity. Retail investors were left high and dry. It is no wonder prices fell so quickly.

The high frequency market makers have since been pleading for more capital, and rumors swirl that many are experiencing financial difficulties. The illusion of benign market makers looking after retail investors has vanished.

There are echoes here of the old problems from the Lehman crisis; but they have mutated into different forms. During the Lehman crisis, mortgage bonds were pooled together, and insurance companies and pension funds bought them. Today, retail investors have been buying popular funds known as Exchange Traded Funds (ETFs). These are easy to trade and cheap, but they have a fundamental problem. While ETFs have simple tickers like HYG, JNK, LQD that the average retail broker can trade on their screen, they are really holding hundreds of individual bonds inside of them that the investor is unaware of. These bonds are not easy to trade at a moment’s notice and are highly illiquid. But while the ETFs rose slowly and steadily, and investors poured more money in, lulled by a false sense of security.

While the ETF shares trade daily by the second, the underlying bonds are not easy to trade on their own. In the old days, insurers and pension funds bought these bonds, put them away in a drawer and never traded them. Today, though, investors expect instant liquidity from an illiquid investment. Liquidity mismatches are as old as banking itself (deposits and cash are highly liquid, while mortgages and loans are often completely illiquid); the problems of ETFs have been known all along, and the outcome has been inevitable.

As the coronavirus panic spread, the ETFs started trading at big discounts to the underlying value of the baskets of bonds. Markets are broken, and the gap is a sign of how illiquid the underlying holdings really are.

But these ETFs should never have been allowed in the first place. In the words of Christopher Wood, an investment strategist at Jefferies, “they commoditise equity and bond investing in an insidious way which ultimately creates a dangerous illusion of liquidity. True, ETFs are cheap. But so is fast food.”

While ETFs may appear technical and unrelated to the broader problems in markets, they share the same underlying problem. We have had the illusion of safety and liquidity for some time, and it is the coronavirus that has exposed the gaping holes in financial markets.

—

The coronavirus won’t kill companies. But it will expose their bloated, over-leveraged balance sheets. Corporate debt in companies has never been higher and has now reached a record 47% of GDP.

Rather than encouraging moderation, central bankers and policy makers have been reloading the all you can eat buffet and persuading everyone to come back for third and fourth plates. The European Central Bank and the Bank of Japan have been buying corporate bonds, and central banks have kept funding at zero rates, which has encouraged a massive increase in indebtedness over the past decade.

Central bankers have long promoted high corporate leverage because they see it as a way to stimulate demand. Even now, many economists see no problems on the horizon. In the New York Times, Nicolas Veron, a senior fellow at the Peterson Institute for International Economics in Washington, was openly mocking anyone advocating prudence, “The prophets of doom who thought that more debt was more risk have generally been wrong for the last 12 years.” Like most central bankers for the past decade, he argued, “More debt has enabled more growth, and even if you have a bit more volatility, it’s still net positive for the economy.”

But while debt has encouraged growth, it has also introduced much greater financial fragility, and so the growth is fundamentally unsound. We are now finding out that less debt, rather than lower rates is better for financial stability.

Further reading

The global economy has gone mad

By Peter Franklin

According to FactSet, 17% of the world’s 45,000 public companies haven’t generated enough cash to cover interest costs for at least the past three years. Debt has been used to finance more debt in a Ponzi fashion. The Bank for International Settlements looked at similar economic measures globally and found that the proportion of zombie companies — companies that earn too little even to make interest payments on their debt, and survive only by issuing new debt — is now higher than 12%, up from 4% in the mid 1990s.

Entire industries are zombies. The most indebted and bankruptcy prone industry has been the shale oil industry. In the last five years, over 200 oil producers filed for bankruptcy. We will see dozens if not hundreds more bankruptcies in the coming year. They were all moribund with oil at $50 dollars; they’re now guaranteed to go bust with oil at $30.

Only now, belatedly, are groups like the IMF waking up to the scale of the problem. In a recent report they warned that central banks have encouraged companies to pursue “financial risk-taking” and gorging on debt. “Corporate leverage can also amplify shocks, as corporate deleveraging could lead to depressed investment and higher unemployment, and corporate defaults could trigger losses and curb lending by banks,” the IMF wrote.

According to the IMF, a downturn only half as bad as 2008 would put $19 trillion of debt—nearly 40% of the corporate borrowing in major countries—at risk of default. The economic consequences would be horrific.

