Tag Archives: financialization

On politics and finance

30 Nov

Buried under the frenzy around the Leveson report was the British government’s coup of attracting Mark Carney, governor of the Canadian Central Bank, to London. Apparently ruled out of the running, much to the chagrin of those who felt he was the best man for the job, Carney has now been appointed as governor of the Bank of England and will take up the job next summer. For those who view these appointments as purely about expertise and experience, this is a great victory. Gone it would seem are the mercantilist days where nationality, wealth and government policy were so closely aligned. The cosmopolitan financial press, from the Financial Times to The Economist, are satisfied. Britain, it seems, is a pioneer in these international recruitments for national institutions: think of the English football team. That Carey was a Canadian certainly helped make him acceptable to the British establishment. He’s sort of one of us, after all, runs the sentiment. But the principle still stands that positions such as these are all about competence and expertise. There is no politics or partisanship here and the appointment of Carney, we are told, is proof of that.

It is also proof of a number of other things. One is that there is emerging a cadre of elite central bankers who move relatively seamlessly from one appointment to another. National boundaries seem less restrictive than in the past. This holds true to some degree at the global level, where competition for posts such as head of the IMF or the World Bank has become more intense. The old Bretton Woods division of the spoils between Europe and the United States is coming under serious pressure and may not survive the next round of appointments. And nationally, central banks are opening up with Britain leading the way. Curiously, the European Central Bank in this regard is behind the times: its appointments are rigidly based upon the principle of achieving balance between nationalities. The unfortunate Lorenzo Bini Smaghi was edged out of the ECB executive board because it wouldn’t do to have two Italians in there and no Frenchman. Draghi became director, Smaghi was out, and Benoit Coeuré was in. This seems rather old hat and overly political compared to the forward looking Bank of England. Whether other central banks follow Threadneedle Street’s example is unclear but the principle has been established and there is no short supply of expert central bankers.

It is also proof that the way we understand banking, finance and monetary policy today is entirely free of political principle. The struggle between banking and financial interests and those of elected representatives is a long-standing and epic struggle. There is nothing new there. But central banks have often been seen as exceptions. They are, after all, lenders of last resort and in that respect are eminently political institutions. Those critical of the ECB in the current crisis have often suggested that it’s role should become more, not less, political in so far as it needs to act in order to save the Eurozone from collapse. Yet the implication of Carney’s arrival is that the tie between central banks and national politics should be cut. This is a mistake. Carney may be Canadian but the Bank of England remains firmly part of the functioning and survival of the British economy. And the Bank of England should still be understood as an agent of national capital, in spite of who is running it.

Carney’s appointment also chimes with a more general feeling that politics is seeping out of macro-economic policy as a whole. Illustrative in this regard is the debate underway at the moment around who might replace Tim Geithner as US Treasury Secretary. One name that has been floated around, and who the FT considers a realistic outside contender, is Larry Fink. As head of the biggest asset management group in the world (BlackRock manages around 3.7 trillion US dollars of assets), Fink is a heavy-weight figure, as important as those running the big Wall Street banks. However, his entire background is in finance. He certainly has views about how the US economy should be run but to appoint Fink would be to give the job to an expert. And this is not a job as central banker but as Treasury Secretary, an ostensibly political appointment. Of course, experts have long been appointment to this position. There is even talk of Geithner stepping down and joining BlackRock and Fink moving in to take his place. Were this to happen, it would illustrate how firmly financiers dominate economic policymaking and how expertise in finance has become the baseline for political appointments within the US Treasury.

As we’ve argued before on this blog, expertise does matter in politics. But the overwhelming tendency today is to view macro-economic policy as a purely technical realm, rather than as one where technical questions co-exist alongside fundamental differences of political principle and alongside important moral questions. Such a tendency has the effect of shielding economic policy from public criticism and gives to public financial institutions like central banks a veneer of political and social neutrality. In fact, no amount of expert knowledge can obviate the need to make political choices. The most honest experts will say that various scenarios are possible and that the choices depend upon what outcomes we want. It is these outcomes that we should be debating, not which expert can magically solve our ethical and political dilemmas about what sort of society we want to live in.

Varieties of finance?

17 Oct

In a previous post, we looked at the structure of the European banking system. We asked whether there was a particular European story that can help explain the sorry state of the current European economy. It was noted that the size of the European banking sector, so much larger than in the United States, reflected the central role banks in Europe play in financing the private sector. In the US, there is more reliance on capital markets than on banks and so the assets to GDP ratio of US banks is much lower than in Europe.

Can we transform those differences into something more systematic? Do differences in financial markets point to deeper and broader differences between different types of societies? The question here is whether there exists the same kind of variety in financial sectors as there does in capitalist economies more generally. A popular way of classifying capitalist systems is according to type: liberal market economies, coordinated market economies and mixed market economies. This is the famous “varieties of capitalism” approach. Can we say that the financial sectors in Europe are shaped by these national institutional factors? One basic distinction, for instance, is between market-based and relationship-based borrowing and lending. In more liberal market economies like the UK, companies are expected to rely more on the open market as a source of finance. In a coordinated market economy, corporate financing is fed through bank-to-business relationships.

