The Next Crisis: Undermining Democratic Legitimacy

Daniela Schwarzer

In the euro area, the crisis mood has somewhat calmed down. Several events in late 2012 have reduced the tensions. Among them are the European Central Bank’s announcement of its bond-buying programme OMT, the agreement on the creation of a banking union (however incomplete it may be for the time being) and the launch of the permanent European Stability Mechanism (ESM). The relief the euro area is experiencing at the moment may, however, only be temporary. Risks are emerging all over. The more obvious challenges still lie in the financial sector and in public finances – and further  steps of crisis management and integration may indeed prove necessary to tackle them. Less obvious and more complex to solve are the political and social challenges.

The debate on the EU’s democratic legitimacy has gained pace. The European Union is quite used to discussing its democratic deficiencies. This post argues that the current crisis adds new dimensions to an old problem. The immature governance structures of the currency union prevent it from providing what European integration has been based on since its start: output legitimacy. While it is today (still) uncontested that European integration contributes to maintaining peace on the continent, it is hard to argue that the euro zone has sufficient instruments at hand to ensure long-term economic growth, social stability and sustainable public finances.

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Democratizing Finance

Sasha Breger Bush, Guest Blogger

Back in 2003, Yale economist Robert Shiller noted in his book The New Financial Order, “We need to democratize finance and bring the advantages enjoyed by the clients of Wall Street to the customers of Wal-Mart” (1).  More recently, Shiller’s 2012 article in The New York Times connects suggestions to “democratize finance” to the Occupy Wall Street Movement: “Finance is substantially about controlling risk. If risk management is suitably democratized, and if its sophisticated tools are better dispersed throughout society, it could help reduce social inequality.” Among Shiller’s proposals, in the older book and more the recent article, are for income insurance based on occupational derivatives and financial innovations to manage old age risks, thereby reducing pressures on welfare based entitlements like Social Security. Efforts to democratize finance in the advanced industrial economies are mirrored in development policy circles, where officials from the World Bank and UNCTAD, among other agencies,  have been recommending for many years now that certain kinds of derivatives markets (largely for commodities and the weather) be re-tooled to better meet the needs of the agrarian poor.

On the surface, such efforts appear to be rather successful. As I detail in my recent book, derivative exchanges have proliferated across the developing world over the past several decades, with 23 of the top 50 derivatives exchanges (by volume) located in the global South in 2010.  This same year, the most rapidly growing derivatives exchanges in the world were located in Asia and Latin America.  Between 2003-06, commodity derivative contract volume outside of the OECD well surpassed that within. And, in 2009, China’s Securities Regulatory Commission announced that China had become the largest commodity derivatives market in the world, contributing over 40% of global volume. On the micro level, commodity and weather derivative contracts are being transformed into retail products, designed for use by smaller and poorer actors who have traditionally been excluded from global derivatives trading—e.g. retail crop insurance based in weather derivatives markets (“weather-index insurance”), agricultural producer bonds with built-in price insurance (like Brazil’s rural product bonds), and other mechanisms for passing on the risk management services of derivatives to those unable to participate directly in the markets.  What could be more democratic?

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Is Income Distribution Holding Up the Recovery? Stiglitz Versus Krugman

Matias Vernengo

A friendly debate between Stiglitz and Krugman (and also further comments here) on the role of income distribution in the recovery has been getting some attention in the blogosphere. Note that I don’t think neither Krugman nor Stiglitz would deny that worsening income distribution was not relevant for the crisis, even if they were slower than some heterodox economists like Jamie Galbraith or Bob Pollin, to name two, in emphasizing the role of inequality. The question is whether inequality has been central for the slow recovery in the last few years.

Stiglitz’s main reason for suggesting that the recovery has been stifled by inequality is that “middle class is too weak to support the consumer spending that has historically driven our economic growth.” Krugman, for some reason, thinks that this argument is a long run one, and suggests that while: “it’s true that at any given point in time the rich have much higher savings rates than the poor. Since Milton Friedman, however, we’ve known that this fact is to an important degree a sort of statistical illusion. Consumer spending tends to reflect expected income over an extended period.” However, he thinks that “you can have full employment based on purchases of yachts, luxury cars, and the services of personal trainers and celebrity chefs.” In other words, worsening of income distribution might actually help the recovery.

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The IMF's Half-Step

Kevin Gallagher

“What used to be heresy is now endorsed as orthodox,” John Maynard Keynes remarked in 1944, after helping to convince world leaders that the newly established International Monetary Fund should allow the regulation of international financial flows to remain a core right of member states. By the 1970’s, however, the IMF and Western powers began to dismantle the theory and practice of regulating global capital flows. In the 1990’s, the Fund went so far as to try to change its Articles of Agreement to mandate deregulation of cross-border finance.

With much fanfare, the IMF recently embraced a new “institutional view” that seemingly endorses re-regulating global finance. While the Fund remains wedded to eventual financial liberalization, it now acknowledges that free movement of capital rests on a much weaker intellectual foundation than does the case for free trade.

Read the full post at Project Syndicate. (c) 1995-2012 Project Syndicate

Triple Crisis Welcomes Your Comments. Please Share Your Thoughts Below.