Corporate debt has doubled in the decade since the financial crisis, non-financial companies now owe a record $9.6 trillion in the United States. Globally, companies have issued $13 trillion in bonds. Much of the debt is Chinese, and their companies will struggle to repay any of it given the lockdown and the breakdown in supply chains.

We have not even begun to see the full extent of the corporate bond market meltdown. One little discussed problem is that a large proportion of the debt is “junk”, i.e. lowly rated. An astonishing $3.6 trillion in bonds are rated “BBB”, which is only one rating above junk. These borderline bonds account for 54% of investment-grade corporate bonds, up from 30% in 2008. When recessions happen, these will be downgraded and fall into junk category. Many funds that cannot own junk bonds will become forced sellers. We will see an absolute carnage of forced selling when the downgrades happen. Again, the illusion of safety and liquidity will be exposed by the coronavirus.

—

The average family is encouraged to save money for a rainy day, in case they are fired, or they face hardship. Saving some money is considered prudent. It’s quite different for business. Companies pocket the profits in the good years and ask Uncle Sam to bail them out in the bad years. Heads shareholders win, tails the taxpayer loses.

Industry can’t be blamed for not expecting an act of God or force majeure, but in the past 30 years we have seen two Gulf Wars, 9/11, SARS, MERS, Swine Flu, the Great Financial Crisis, etc. Saving for a rainy day should only be expected in cyclically sensitive industries.

But rather than do that, companies have been engaging in a rather more reckless strategy: borrowing to buyback shares. This may boost their Return on Equity (ROE), but it is not remotely prudent and makes their companies highly vulnerable. Borrowing to prop up their own shares means they have less on hand when hard times come.

According to Barons, “Stock buybacks within the S&P 500 index totalled an estimated $729 billion in 2019, down from a record $806 billion in 2018.”

And then along came coronavirus.

Of those industries that are now seeking a bailout, none has saved for a rainy day. Boeing, the poster boy of financial engineering and little real engineering, bought back over $100 billion worth of stock over the past few years. Today it is asking the government for a backstop to its borrowing.

According to Bloomberg, since 2010, the big US airlines have spent 96% of their free cash flow on stock buybacks. Today, they’re asking US taxpayers for $25 billion.

Airline CEOs have been handsomely paid while not saving for a rainy day. Delta Airline’s CEO Ed Bastian made the most, earning nearly $15 million in total compensation. American CEO Doug Parker $12 million, while United CEO Oscar Munoz earned total compensation last year of $10.5 million.

Further reading

Corporate buyback culture is financial engineering not value creation

By Charlotte Pickles

The cruise liners were little different. Over the past decade, Carnival Cruises paid $9.2 billion dollars in dividends to its billionaire owners and bought back $6.7 billion of shares. Royal Caribbean, which is a smaller company, paid out $2.7 billion in dividends and $1.6 billion in buybacks. And the smallest cruise liner Norwegian Cruise Line spent $1.3 billion on share buybacks.

For years, the cruise lines have triumphantly proclaimed massive dividends and buybacks. For example, Carnival proudly announced in 2018. “In just three years, we have doubled our quarterly dividend and invested $3.5 billion in Carnival stock.”

Cruise lines have no real claim to any bailout. They pay no taxes due to a legal loophole, and all their vessels fly the flags of Liberia, Panama and the Marshall Islands. Furthermore, their owners tend to be billionaires with more than enough financial wherewithal to recapitalise their own businesses. Their shareholders are not among the 1%. They’re among the 0.01% of richest people in the world. In the worst-case scenario, the US has a highly efficient bankruptcy process. Bondholders of today become shareholders of tomorrow, and the companies can have a fresh start. Bondholders would only be more than happy to own the equity of these companies.

Banks, too, will inevitably be asking for bailouts before this is over. Banks have among the most aggressive stock buyback programs of any industry, with some repurchasing a staggering 10% of their outstanding shares annually. The eight biggest banks have announced they will suspend their share buybacks for the next two quarters due to the COVID-19 pandemic on the global economy. In 2019, the top eight banks bought back $108 billion of their own stock.

If any good can come of the current crisis, perhaps it is exposing the irresponsibility of share buybacks and lack of prudence of most companies.

—

Monetary policy was one of the mechanisms employed in response to the last crisis, in the hope its effects would trickle down to the unwashed masses. Central banks bought vast amounts of treasuries and mortgage bonds to tighten financial spreads for banks and borrowers, but none of it went directly to households. It was all intermediated by the financial system and those who had access to capital.