Finding out whether any of these patterns exist in the date on financial markets is not easy. Interest has tended to be in the ties between business and politics, not in the correspondence between differences in financial markets and broader varieties of capitalist production. But there is some data out there. In the Liikanen report on the European banking industry, we see little evidence for these kinds of patterns. In terms of the balance between stock market capitalization, total debt securities and bank assets, we do see differences between Europe and the US. But within Europe, a supposedly liberal market economy like the UK has bank assets that massively outstrip any other European country and offsets its larger stock market capitalisation (p119 of the Liikanen report). The data on financial institutions and markets collected by Thomas Beck, Ash Demirgüç-Kunt and Ross Devine (available here) is extensive but suggests that the biggest difference is between income levels, not between varieties of capitalism. Another way of thinking about the varieties of financial markets is whether it can help explain different national government responses to the current economic and financial crisis. One study of this by Beat Weber and Stefan Schmitz (available here) found that institutional factors did not in fact influence very much the rescue packages put together by European governments. They point instead to other factors. The degree of inequality in society, which they take as an indication of the fact that policymakers in those countries use access to credit as a substitute for higher wages (what Colin Crouch calls “privatized Keynesianism” – see here), is for them one element that explains the form the government bail-outs took. On the varieties of capitalism, they note that as an approach it is focused more on production and not on financial systems. It has therefore little to say about financialization as such.

National differences remain important and a feature of the current crisis is the difference in the national responses. Behind efforts to build a common European response are national bail-out packages that differ greatly in terms of size and in the strictness of their conditions. But financialization as such, and the boom of the late 2000s, was common to many high-income countries. By way of explaining the current crisis, Beck and his colleagues write that “the lower margins for traditional lines of business and the search for higher returns were possible only through high-risk taking” (p78 of this paper). The implication here is that the lack of profitability in the real economy drove the expansion of financial activity in the 2000s. This explanation isn’t perfect but it certainly helps us understand why it has been so difficult for governments to return to positive growth. If financialisation was itself more symptom than cause, then we are still left with the causes of the crisis today.

The state of European banking

5 Oct

 

In his assessment of a new report published on banking reform within the EU, Martin Wolf starts off with an arresting statistic. In 2010, he writes, US banks had assets worth 8.6 trillion Euros. Banks in the EU had assets worth 42.9 trillion Euros. For the US, those assets represented 80% of GDP; in the EU, they represented 350% of GDP. The EU’s banking sector, claims Wolf, is too big to fail and “too big to save”.

Wolf’s fact raises interesting questions. Can we say that in Europe the expansion of the financial sector has been so significant that it dwarfs developments in the US and gives us an explanation for Europe’s current sovereign debt crisis? Explanations of the Eurozone crisis have in recent months increasingly focused on governance issues tied to the Eurozone itself and to poor economic performance of many Eurozone economies. Is the implication that the crisis is a European affair?

A useful place to look in order to answer these questions is the report that Wolf cites, put together by a group of experts and led by Errki Liikanen, governor of Finland’s central bank. Most of the coverage of the report has been about its recommendations: ones that are not so different from those of the Vickers report in the UK (see here for a comment on Vickers). However, the report itself gives a detailed account of the crisis and of the transformations in the European banking sector.

In general, it implies that whilst there is variation, there is no “European exception”. The origins of the crisis lie in the collapse in the sub-prime mortgage market in the United States, which put a number of lending institutions into serious difficulty. This localized crisis quickly fed through an internationalized financial system to affect non-US institutions. Many European banks were left with very bad loans on their books: the German bank, Deutsche Industriebank IKB, was one of the first to be bailed out by the Bundesbank. As early as August 2007, the interbank lending market in Europe dried up altogether: the ECB had to step in with an injection of 95 billion Euros. In December of the same year, it injected a further 300 billion. At issue here is the generalized dependence of US and European financial institutions on what turned out to be very bad loans.

On the size of the assets of European banks, compared to other parts of the world, the report also has a lot of good information. The report notes that the EU banking sector is very large when compared with other countries and regions, as the figures above make clear. However, it notes that this reflects the fact that bank intermediation plays a bigger role in Europe than elsewhere. What this means is that banks are the principal source of private sector financing in Europe in contrast to the US for example. Banks in Europe also have mortgages on their balance sheets, whereas in the US Fannie Mae and Freddie Mac soak up these mortgages and are government-sponsored institutions. The staggering difference in the assets of banks in Europe and the US is not automatically a sign of different trends in financialisation but points also to some more long-standing differences in the nature of private sector financing. The report also notes that the restructuring of the banking sector which occurred in the US post-Lehman, in particular the collapse of small and medium-sized banks, has not occurred in Europe. The level of total assets has thus remained constant, propped up by ECB and national government intervention in Europe. Here there is a marked difference between Europe and the US: interventions in Europe have prevented restructuring, in the US they were a conduit for change.

There is no particular European story to the growth of the financial sector in Europe. Some specific features of bank intermediation have interacted with more generic features of financialisation that we can observe in Europe and elsewhere. What is less clear from the report itself is whether the growth of the financial sector has been the result of changes within the non-financial sector, a freer regulatory environment or simply the working out of a speculative frenzy within financial institutions aiming to make more money in the short term, with little regard for longer term consequences. The recommendations of the report suggests it believes that the latter two factors are the most important.

