The following is an article I wrote and that appeared in a Progressive Economy Forum publication in September, 2018: 10 Years Since the Crash: Causes, Consequences and the Way Forward.
To fix things we need to first tell ourselves the correct story about how we got here. Financialization is easily the least studied and least explored reason behind our inability to create shared prosperity – despite our being the richest and most successful nation in history.”
Rana Foroohar, in Makers and Takers: the rise of finance and the fall of American business.
After forty years of financial liberalization, a progressive government will face many challenges. One of the biggest will be management of Britain’s finance sector, and together with partners, stabilization of the anarchic and potentially catastrophic international financial system.
The ‘globalisation’ or deregulation of finance since the 1960s has ‘liberated’ financial capitalism from democratic oversight and regulation by accountable governments. It has led to the creation of global markets in money, as well as property, trade and labour. Quinn Slobodian in his book ‘Globalists’ argues that the creation of global markets, remote from democratic oversight, is no accident: it was the clear intention of neoliberal economists to ‘encase’ financial and other global markets and to ‘protect’ them from accountability to democratic governments.
As a result of financial globalization, a great wall of money, unregulated by governments, is today aimed at the world’s finite resources (assets). These include land or property. Global flows of money have inflated property and other asset prices around the world. Global money flows force up prices of assets like stocks, bonds, works of art, brands, vintage cars. These assets are largely owned by the already-rich. Post-crisis economic policies have simultaneously lowered wages in real terms. As a result, global income inequality has exploded.
Rising inequality has led to the return of so-called ‘populist’ political parties, worldwide. These all give expression to the anger and discontent of those ‘left behind’ by financial globalization, and has led to the rise of nationalisms, authoritarianism and, in parts of Europe, even fascism.
The aim of a progressive government must surely be to resist these ugly forces and restore social and economic stability and justice. To do this will mean management of a globalized financial system that fuels inequality and causes regular financial and economic failures, sovereign debt and austerity crises, and associated falls in living standards and job losses. Management of the financial system – at both domestic and international levels – will end regular bank failures and bailouts. It will bring an end to the relentless rises in asset prices and other international imbalances in both trade and capital flows. Management of cross-border capital flows will enable governments to tax big corporations.
Finally, a nation’s public finances will never balance as long as the system of mobile capital and financial deregulation causes regular, and increasingly frequent economic disruption and instability. Management of the financial system is essential if a progressive government is to tackle climate change, create skilled, well-paid jobs and to balance the government’s budget.
The era of deregulation
Financial deregulation came about as monetarist policies turned Keynesian theory and policies on their head. John Maynard Keynes was above all a monetary theorist, not as he is routinely derided by both friend and foe, ‘a tax and spender’. He regarded fiscal policy as an emergency backstop, to be used in cases of crisis. But most important of all, he argued was the responsibility of the public authorities to avoid, and prevent crises, especially financial crises.
Keynes’s overwhelming concern with monetary theory and policy had evolved during and after the crisis of the Great Depression. From that he learned that managing the financial system was vital if the economy is to thrive, and if private and public debts are to be affordable and balanced. His enemies were, and are today, supporters of laissez faire– policies for ‘light touch regulation’ that left management of the financial system to the ‘invisible hand’ – to unaccountable investors in capital markets.
Central to the management of both the domestic and international financial system, Keynes argued, was the management of cross-border capital flows.
Nothing is more certain that the movement of capital funds must be regulated; – which in itself will involve far-reaching departures from laissez-faire arrangements.
(Collected Works Vol XXV, p. 31, 8 September 1941: memorandum: ‘first shot at post-war currency policy’).
The ‘Nixon Shock and the revolt of the ‘Globalists’
Monetarists and other orthodox economists disagreed vehemently with Keynes. In the 1960s and 70s they capitulated to the interests of Wall St and the City of London and lifted controls over cross-border flows of capital.
In 1971 President Nixon unilaterally dismantled the international financial architecture constructed by Keynes and economists at Bretton Woods. President Roosevelt had convened a conference of economists from countries in both the North and South, and was determined to exclude bankers from the deliberations. The economists present had all lived through and learned the lessons of the Great Depression and a devastating World War. They were determined to construct an international financial system that would end the dominance of bankers in determining economic policy, guarantee stability and that would end imbalances in trade between nations.
Those lessons were quickly undone by ‘the globalists’.
The 1970s inflation: blaming the workers
After 1971 the international financial system was gradually deregulated and skewed towards speculative, rent-seeking activity. This resulted in successive inflations and deflations of asset prices, and in the massive inflation of debt at a global level – both private and public.
