As the global financial crisis continues to stagger forward, one thing remains particularly astonishing: the apparent success of the claim that it is primarily government actors who are to blame for the current state of affairs.
The financial crisis, which for one brief moment in the fall of 2008 seemed to reveal the dangers inherent in an increasingly deregulated global financial system, has instead been successfully reframed as the result of regulatory failure. At the same time, the part played by the reckless ambition of financial speculators and their energetic enthusiasm for circumventing financial regulations has been largely forgotten.
In most quarters talk of “market failure” has been eclipsed by a more familiar rhetoric which blames incompetent regulators and spendthrift governments. According to this logic the debtor states facing chronic financial crisis have no one to blame but themselves and the remedy to their troubles lies in “tightening the belt” on government spending. But is this really the case? How can one so easily forget the bigger picture and overlook the part played by global financial actors? More important, what lessons can be drawn from the current crisis and what might be obscured by accepting the simplistic explanation that unsustainable government spending is at the root of the problem?
Politics and finance
Arguably the ongoing crisis is part of a much larger struggle that is more political than economic. Fundamentally, it is about “who gets what, when and how” – in other words, as Harold Lasswell so concisely defined the term, it’s about politics.
The organization of international finance is not a natural phenomenon. On first glance, however, the power relations inherent in the arbitrary system of rules and practices governing international finance may not be apparent. Finance is notoriously technical and, for most of us, the rules and practices surrounding the organization of international financial relations remain eyeglazingly boring.
In this mind-numbing quality lies an important strategic advantage. For many potential critics, finance simultaneously appears to be too technical to be political and too complex to master. It is this quality that conveniently leaves the field free for those who do appreciate and benefit from its substantial possibilities.
Manias, panics and crises
Clearly an active, innovative and stable financial system is necessary for a healthy economy. But what has developed over the past four decades is an international financial system which is prone to irrationality, over exuberance and crisis. As Kindleberger documents, the tendency to “manias, panics and crises” has long been a feature of finance.
Recently, however, many international financial institutions have grown too big to fail without endangering the entire system. As a result we now have a system which generates fantastic profits when times are good but requires public bail outs during crises. In effect this system privatizes profits but socializes losses.
Since the 1970s it has become commonplace to assert that finance should be self regulating. The Glass Steagall Act passed in 1933 was overturned in 1999 for just this reason. Yet, in spite of claims that financial deregulation will produce a more efficient financial order, it has instead produced an explosion of debt backed primarily by a combination of greed and irrational exuberance.
This is by no means the first time that public money has been required to bail out private excess. The third world debt crisis followed a similar path. In the 1970s the collapse of the Bretton Woods system generated increased opportunities for international bankers at the same time as the oil crises produced large pools of petrodollars seeking investment opportunities.
As private international lending surged, the herd mentality of bankers seeking new opportunities in the developing world was reinforced by opinion leaders such as Walter Wriston, the chairman of Citicorp, who famously claimed that this lending was secure because “countries don’t go bankrupt.”
By the summer of 1982, however, the first Mexican financial crisis demonstrated that countries could indeed go bankrupt. This marked the official start of the third world debt crisis and, in the following decades, country after country faced default. Time and again public intervention was necessary to contain financial contagion and prevent the financial house of cards from tumbling down. Today a similar dynamic is emerging but this time it is the developed world which is at the center of events.
The interference myth
Since a healthy international financial system is necessary to the global economy, it is important to consider how international finance is organized. The assertion that finance functions best with only minimal government “interference” has not been supported by recent events. While minimal regulation may serve the short-term interests of some, it eventually results in crisis. This is not an efficient way to organize such an important part of the global economy. While it may be true that bad regulation is no better that no regulation, neither state of affairs is desirable.
Ideally, what is needed is an international regulatory system in which private practitioners as well as public regulators pool their expertise and work together in an atmosphere of mutual respect to create the conditions for the healthy and sustainable financial system. It is high time that private financial actors looked beyond individual self interest and accepted their responsibility to the larger community.
Too big to fail?
At present the international financial system is unprecedented in scope and scale. It is too big to fail and yet it is failing states. During crises taxpayers must bail out financial institutions or lose hope of a stable financial system and with it any hope of a prosperous economy. But what do taxpayers get for their investment? They are cautioned not to ask for shares or nationalize rescued institutions. Instead privatization remains the mantra and liberalization the goal.
Such arguments, put forward by some of the most respected and wealthy members of society, continue to have tremendous resonance. Many who benefited from government intervention are now emboldened to blame the very governments that rescued them.
An enormous public relations offensive is underway in which the ongoing crisis is being reframed as a failure of regulation and therefore a failure of government. There is no recognition of the anti-regulation consensus or the chronic underfunding of regulatory organizations in the period which led up to the crisis. Instead the assertion that governments are inefficient and that markets must be “free” is repeated again and again. In such an environment it is particularly important to remember that the blame for the current crisis lies in the private financial sector and it was public actors who averted disaster.
At present we live with an international financial system that not only institutionalizes but also rewards reckless behaviour. Clearly privatizing profits and, when you encounter difficulties, socializing losses is nice work if you can get it. It is, however, up to government actors and all those who defend the interests of citizens and taxpayers to be aware of this dynamic and work toward implementing a regulatory order capable of ending this peculiar state of affairs. To accomplish this, it will undoubtedly be necessary to challenge the assertion that international finance must be self-regulating while firmly keeping in mind the inherent limitations of the private financial sector.
Elizabeth Friesen is an academic and researcher