A comment on Soros

18 Sep

For a long-time a bête noire amongst pro-Europeans because of his status as the financier that forced Britain out of the Exchange Rate Mechanism and thus cemented the UK’s outsider status in European monetary integration, George Soros has recently emerged as one of the most authoritative commentators on the ongoing Eurozone sovereign debt crisis. His most recent article in the New York Review of Books was one in a long line of alarmist but thoughtful interventions into the debate.

Soros’ main argument is that Germany needs to choose between either fully backing the Euro or leaving the Eurozone altogether. Lacking the will to act as paymaster, but determined to keep the Euro together, Germany has been accepting the bare minimum that is needed to keep the currency union together. According to Soros, this is a case of the cure being worse than the disease. By insisting on national responsibility for EU-incurred debts, Germany risks recasting the egalitarian European integration project around the twin poles of creditor and debtor. Debtors are pushed into deflationary traps as they struggle under debt burdens and national antagonisms deepen as debtor states survive on a Euro drip provided by miserly creditors. All in exchange for deep cuts in social protection and welfare.

The novelty of Soros’ argument lies in his claim that a German exit from the Euro would save rather than sink the currency. His reasoning is clear. When a debtor – like Greece – leaves the Euro, the benefits of a depreciating new currency are offset by the strangling effect of Euro-denominated debts rising dramatically in value. When a creditor like Germany leaves the Euro, however, the situation is different. The creditor, of course, faces a loss. But those remaining in the currency zone benefit enormously: depreciation of the Euro would bring competitiveness back to Eurozone members and the main political obstacle to further political integration –German obstructionism – would have disappeared. The Eurozone would be free to introduce key measures – debt mutualisation, for instance – that would exist were it not for Germany.

By blaming Germany, Soros’ argument appears as part of a more generalized anti-German sentiment popular all across Europe. In fact, Soros himself seems rather comfortable with the idea of a German-dominated Europe. He would just rather that Germany accept the responsibility that comes with empire. As he puts it, “imperial power can bring great benefits but it must be earned by looking after those who live under its aegis”. Soros’ advocacy of German paternalism is hardly a compelling vision. But his focus on the German origins of the crisis are welcome as they challenge the notion that profligate spending by Southern cone European governments is at the heart of the current mess. But there are limits to the blame game.

It is certainly the case that German banks and businesses benefitted from the introduction of the Euro. In particular, it meant that consumers in Southern Europe could – via public or private borrowing made possible by the low risk premiums brought about by monetary union – buy German exports. But it is also the case that in the late 1990s and early 2000s, Germany was – as The Economist put it – the “sick man of Europe”. The changes put in place by Chancellor Schroder were far from socially neutral: labour markets were liberalized and wages were frozen or cut in real terms. Only the Social Democrat’s hold over the trade unions made this possible. Germany underwent an internal devaluation with the burden of adjustment squarely pushed onto the German working class. It was in this period that Die Linke, a party to the left of the SPD, was created. The sentiment driving German caution in this crisis is thus a complex one. It certainly involves some miserliness and a good dose of anti-Southern prejudices. But it also includes an understandable fatigue on the part of German workers at having to bear the burden of adjustment. When we read that in recent weeks banks have been holding over 700 billion Euros in surplus liquidity at the ECB, it seems that there is ample room for some adjustment on the part of German capitalists.

Soros’ account of the crisis is also curiously Eurocentric. As someone aware of the global dimensions of the current economic and financial crisis, he chooses to focus on the unique features of Eurozone governance. Had the Eurozone been armed with a common treasury, and not just a European central bank, Soros suggests that there would have been no Eurozone crisis. Policy mistakes, tied to the short-sightedness of Eurozone policymakers, have caused the crisis. This is at best a partial explanation. Outside of the Eurozone, the British and US economy are struggling to exit a major economic downturn. The crisis itself – beginning with the Lehman Brother’s collapse – originated in the US. Popular mobilization against the inequalities that have build up in recent decades is not European either. It was unwise to create a common currency without institutions capable of exercising the required political discretion in a time of crisis. But the crisis is one of capitalism, not just of the Eurozone. Were the right institutional fixes to be introduced, we would still be faced with the twin problems of financialization and debt-financed growth. And endlessly replicating an export-based growth model raises the question of who will be the “market of last resort”? In focusing on the Eurozone, Soros misses the wider dimension of the crisis.

Stat of the day

9 Jul

In an otherwise curious article critiquing traditional Keynesian policies, British peer – and Labour guru – Maurice Glasman writes that:

“Of the £1.3 trillion lent by banks in the British economy between 1997 and 2007, 84% was in mortgages and financial services”.

This clearly suggests a change in the function of the banking system in the UK: rather than lending in ways that contribute to large-scale capital and labour intensive projects, it has been the facilitator of a debt-dependent growth model.

If in doubt, regulate…

13 Jun

Another idea that has gained traction in recent days is that of a European-wide banking union. This idea, as with Eurobonds, is not new but the most recent bail-out of the Spanish banking sector has put it back onto the agenda. Key figures – from the President of the European Commission to the head of the European Central Bank – have come out in favour of a banking union. The fact that the bank at the centre of Spain’s difficulties, Bankia, was for so long able to hide its problems, even to the point of being fêted as a success story until not very long ago, has made many doubt the ability of national regulators to properly keep a tab on what their banks are doing. Ergo, the turn towards a pan-European regulatory solution.