The absurdity of the policy was perfectly illustrated recently in Europe. The European Central Bank has been busy buying bonds, and recently it bought bonds from LVMH, the luxury conglomerate owned by the world’s richest man Bernard Jean Étienne Arnault. The bonds had a negative yield, meaning that the ECB was paying LVMH to borrow. LVMH used the ECBs money to buy Tiffany.

If rates are now so low that billionaires are being paid to borrow, monetary policy has reached the limits of its usefulness.

Investors own stocks because their bond portfolios have acted like a hedge. Whenever stocks have fallen, bonds have gone up. In every downturn since the 1980s, central banks have cut rates, but most government bonds now have close to zero yields.

Extremely low interest rates and high valuations mean that any small change in interest rates will make portfolios much more volatile. If interest rates were to rise even slightly, they would vaporise many bond and stock portfolios. The margin of safety in bonds and stocks has diminished rapidly as rates have approached zero.

The world is now upside down. Many investors now buy stocks for current income and buy bonds to trade given how volatile they have become. Things cannot hold.

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What do high frequency market making, share buybacks and high corporate debt have in common? They are supposedly tools to make trading, growth and returns on capital more efficient and cheaper, yet they have made the system more fragile and less resilient. Perhaps returns on capital and cheapness of market orders and ETFs are less important than stability and anti-fragility, i.e. designing systems that are robust in the face of stress.

We have seen the fragility in supply chains in the recent crisis.When the coronavirus struck in China, suddenly companies everywhere found out that outsourcing all their manufacturing and even medicines and face masks to China might be a problem.

Manufacturing has become less robust, more fragile, even if the returns on capital are better for those companies that outsource everything to China in pursuit of share buybacks.

The lessons of history are instructive. Although planting a single, genetically uniform crop might be more efficient and increase yields in the short run, low genetic diversity increases the risk of losing it all if a new pest is introduced or rainfall levels drop.

Further reading

Have we been played by China?

By James Kirkup

The Irish Potato Famine is one such cautionary tale of the danger of monocultures, or only growing one crop. The potato first arrived in Ireland in 1588, and by the 1800s, the Irish had used it to solve the problem of feeding a growing population. They planted the “lumper” potato variety. All of these potatoes were genetically identical to one another, and it was vulnerable to the pathogen Phytophthora infestans. Because Ireland was so dependent on the potato, one in eight Irish people died of starvation in three years during the Irish potato famine of the 1840s.

The lessons from nature are dire. In the 1920s, the Gros Michel banana was almost wiped out by a fungus known as Fusarium cubense, and banana shortages became a growing problem. The widespread planting of a single corn variety contributed to the loss of over a billion dollars worth of corn in 1970, when a fungus hit the US crop. In the 1980s, dependence upon a single type of grapevine root forced California grape growers to replant approximately two million acres of vines when the pest phylloxera attacked.

Today, China is manufacturing’s monoculture.

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Against this dangerous backdrop of volatility and uncertainty, the coronavirus will now achieve the impossible. For the past few years, two ideas have floated around on the political fringes of the Left, but they have been dead on arrival. No one has seriously thought they might become government policy. Today, the Left and Right in the United States and Europe are embracing them.

Andrew Yang, a former tech executive from New York, ran a quixotic, obscure presidential campaign in the United States based on the idea that every citizen should receive a Universal Basic Income (UBI). He advocated a “Freedom Dividend”. This would be a form of universal basic income that would provide a monthly stipend of $1,000 for all Americans between the ages of 18 and 64.

Today, Trump, Pelosi, Romney and others are fully backing Yang’s idea. Respected think tanks such Brookings and Chatham House have advocated UBI. But once it is implemented, there will be no going back. Handouts will start small and grow.

The other big idea has come from Stephanie Kelton, who advised Bernie Sanders and advocates for Modern Monetary Theory (MMT). Kelton argues that in any country with its own currency, budget deficits don’t matter unless they cause inflation. The government can pay for what it needs by simply printing more money — no reason to borrow by issuing bonds. Helicopter money.

Further reading

Could free cash fix the economy?

By Peter Franklin

Her ideas were widely criticised across the Left and Right, ranging from Paul Krugman to Warren Buffett to Federal Reserve Chairman Jay Powell.