The cause of the inflation was and is, financial deregulation.
Under a 1971 scheme known as Competition and Credit Control, British bankers were freed up by the Heath government to lend ‘easy money’ at high real rates of interest. They took the opportunity to increasingly lend for speculative activity, including lending aimed at property. Bankers preferred to lend to those willing to pay the highest ‘price’ or rate of interest. This was because only the riskiest, most speculative ventures commanded high rates of interest, and were most profitable.
This expansion of commercial bank credit led to “too much money chasing too few goods and services”. It increased demand and resulted in the notorious inflation of the 1970s. This inflation was and still is blamed on workers – and on the economist most opposed to lax regulation of the finance sector: John Maynard Keynes. Workers were only responding to the rise in prices caused by financial deregulation and insisted, rightly, that their wages kept up. While wage inflation exacerbated the crisis, workers were not the causeof spiralling inflation. Bankers, central bankers, orthodox economists and weak politicians were.
The result was as Keynes had predicted: rampant inflation of prices and of debt, followed by the inevitable crash: deflation of debt, wages and prices, and increasingly frequent financial crises.
Have lessons been learned?
Despite the recurrence of financial crises since 1971, and despite the 2007-9 Great Financial Crisis and its aftermath of sovereign debt crises, austerity, recession and rising inequality, nothing has been done by governments or regulators to transform the system. The deregulated, international financial architecture is as volatile and dangerous as it was before the crisis. Rising interest rates, and the massive inflation of private and public debt once again pose a threat to the global economy. Countries like Argentina, Turkey, South Africa and Indonesia are already battling volatile currency moves and sovereign debt crises.Commentators once again see the emerging market crises as a harbinger for countries at the core of the global economy – i.e. the Anglo-American economies.
Thanks to the maintenance of a system of unfettered financialisation, global debt rose by over $8 trillion in the first quarter of 2018 to more than $247 trillion or 318% of GDP. (IIF) That is almost double the level of debt which imploded and caused the crisis of 2007-9. Then global debt stood at $142 trillion in 2007 and at 269% of GDP, according to McKinsey.[1]This global level of debt is frightening when compared to global income (GDP) which is in the region of only $76 trillion.
The power of bankers is today increasingly concentrated in the hands of the few. America’s top five banks (and all banks are global in their activity) control 47% of banking assets compared to 44% in 2007, and the top 1% of mutual funds have 45% of assets. They are far too big to fail.
The “shadow banking” sector operates beyond the reach of regulatory democracy. Unlike traditional high street banks, shadow banks remain unregulated, even while they lean increasingly on the resources of taxpayer-backed central banks. In 2010, and on a conservative definition, the shadow baking sector controlled 13% of the world’s financial assets: a $28 trillion. Today the sector controls a whopping $45 trillion of the world’s assets – in other words our pensions and savings.
Finally, while financial institutions have had to cough up fines of more than $321 billion, the only bankers who have done jail times are those that committed crimes unrelated to the crisis – like the traders who rigged the Libor rate. (FT 7 Sept 2018).
Because of the failure by governments to restructure and re-regulate the international financial architecture after the Great Financial Crisis of 2007-9; and thanks to massive taxpayer-backed bailouts and guarantees, business is better-than-usual for global financiers. As Professor Vogl of Princeton University has argued:
the crisis has proved itself as a way to solidify the existing economic order…One can thus argue that the financial and economic state of emergency in recent years has given rise to …action that resembles a continuous coup d’Etat.” (INET Berlin, 2012. [i])
Because of the failure to transform the system, bankers in both the traditional and shadow banking system, continue to lend speculatively to the riskiest borrowers (both at home and internationally) at high real rates of interest. They gamble with the world’s savings and pensions in the shadow banking system; and both banks and big corporations dodge regulatory democracy by moving profits across borders into tax havens.
As Labour’s National Executive argued back in May, 1944, all widespread trade depressions in modern times have financial causes; successive inflation and deflation….reckless speculation, and overinvestment in particular industries.
To restore stability both to Britain, but also the global economy will require a progressive government to comprehensively tackle the “financial causes” of economic failure.
[1]McKinsey, February, 2015: Debt and not much Deleveraging.
[i] Professor Joseph Vogl, INET Conference Berlin, April 12, 2012, Panel: Sovereignty Effects
Which Way Forward? https://www.ineteconomics.org/uploads/papers/Vogl-Paper.pdf