Exactly what a European banking union would look like or what powers it would have depends on who you ask. Maximalists tend to hover around the EU institutions as they believe such a union would further strengthen the EU. According to Commission President, Jose Manuel Barroso, a banking union could include an EU-wide deposit guarantee scheme, a rescue fund financed by banks themselves and the granting an EU authority the power to order losses on banks. Minimalists, from within national regulatory bodies, claim that only a small set of powers need be transferred to a Brussels-based body. They also stress that a European banking regulator already exists in the form of the London-based European Banking Authority. The EBA already has powers to make rules and to force banks to comply. It was behind this year’s stress tests of Europe’s biggest banks and the demand that they boost their capital ratios. Minimalists also say that only a small number of big banks should be supervised. What Merkel called the “systemically important banks”.

Over the weekend, two heavy-hitters (of a sort), Niall Ferguson and Nouriel Roubini, weighed into the debate. They noted that for two years now inter-bank lending in Europe has been replaced by a singular reliance on ECB financing. And some countries – Greece and Spain – are experiencing a steady rise in withdrawals from their banks. As well as a direct recapitalization of the European banking system, Ferguson and Roubini argue that an EU-wide system of deposit insurance needs to be established, alongside a European-wide system of banking supervision and regulation.

Some of the same criticisms made of Eurobonds can be made of the banking union idea. That the political conditions for its creation are absent is evident from the kind of discussions being had about how such a banking union would be set up. Cognizant as ever that national publics are unlikely to wave through any forward movements in integration, some suggest that instead of creating a banking union via an EU treaty change – a slow and complex process, fraught with opportunities for sabotage by recalcitrant domestic populations – it would be possible to simply give over the regulatory power to the ECB. And this could be done without a treaty change but just by a unanimous vote of the European Council. As Alex Barker on the FT Brussels blog writes, this “avoids the political headache of more treaties” and “is faithful to the unsaid rule of this crisis: central bankers should win more power, regardless of whether they deserve it”. That so much thought is given about how to push through such a banking union without going through democratic procedures of ratification suggests the solution itself lacks the public support it would need to be a success. Even short-term fixes such as providing banks directly with extra capital raise big questions about how the money being provided will actually be used. There is always a balance to strike between politics and expertise and giving new institutions the powers to make decisions based on expert judgement is not necessarily anti-democratic. But when the democratic authorization is entirely absent, or when new institutions are created in ways that explicitly avoid any wider public debate about their merits, we can be confident that the stick has been bent too far in the direction of expertise.

Another problem is that – in line with another unsaid rule of the present crisis – the banking union seems to represent a case of “if in doubt, regulate”. As already mentioned, a European Banking Authority already exists. But critically, a more muscled Brussels-based variant wouldn’t necessarily address any of the more fundamental questions about the financialisation of Europe’s economy and the way this financialisation has interacted with some of the structural features of the Eurozone. More regulation can simply mean refusing to look more closely at the root of the problem. It is unsurprising that the EU’s kneejerk reaction to a problem is to try to create new regulation. We should resist the temptation to regulate and think instead about the fundamental causes of the present crisis.

France’s heterodox economists

31 Jan

Back in June, The Current Moment blogged about a manifesto written by a group of “dismayed economists” in France whose critique of free market orthodoxies was beginning to gain ground. This past weekend, a long interview with one of the original signatories of this manifesto, the French economist André Orléan, was published in Le Monde. Focusing on the role of financial markets in macro-economic policymaking, Orléan makes a number of excellent points.

He notes that historically, the role of specific economic interests, such as those of finance or of specific sectors of the real economy (export industries, domestic farming interests etc.) have been contained by the wider concerns of governments. The universality of the general interests holds sway against the particularities of individual groups. He makes the good point that this battle has often been fought through national central banks. They have been the main tool used by the executive power to pursue the interests of wider society. This gives us a rather different perspective on what is often assumed to be the narrow partisanship of politically-controlled central banks. In the mainstream economic literature, independent central banks are the guardians of the public interest; central banks directed by national executives are prisoners of political short-termism. This may be the conventional view today but Orléan reminds us that the historical record supports the opposite view: politically-controlled central banks were the vehicles for the articulation of the public interest. The primacy of politics over economics, as Orléan puts it, has had as one of its main tools the power of the central bank. This might shed a different light on the Orban government in Hungary: attacked for its anti-democratic ambitions, one of Orban’s proposed reforms was to curtail the independence of the Hungarian central bank. Rather than welcome this as an attempt to regain political control over macro-economic policy, Orban was criticized for his nascent authoritarianism. In fact, the more powerful assault on the democratic control of macro-economic policy has been waged over the years by the European Court of Justice, particularly its attack on the notion that national public sectors should be shielded from the competitive pressures of the private sector.

Orléan also has an interesting reflexion on the nature of finance. Contrasting it with the market for goods or services, he notes that finance has a “directly collective dimension”: it is concerned not just with individual sectors but with the economy as a whole. He gives the example of the infamous downgrading of France’s triple A rating by the agency, Standard & Poor’s. In its report, S&P referred to the EU’s new fiscal compact agreed upon in December 2011 (which the UK and the Czech Republic are today refusing to ratify), which it judged inadequate to meet the demands of the Eurozone debt crisis. Orléan notes that it is exactly this kind of very general judgement that is typical of the financial sector; and yet such generality does not pass through – as with democratic decision-making – a system by which a variety of different views are confronted via the freedom of the ballot box. This curious combination of its very narrow representative claim along with its interest in the economy as a whole can go some way of explaining the rise of technocratic governments in Europe today: they express the same peculiar combination, with individual technocratic leaders such as Italy’s Mario Monti having a history of very close relations to the world of finance.