The IMF’s Half-Step

Kevin Gallagher

“What used to be heresy is now endorsed as orthodox,” John Maynard Keynes remarked in 1944, after helping to convince world leaders that the newly established International Monetary Fund should allow the regulation of international financial flows to remain a core right of member states. By the 1970’s, however, the IMF and Western powers began to dismantle the theory and practice of regulating global capital flows. In the 1990’s, the Fund went so far as to try to change its Articles of Agreement to mandate deregulation of cross-border finance.

With much fanfare, the IMF recently embraced a new “institutional view” that seemingly endorses re-regulating global finance. While the Fund remains wedded to eventual financial liberalization, it now acknowledges that free movement of capital rests on a much weaker intellectual foundation than does the case for free trade.

Read the full post at Project Syndicate. (c) 1995-2012 Project Syndicate

Triple Crisis Welcomes Your Comments. Please Share Your Thoughts Below.

Position Limits for Agricultural Commodity Derivatives: Getting Tougher or Tough to Get?

Jennifer Clapp

For those following the debate on commodity market speculation and its relationship to food price volatility, these are interesting times. Recent months have seen important developments in both the US and the European Union as regulators seek to reform financial markets in a bid to reduce excessive speculation in agricultural commodities. The regulatory outcomes in these jurisdictions will influence whether we end up in a race to the top or a race to the bottom with respect to the rules that govern financial investment in agricultural commodity derivatives.

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Paying Dexia's Debts: The Risks of Globalized Finance

François Chesnais, Guest Blogger

The story of Dexia Group or Dexia S.A. is that of the rise and fall in less than twenty years of a diversified financial services corporation, small by global standards but which tried to play in the first league. It is the story also of taxpayer money spent uselessly trying to salvage the bank by two governments at the very time they were axing socially important expenditures. This is why the political demand for true nationalization under citizen control put forward since 2010 by the Left and those in the no-global movement, notably Attac, has focused in particular on Dexia.

This story began in the 1990s, at the time financial euphoria was rampant on both sides of the Atlantic, with the privatization of Belgian and French financial institutions. In Belgium, privatization primarily concerned the Gemeentekrediet van België / Crédit Communal de Belgique, which had been set up in the 19th century and was still owned in part by municipalities. The bank became a retail bank and took the path of international acquisitions and mergers, notably in neighboring Luxemburg. In France, an entity named CAECL (Caisse d’aide à l’équipement des collectivités locales) established in the post-World War II period, converted into a new public corporation named Crédit Local de France, with a mandate and status permitting it to expand through acquisitions. A US subsidiary, the CLF New York Agency was set up in 1990. In 1991 a proper initial public offering took place on the Paris Stock Exchange, with a distribution of shares between the French State (25.5%), the Caisse des Dépôts (25%) and individual investors from France and abroad (49.5%).

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Paying Dexia’s Debts: The Risks of Globalized Finance

François Chesnais, Guest Blogger

The story of Dexia Group or Dexia S.A. is that of the rise and fall in less than twenty years of a diversified financial services corporation, small by global standards but which tried to play in the first league. It is the story also of taxpayer money spent uselessly trying to salvage the bank by two governments at the very time they were axing socially important expenditures. This is why the political demand for true nationalization under citizen control put forward since 2010 by the Left and those in the no-global movement, notably Attac, has focused in particular on Dexia.

This story began in the 1990s, at the time financial euphoria was rampant on both sides of the Atlantic, with the privatization of Belgian and French financial institutions. In Belgium, privatization primarily concerned the Gemeentekrediet van België / Crédit Communal de Belgique, which had been set up in the 19th century and was still owned in part by municipalities. The bank became a retail bank and took the path of international acquisitions and mergers, notably in neighboring Luxemburg. In France, an entity named CAECL (Caisse d’aide à l’équipement des collectivités locales) established in the post-World War II period, converted into a new public corporation named Crédit Local de France, with a mandate and status permitting it to expand through acquisitions. A US subsidiary, the CLF New York Agency was set up in 1990. In 1991 a proper initial public offering took place on the Paris Stock Exchange, with a distribution of shares between the French State (25.5%), the Caisse des Dépôts (25%) and individual investors from France and abroad (49.5%).

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Financial Instability as a Threat to Sustainable Development

Yilmaz Akyuz

As seen over and again during recurrent financial crises in both developing and advanced economies (DEs and AEs), financial instability and boom-bust cycles undermine all three ingredients of sustainable development – economic development, social development and environmental protection.

Financial bubbles generate excessive investment, which remains unutilized for an extended period even after full recovery from the ensuing financial crisis. This includes investment in industry, as in Japan in the late 1980s and early 1990s, as well as in property, as seen during the current crisis in the US and Europe. This is the main reason why recoveries from financial crises see little investment.

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Importing Risk into Insurance

C.P. Chandrasekhar

On October 4, in a cabinet decision that had been predicted by the media and expected by the stock market, the United Progressive Alliance (UPA II) government announced hikes in the ceiling on foreign equity ownership from 26 to 49 per cent in units in the insurance sector and from nil to 49 per cent in the pension fund industry.

The immediate motivation for approving these measures was the government’s declared intent of winning the approval of international rating agencies and foreign investors. To that end, the insurance reforms were presented as part of a set of decisions, including clearance for FDI in multi-brand retail and civil aviation, hikes in diesel and LPG prices and changes to the forward contracts regime, announced end-September and early-October.

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