Yet today, the two ideas have come together. There are no atheists in foxholes. Even libertarians on Twitter are now calling for government intervention. Investors and politicians of all stripes are calling for UBI financed by MMT money issuing.

This is an epochal turning point, a great reset. The coronavirus is the grain of sand that will cause the avalanche.

For once the taboo of printing money to pay citizens is broken, we can never go back. Governments will spend money with few constraints, aided by central banks. It’s a strategy that has not worked well in emerging markets, and it did not work well in the 1970s — which has conveniently been forgotten.

Undoubtedly, the government must compensate citizens from mandatory curfews and quarantines. The short-term impacts of the lockdowns must be mitigated, but temporary policies must not become permanent political expedients.

That’s why the danger is not today or even a year from now, it’s five to ten years away, when the crisis has past, along with the reason for UBI and monetary easing. What politician will be disciplined enough to stop spending? What central banker will raise rates when it is unpopular to do so?

Today we are reaping the whirlwind of the last financial crisis. Rather than pursue lower leverage, less debt and more robust institutions and more responsible corporate behaviour, investors and companies instead learned that they would be bailed out in a crisis.

Central banks became enamoured of their own success as fire fighters, and they have busily been trying to put out fires by encouraging reckless behaviour, prizing low volatility above a robust financial system, viewing “risk management” as preferring no financial corrections ever.

They should accept that sometimes putting out every single fire creates greater conflagrations. They should be humbler about the extent and limits of their power.

It looks like they’re about to learn the hard way.

This sense that the 1920s represented something positive and culturally adventurous after the ardour of a decade of crisis and war is real enough. Among artists, writers, musicians and scientists there was a self-conscious willingness to embrace new ideas and to transcend the conservative world of pre-1914; among the wider public, if they could afford it, the 1920s did open up the prospect of motor transport, international travel by the (still dangerous) new air routes, owning a radio or a gramophone.

For the younger generation, those who were too young to serve in or work for the war effort, it was important to place a distance between them and the damaged generation of 1914. Talk of war was not encouraged. Veterans crippled physically or psychologically, or both, were shunned as a reminder of the grim ordeal now over.

The material life of the 1920s was also transformed by the advent of a real consumer revolution and the modern media. In 1922 the BBC was established and within a decade the density of radio ownership in Britain was the highest in Europe. The cinema was everywhere and American films introduced the British public to a new kind of consumerism. Where high fashion had been the preserve of the upper and upper-middle classes before 1914, cheaper imitations were widely available in the 1920s.

The ideal of leisure, completely familiar to our contemporary world, became a possibility for millions for the first time, whether driving in the new cheap motor-cars pioneered by William Morris, Herbert Austin or the American Henry Ford (only the last has survived), or holidaying in British seaside resorts, or taking part in popular sports such as golf or tennis. Lifestyle — again a familiar 21st century concept — made its debut in the 1920s among those with enough money to indulge their taste.

The positive was in evidence not only at home but also abroad. Enshrined in the post-war settlement in 1919 was a commitment to a League of Nations which was supposed to establish “collective security” as a global system to prevent further warfare. The League was never severely tested in the 1920s and British people flocked to join the League of Nations Union established in 1918 in order to educate the public in the virtues of co-operation and collective action. By 1927, there were more than 600,000 members.

Suggested reading

The war that saved Europe from Communism

By Roger Moorhouse

The post-war settlement also granted the British and French Empires control of former Turkish areas in the Middle East, and German colonies in Africa and the Pacific. These were supposed to be mandates held on behalf of the League, but they quickly came to be regarded as part of the Empire. For schoolchildren in the 1920s, the map of the world was filled with pink or red (both colours were used even for areas such as the Sudan or Iraq, which were not formally British possessions) to indicate the vast global extent of the Empire.

Empire Day became an important event in the public calendar reminding people that in the 1920s Britain was the global superpower. In 1924-5 a great Empire Exhibition was held at the Wembley stadium (finally demolished in 2003) which attracted 27 million visitors intent on enjoying the spectacle of British imperial grandeur.

Alongside the hopes for a new age, there nevertheless existed a darker side. Britain was a class society in which the bulk of the population lived on low wages and little welfare. After the wartime boom in production and employment, declining output and unemployment characterised much of industrial Britain. The slow revival of trade and falling prices put pressure on employers to cut wages and for nine days in May 1926 British society was confronted with the first General Strike of workers organised by the Trade Union Congress to demand better pay and conditions for coal miners.