Orléan’s views on the way out of the current crisis are based around a reassessment of the idea of value in the economy and of value creation. He argues for a much greater focus on the creation of value within the real economy, as this is ultimately where jobs and growth are created. He suggests that a new law should be introduced that firmly separates savings banks from investment banks, an argument included in the French Socialist Party’s programme. There is nothing radically new in Orléan’s arguments but his attack on conventional assumptions in economics is both powerful and welcome.

The Occupy Effect

25 Jan

In an earlier post, we commented on the difficulty movements such as Occupy Wall Street or Indignados were having in influencing the course of electoral politics. In Spain, in spite of all the protests in Madrid and other parts of the country, elections late last year saw the return of the Right to power after a campaign where its leader, Mariano Rajoy, pointedly avoided setting out anything like a detailed economic plan. In Italy and Greece, protests coincided with the replacement of elected governments by technocratic administrations rather than with any lurch to the left or any real change in austerity-based politics.

This may now be changing. Recent campaign speeches suggest that these popular mobilisations have begun to shift the terrain of representative politics. In France last weekend the Socialist Party candidate, François Hollande, in a keynote speech, made a point of targeting the world of finance. Two moments of his speech took on a confessional, intimate tone. I shall let you into a secret of mine, he said, clearly trying to differentiate himself from the current incumbent of the Elysée palace: “it is people that interest me, not money”. And a little later, with the same confessional tone: “let me share with you who my real enemy is… It is an enemy without a face or a name; it governs without being elected… It is the world of finance”. Hollande’s proposed policies to disable this “enemy” were in line with what has been suggested elsewhere: to isolate the speculative activities of banks from their commercial lending; to introduce a comprehensive financial transaction tax, not just a tax on the trading of stocks; to set up a public ratings agency at the European level and to renegotiate the EU fiscal pact so as to make explicit its growth model. Hollande called this a pact for responsibility, governance and growth.

In Obama’s 2012 State of the Union address, given yesterday to Congress, the same themes were apparent. Invoking much of the Occupy rhetoric about the 99% versus 1%, Obama argued for a fairer, less unequal US society. He endorsed the Warren Buffet idea of raising taxes on the most wealthy and dismissed any claims that he was engaging in class warfare, calling these policies common sensical rather than partisan (see here for the Guardian’s write-up). The Republican primaries have similarly been taken up with the same themes. One of the problems faced by Mitt Romney is that he not an industrial magnate or oil man but gained his wealth through finance, making him the target of people’s anger at Wall Street and at bankers. The battle with Gingrich has been focused on tax with Romney forced to disclose his tax returns. Romney’s fight-back after his defeat in the South Carolina primary has been to highlight, under the banner ‘Newt Gingrich cashed in’, the payments received by Gingrich from the mortgage brokerage company, Freddie Mac.

If recent political mobilisations have indeed given this current economic crisis its political narrative, it is worth asking what this narrative is. So far, it is mainly an ethical critique of contemporary capitalism. Critics of finance take issue with the unscrupulous actions of bankers and hedge fund managers, their conspicuous wealth, the brazenness of new inequalities. In its place, Obama, Hollande and others call for a return to more traditional values where money matters less than people and the common good. There are obvious limits to such a critique. A defining feature of capitalism is its systemic nature: it is based upon a set of social relations that are more than merely the accumulation of individual intentions. Without uncovering the specific set of social relations that are the basis of today’s financialized capitalism, invocations towards a better, fairer society will only breed disappointment as changes fail to appear.

Towards a European Tobin tax?

23 Jan

Reports in the press this week suggested that German Chancellor, Angela Merkel, had been won over to the idea of introducing a tax on financial transactions at the European level.  This has been primarily a French idea so far, with Nicolas Sarkozy a convert to a policy he had previously dismissed as ridiculous. The Tobin tax idea had been taken up by the French anti-globalization movement at the end of the 1990s and early 2000s and was virulently opposed by most of France’s political class. Today, in a very different political climate, the idea has been given a new lease of life.

Whether or not a financial transaction tax is finally introduced remains uncertain. This week’s press also reported that Sarkozy – who faces an election in the coming months and has committed himself to this tax as a demonstration of his activism in regulating financial markets – might settle for a tax on share trading as a first step. This already exists in the UK in the form of stamp duty on stock exchange transactions. Keeping the UK on board with any new European regulations would be welcomed by other European leaders as lasting rifts and real isolation are anathema to the EU. Bringing Cameron back in from the cold would be attractive to all involved in last year’s falling-out between the UK and the EU. Such a tax would, however, leave unregulated all other kinds of financial trading like derivatives and high-frequency trades. These have been identified as the real targets but an initial tax on share trading might solve Sarkozy’s problem of having committed to introducing a financial transaction tax before the election.

