Responding to Jeff Madrick’s recent post on the US financial regulation legislation, Triple Crisis guest blogger Robert Wade argues for the need to consider “external” causes of the global financial crisis.
I agree with and admire the lucidity of Jeff Madrick’s post — as far as it goes. But (for understandable reasons) it keeps the spotlight trained on microeconomic financial regulation, as does most of the debate. My concern is that the focus on financial regulation obscures the important role of “external” causes in contributing to financial instability (external to national financial systems), and obscures the pressing need for policy reforms to curb these external causes. I highlight two external causes: (1) national income inequality; and (2) international payments imbalances. I argue that if high income inequality and large international payments imbalances are not curbed, we run a serious risk of repeat crises – because the microeconomic efforts to re-regulate and re-structure national financial systems will be eroded or swamped by the force of these more macroeconomic external causes.
Paul Volcker says the financial reregulation bill passed to much hoopla by Congress in mid-July deserves only a grade of B. Sheila Bair, head of the Federal Deposit Insurance Corporation, says the Basel committee of the Bank for International Settlements is already backing off stern capital requirements for banks that the bill was supposed to establish. Michael Mandel, the former chief economist of Business Week, says he cannot even tell you what the financial regulation bill is trying to accomplish.
To most people, the new financial reregulation package must look like the work of a bunch of Congressmen, along with the President’s economic team, plugging holes in a dam. The Obama Treasury got the nation off on the wrong track when it issued its June 2009 white paper. It basically listed a series of problems that had to be dealt with. Does anyone have a sense which are the biggest holes, how many there are, and whether we’ve really plugged them? Or why there were holes in the first place?
In the immediate aftermath of the global financial crisis even the deepest market fundamentalists embraced the core Keynesian insight that when in deep recession, monetary policy will be ineffective and fiscal stimulus is required. They have now abandoned that view as calls for fiscal austerity abound regardless of the increasingly fragile nature of the global recovery.
While economists and policy-makers debate the short and medium-term remedies to the crisis, there is an incredibly surprising and under-discussed consensus emerging for the longer run. From the Financial Times to the South Centre there is agreement that the United States and East Asia (notably China) have to change the ‘structures’ of their economies.
The more things change, the more they really do stay the same. For a while after the global crisis, we were told that the IMF had changed its position with respect to the strict and generally pro-cyclical measures it had been suggesting to countries in the throes of financial or balance of payments crisis. Their economists openly accepted the need for fiscal stimuli and generally counter-cyclical macroeconomic policies to combat the recession.
According its own internal review in September 2009, the IMF has really changed in this respect: “Internalizing lessons from the past, (IMF) programs have responded to country conditions and adapted to worsening economic circumstances to attenuate contractionary forces…The stance of fiscal policy in most cases has been accommodative and adjusted to evolving conditions. Deficits were allowed to rise in response to falling revenues and, in cases where domestic and external financing was lacking, this was facilitated by channeling Fund resources directly to the budget.”
The recent global debate over the pay of bankers has raised issues that are basic to economic theory, and to moral and political philosophy, simultaneously. One question concerns what level of pay is necessary in order to attract people to do a certain job, and to do it effectively. Another question concerns what level of pay would be appropriate, fair, or just to pay people to do that job. Both are entailed in the current debate on the pay of bankers (particularly investment bankers).
The G-20, and more recently the European Parliament, as well as individual countries (especially Germany, France and the UK) have promoted the institution of new norms to govern the pay of bankers, requiring for example that their pay should be spread over a number of years, or be provided in part in the form of shares or other instruments, the return of which will depend on the success of the bankers’ strategies over a longer period than previously.
Following up on Kevin Gallagher’s Triple Crisis post on the proposed US-China investment treaty, Gallagher has outlined in a recent column in The Guardian how the pending Korea-US Free Trade Agreement would prevent the Korean government from doing precisely what it is now doing to manage the financial crisis: control the flow of foreign currencies.
“South Korea will join the growing group of nations that have recently resorted to currency controls in the wake of the global financial crisis. As a rash of new research has shown, such controls are legitimate tools to prevent and mitigate financial crises.
“Yet if the pending South Korea-US free trade agreement that the US just agreed to expedite at the G20 meetings had been ratified by now, South Korea’s actions would be deemed illegal.
“As the Obama administration works to put Bush-era trade policy behind and forge a ’21st century trade policy’ it should fix this flaw that could be fatal to South Korea’s financial stability….”
There is only one message that comes out of Toronto, where the G20 summit has come to an end. The formation, ostensibly created to reflect changing power equations in the world economy, serves no purpose. It has turned out to be one more talking shop in which agreement to disagree is presented as a consensus.
The disagreement that matters today concerns the near-global rush to reduce public debt by curtailing government expenditures. Occurring so soon after the Great Recession this policy stance is threatening a second recessionary dip.
On Tuesday, June 29 the World Trade Organization’s Committee on Financial Services will hold its much anticipated session on the WTO and the financial crisis. Developing countries should follow this session with great scrutiny. The WTO has claimed that it played no negative role in the financial crisis. However, research by the IMF and the UN suggest otherwise.
Work by independent economists, the IMF, and the World Bank has shown that those nations that capital account liberalization is not associated with economic growth in developing countries. Indeed, developing nations need to cross a minimum threshold of institutional development before such liberalization can help spur growth.
Almost two decades ago, Francis Fukuyama, at the peak of the hubris and arrogance of neoliberal thinking, famously suggested that history had ended. The unfolding of the European crisis may finally prove him wrong. It is true that the failures of the Washington Consensus during the 1990s led to a revival of the left in Latin America, starting with the election of Chávez in 1998. However, I would venture, risking being a bit Eurocentric, that political changes in the periphery are seldom capable of having global effects in the same way as changes in the center of the capitalist system.
On the other hand, the crisis of the euro, and the adjustment measures taken by the European countries may prove more significant as a way of bringing back the old coalitions that were instrumental in building the Welfare State. There are at least two elements in the rescue packages implemented in Greece and Spain that are particularly wrongheaded and will have a terrible social impact.