There were widespread fears among the better off and in the government of a radical, even revolutionary movement inspired by the example of the communist October Revolution in Russia in 1917. The strike was broken, but the shadow of revolutionary threat, though never a real one, fuelled uncertainties about the future of Britain’s free enterprise, capitalist system.

In 1929, that system was subjected to its severest test with the onset of the world recession that lasted down to 1932. Although much has been made of the recent global economic crisis in 2007-9, it was modest by comparison with the collapse of trade, falling prices and wages, and mass unemployment ushered in at the end of the 1920s. Britain in 1929 was one of the richest states in the world, but the economy bore no relation to the wealth of today’s economy, and its general availability of welfare.

In the late 1920s, there was no welfare state; people were helped by charities, supported each other in family networks, or relied on meagre handouts for the old and unemployed. It is difficult to imagine today, despite regular complaints that the current welfare system is unjust and inadequate, the degree of sheer economic insecurity and poverty faced by millions of Britain’s labouring classes in that decade.

Suggested reading

How Britain created the Middle East crisis

By James Barr

Fear of the overthrow of capitalism was chiefly a middle-class concern. So, too, was anxiety about the “race”, which had much to do with differences between Britain’s social classes. In the 1920s there emerged a significant “eugenics” movement and the eugenists, both scientists and a broader, informed public worried that the rapid growth of an underclass of deprived and poorly educated Britons would lead to a decline in the genetic quality of the race. Statistics were misused to demonstrate that in 30 or 50 years’ time, the population would be swamped by humans of inferior physical and mental qualities; the middle-classes, those deemed to be genetically valuable, had too few children to compensate for the wider degeneration of the population.

Eugenists argued in favour of sterilisation of the “unfit”, either voluntary or compulsory. A bill presented to Parliament in the early 1930s to allow sterilisation was defeated, but ideas about the “fit” and “unfit” members of the community, now seen as a Nazi policy, had roots in British racial anxieties as well. Marie Stopes, pioneer of birth control in the early 1920s, and often presented as a model for the new progressive age, actually favoured control in order to prevent births that she regarded as a threat to the future of an imperial race.

Popular fears also arose from the prospect of any future war. Despite the confidence of middle-class liberals that the League would somehow guarantee a secure global future, there was also a more pessimistic view that war was built into the great power system or even human nature itself. The pacifist movement that emerged in Britain in the 1920s was small in number but vocal.

The No More War Movement, founded in 1922, campaigned against militarism and the glorification of war; a National Peace Council was set up a year later as an umbrella organisation for all the small and local peace organisations; the Women’s International League for Peace and Freedom, founded in 1915, had branches across the country. Among the many anxieties about future war, none was as important as fear of aerial bombing. First experienced when German aircraft attacked British towns in 1917-18, bombing was seen as a direct threat to ordinary civilians who were defenceless in the face of high explosive, gas or incendiary bombs.

Suggested reading

Russia's brief encounter with the sexual revolution

By Daniel Kalder

The effects of bombing were greatly exaggerated, but the common assumption that bombing might usher in an apocalyptic end to British society, or even Western civilisation as a whole, became embedded in popular views of future war. The absence of any serious international crisis in the 1920s did not damp down the pessimism. Indeed, the optimistic view of the present and the future as an age of progress and peace made the possibility of a descent again into world war all the more horrifying. The tension between the enjoyment of current stability and the prospect of a less stable future gave to the 1920s a bittersweet flavour.

Much the same might be said of the coming 2020s. Although in Britain and the rest of Europe people are healthier, better off and more secure than they have ever been, that very safety creates its opposite, fear of what might happen if the security is challenged.

For Britain, the next decade has become a source of real anxiety. For all the enthusiasm for leaving the European Union, Britain will be sailing into uncharted waters economically, socially and internationally. The sustained consumerism of the past decades makes it difficult to imagine a world in which everyone has to consume less, but it may well happen; British society is now deeply divided over many issues where it was not a decade ago; terrorism has been held in check, but it is always there as a possibility; environmental damage is a constant background noise but one that will become more insistent as the decade goes on. And war? No historian looking at the overconfidence of the 1920s that war was past history would dare to predict what might happen in ten years’ time.

The history of the next decade will not be the same as the 1920s, but it is likely to display a similar tension between hopeful expectation and hidden anxiety as a century ago.