Is a financial transaction tax really the solution to the current crisis? The main rationale for it today is that it would serve as an alternative source of revenue for bail-outs and other expensive public actions that have up until now been funded by the taxpayer. That such a tax could improve government balance sheets to the point of reducing the need for austerity seems rather fanciful. What it would challenge, however, is the idea that governments defer unconditionally to their financial sectors. Whilst governments routinely stand by and watch as industries relocate to the Far East and shed thousands of jobs, they seem unable to accept that any such “creative destruction” should operate in finance. To many, this smacks of double standards and a tax on financial transactions would demonstrate – at the very least – the exercise of some political muscle vis-a-vis banks and financial services.

This argument about the symbolic nature of such a tax is not a bad one. But it tends to miss the bigger picture. The reason why a Tobin-style tax has become a popular idea amongst European governments is that it is like the famous phrase of Tomasi di Lampudesa’s The Leopard: things must change so that they remain the same. There is nothing in a financial transaction tax that really challenges the relationships and interests that together have given us this debt-finance growth model of the last 40 years. Nor would the tax really reverse the striking rise in inequality that has come to characterise our societies. The theory of the present crisis of capitalism contained within the Tobin Tax idea is that responsibility lies in the financial sector and that whilst the economy is generally sound, a few bad financial apples are bringing us all down. By taxing them and redistributing the revenue according to priorities set by elected representatives, we can return to the status quo ante.

One argument we’ve been pushing at The Current Moment is that financialisation is as much about a change in the real economy as it is about the financial sector itself. Isolating finance from its place in the wider economy, as the idea of a financial transaction tax does, misses the nature of the problem. This idea is also naive in that it imagines that relationships between real people can be transformed via a state-levied tax. Societies, today as in the past, are based around relationships that can only be changed by real political struggle. There is no short-cut or easy way around the problem of either redistribution or of making European societies more productive. The financial transaction tax is a coward’s way out of tackling today’s economic and social crisis and will only entrench, rather than transform, existing inequalities.

Interview with Peter Hall

6 Dec

Continuing the series of The Current Moment interviews, today we are publishing an interview with Peter Hall, Krupp Foundation professor of European studies at Harvard University. Peter Hall has published widely in the field of European political economy and comparative politics. His published books can be viewed here. One of his recent papers explores the political origins of the current economic crisis.

 

What are the stories right now that you think people either aren’t paying enough attention to, or about which we have the wrong view?

On this side of the Atlantic, we are mesmerized by the fiscal dimensions of the global economic crisis and not nearly attentive enough to what will be required to ensure the U.S. remains competitive and capable of robust economic growth over the longer term.  Above all, that will require large investments in human capital and public infrastructure, since these are the resources on which all kinds of businesses depend for success.  Despite the efforts of some analysts, such as Michael Spence, and of President Obama himself to argue that, by focusing on these issues, we can address the immediate problem of unemployment and long-term growth together, these issues have not yet become central to public debate.  I wish Americans could see how rapidly China is moving on these fronts and how fruitful such strategies have been in parts of Europe, such as Finland.  We are so obsessed with the short-term, on both economic and electoral fronts, that we are moving far too slowly to lay the basis for renewed growth over the long term.

In Europe, discussion of the Euro crisis is dominated by many myths.  But the one yet to be questioned at all seriously is the myth that deregulating markets in labor and goods so as to intensify competition in them will regenerate growth in the southern European economies.  Such moves are typically described as ‘structural reform’ – a term that has become the mantra of the EU and IMF.  In the long run, structural reform may make some economies more competitive, but to pretend that it will revive economic growth in the short to medium term is an illusion.  Yet this illusion is at the center of most of the plans concocted to revive the southern European economies and resolve the Euro crisis.

For obvious reasons, this is a convenient myth, but it is an empty slogan, all the more pernicious because it diverts attention from the role that government has to play in the revival of economic growth.

Let’s turn to the Eurozone debt problem. The dominant view is that Greeks and Italians are corrupt, inefficient and lazy, and that is why they find themselves in this mess. What is your view of what is going on?

For the most part, this is a canard, encouraged far too quickly by many politicians in northern Europe who reacted to the sovereign debt crisis as if it were an issue of morality rather than a crisis with economic and political foundations that threaten the viability not only of the Euro but of the EU.  Those politicians now realize the full dimensions of the crisis, but their initial reactions has made the task of persuading their electorates to accept measures that might genuinely cope with it much more difficult.

The difficulties from which Greece and Italy are suffering have something to do with problems of political, as well as economic, development.  Both countries would be better off with public institutions less prone to corruption.  But to suggest that that their people are not working hard enough or retiring too early is to misrepresent the problem altogether.  Comparative data suggest that the de facto retirement age is not very different in most of southern Europe than in northern Europe and that the southern European countries have taken just as many steps as those in the north to make their markets more competitive over the past ten years.

The roots of the Euro crisis lie, at a much more basic level, in asymmetries in the organization of the political economies in the north and south of Europe.  In general, as David Soskice and I observed in Varieties of Capitalism (2001), the organization of the political economies of northern Europe gives their firms capacities for wage coordination, skill formation and continuous innovation that suit them well to operate strategies of export-led growth, and EMU provided them with guaranteed markets in the rest of Europe.  By contrast, history has left the southern political economies with fissiparous trade unions and limited capacities for concerted skill formation or continuous innovation.  In the past, they coped with that by operating growth strategies led by domestic demand and then devaluing their currencies to offset the inflationary effects of such strategies on their external competitiveness.  In EMU, they were unable to do that.  Instead, not unreasonably, they took advantage of the cheap credit flowing from northern Europe to promote economic growth.  But, unable to offset the inflationary effects through devaluation, they lost competitive advantage to the north.  The result can be seen in the gross imbalance of payments between the two parts of the Eurozone.

The standard recipe for the recovery from the Eurozone crisis is austerity and structural reforms in the peripheries, plus some recapitalization of banks. Do you think this is the right way to go?

To appreciate the Euro crisis, we have to realize that there are two sides to it.  On the one side, there is the longer term problem of how to devise a structural adjustment path that will restore prosperity to both the south and the north.  On the other side, this is a crisis of confidence, notably in the markets for sovereign debt but spreading over time to the European financial system as a whole.  The European Union has remarkable capacities for muddling through, and, given enough time, I believe it can resolve this long-term problem adequately if not perfectly.  But it is never going to get to the long term if it does not effectively address the immediate crisis of confidence and, as everyone now acknowledges, its efforts to do that over the past year have consistently offered too little, too late.

The immediate crisis is what worries me.  With respect it, there are two issues.  Is there a way for the members of the Eurozone to restore confidence in the markets?  And, if that can be identified, will the member states and the ECB be willing to take the requisite measures.  At this point, I think, as do many others, that the only way to restore confidence in the bond markets is for the ECB to guarantee the sovereign debt of its member states against default, except perhaps for Greece where the markets have already priced in a default.  Various schemes have been mooted whereby the ECB might do this, indirectly if not directly.

The problem is that it will not be easy for the ECB or the member governments to do this.  Mario Draghi and the German government currently oppose such a step.  It is forbidden by Article 123 of the Treaty establishing EMU, and the German Constitutional Court likes to take that Treaty seriously.  The only ray of light here is that the relevant resolution passed by the German CDU at its recent conference does not entirely rule out such a step, describing it as ‘a last resort’.  I think the time for last resorts has come, and I could imagine a deal in which the member governments agree to much stricter enforcement of fiscal targets and long-term support for the ECB in return for a measure of this sort.  However, it is an entirely open question whether the Eurozone governments have the political wherewithal to make this move.  If they do not, I think the crisis of confidence is likely to persist and strengthen until an Italian, Spanish or even Belgian default looms, and then it may be too late to save the Euro.  It takes a confidence trick to resolve a crisis of confidence and the sooner one acts, the less costly the resolution.

What do you think would address the trade and debt imbalances between Northern and Southern Europe? Do you think it can be done within the European monetary order?

This is a question about whether balanced structural adjustment is feasible over the long term within the confines of EMU.  Certainly, the current approach of imposing all the costs of adjustment on southern Europe (of which Ireland can be considered an honorary member) is likely to fail.  Except possibly in Ireland where growth is gradually picking up, there is no reason to expect that rapid enough growth can emerge from such austerity to render the debt load of these countries sustainable.  At a minimum, long-term stability depends on a more coordinated set of fiscal policies in which some reflation in northern Europe is married to a softer adjustment path in southern Europe.  However, this will not be easy to secure.  In particular, as Wendy Carlin and David Soskice have observed, reflation poses risks to the wage coordination on which the northern European economies depend for their competitiveness.

Even then, for reasons I have noted, there is some question about whether the southern European economies can prosper within EMU.  Portugal and Greece, in particular, do not have especially strong export sectors and are not likely to grow them overnight.  These countries have long depended on growth strategies that are accompanied by moderate levels of inflation and, because the ECB has to pursue a monetary policy of one-size for all of Europe, it cannot always dampen down that inflation effectively.  In the wake of the sovereign debt crisis, borrowing costs are likely to remain higher in the south, which will help.  But the danger is that, if the southern European governments cannot pursue growth led by domestic demand for fear of its inflationary consequences, they may experience only low levels of growth for the foreseeable future.  Structural reform will help in the long run but likely only a little.

It may well be that Europe can live with persistent imbalances of payments at some level, but the question is whether more effective coordination of fiscal policies will be enough to allow the southern European economies to grow at rates that are politically acceptable to their electorates.

The hegemony of the demand for austerity is striking. It is offered as the solution to the Eurozone crisis, as well as to the American situation – the US Congress even created a supercommittee to find savings. Yet it seems odd to have such agreement around austerity in the midst of a potential double dip recession. What is wrong with the demand for austerity? How do you account for the strength of this common sense?

The demand for austerity can be explained to some extent by the fact that we have just lived through a period in which financial innovation married to inadequate financial regulation made possible much higher levels of leveraging of assets, leading to higher levels of debt, whether in the public or private sectors of the U.S. and Europe.  To some extent, we are paying today for what we ate yesterday.

The best way to pay back these debts, of course, is from the fruits of more rapid economic growth and that is most likely to be secured, as John Maynard Keynes argued, by reflationary policy. Thus, in the context of global recession immediate austerity does not make good economic sense.

To explain why so many are advocating it, then, we have to recognize that economic policy, whether at the national or international level, is rarely driven entirely by concerns about how to improve overall economic well-being.  It is made by actors, who may be political parties or governments, who are also seeking distributive benefits for their constituents, and, in many cases, these distributive demands are cloaked beneath calls for austerity.  Thus, the demand of several northern European governments, including the Finns and the Dutch as well as the Germans, for austerity in southern Europe is motivated, to a significant extent, by a concern to ensure that they do not pay the costs of adjustment in the wake of the Euro crisis.   I see the demands for austerity of many Republicans in the U.S. as an effort to cut public spending programs that they think serve Democratic rather than Republican constituencies.  If distributive concerns were not at the heart of those demands, those Republicans would be much less reluctant to raise taxes in order to balance the budget.

In the US, there is an influential view that we need to have continued expansionary monetary policy but contractionary fiscal policy. That seems to be the recipe of the moment, with the Fed even contemplating another round of quantitative easing. What do you think of this approach to inadequate demand and balance sheet problems?

As the French would say, I am willing to accept this for lack of something better.  Something better would be a coordinated reflation in which more expansionary fiscal policy was now playing a larger role.  We have arrived at this situation, I think, because central banks, including the Federal Reserve and the ECB, have been willing over the past three years to do what governments have been unwilling or unable to do.  For that, they deserve considerable credit.  One can reasonably ask whether the best way to respond to an era marked by a large expansion in lending is to pump even more money into the system, but, since inflation remains low in most of Europe and North America, partly because the trade unions have been so weakened and unemployment is high, this seems to be an appropriate strategy.  In the absence of a substantial fiscal stimulus to aggregate demand, however, it is unlikely to lower unemployment much.

Debt, especially mortgages and student loans, have become a major issue over the past few years. What if anything do you think should be done about it? How should we understand the growing debt of American households in the past decades?

As Ragurham Rajan and others have pointed out, in the United States, during the 1980s and 1990s, easy consumer credit and home equity loans became a substitute for social policy.  They have been the means ordinary people with little in the way of savings used to survive adverse life events and fluctuations in the economy.  Student loans can be seen, in similar terms, as a substitute for publicly-funded education.

They can also be seen as a key component of the growth model operated in the United States over that period.  Growth in this country was led by domestic demand and the only way to sustain demand in an era when disposable income for households at or below median incomes stagnated was to promote the kind of asset boom in housing that gave many the illusion that their wealth was increasing even if their income was stagnant.

In the past two years, as home prices declined and some forms of credit became harder to secure, American households increased their savings and that, in itself, is gradually reducing the debt burden of the private sector. I do not see any need to take steps to further reduce that debt.  Indeed, it is difficult to see how the American economy can continue to grow without the availability of such credit.

However, there are serious longer-term problems on the horizon.  More than half the American populace has no savings for retirement at a time when larger cohorts can be expected to retire and health-care costs continue to rise exponentially, eating into the disposable income of many families.  Part of the problem is that most of the fruits of economic growth over the past three decades have gone to people in the top 1 percent of the income distribution.  In the long run, the solution will have to entail engineering a more equitable distribution of wealth so that ordinary working families have the means to increase both their savings and their spending.

One thing that seems to tie the American and European situation together is the considerable growth of financial activity. Is there anything to the view that the last decades can be understood as a period of financialization? If so, what does it mean to say the economy has become financialized?

Seen from a long-term perspective, this does indeed look like an era of financialization.  The share of profits in the economy going to the financial sector expanded dramatically.  With the invention of new financial derivatives and the development of financial markets, many firms ostensibly devoted to manufacturing, such as General Motors, have made an increasing share of their profits from financial activities that leverage their capital.  That has contributed, in turn, to rising income inequality at the high end of the distribution, as those skilled at financial engineering generated profits large enough to allow them to demand astronomical levels of compensation.

In my view, it would be an exaggeration to say that the economy has become ‘financialized’.  There are still many productive components of the American economy that do not turn on finance.  However, it is apparent that we are all vulnerable to the systemic risks that a large financial sector, increasingly devoted to speculation, entails, and that is a serious cause for concern.  Although some of the financial innovation of recent decades has made some markets more liquid and borrowing easier for some productive firms, I doubt that this type of ‘casino capitalism’, to borrow a phrase from Susan Strange, ultimately contributes enough to economic prosperity to justify those risks.  We are currently paying serious costs for this and, unless financial regulation becomes more stringent than is currently anticipated, I think there will be more to pay.

Related to that question, what do you think accounts for the ‘bubbliness’ of the US and European economies, and especially the scale of these bubbles? We have seen a number of different bubbles and credit crises – housing bubbles in the US, UK, Ireland, and Spain; sovereign debt events in Greece, Portugal, and Italy, perhaps even France. While there was the dot come bubble in the late 90s, and the East Asian financial crisis, those don’t seem to have had the magnitude and systemic character as the latest period. What is, or isn’t, different about what we’re experiencing now?

I do not believe that any single set of factors can explain these diverse developments.  The housing bubbles can be explained, at least in basic terms, by a long period of easy credit, made possible, as I have noted by the expansion of the financial markets in various kinds of derivatives.  That was made possible, in turn, by what I consider lax financial regulation.  It is ironic that economists liked to describe this period as an era of ‘great moderation’.  In each case, however, some ancillary factors were at work.  In Spain, the cost of borrowing was greatly reduced by the confidence effect associated with entry into EMU.  In Ireland, it was encouraged by rapid rates of economic growth.

The sovereign debt crisis has more complex roots.  In Greece, which enjoyed the same easy access to credit as Spain, the fiscal fecklessness of the government is notable.  In Ireland, some of the problems can be attributed to the government’s mistaken decision to guarantee the bonds of its banks.  In different ways, Portugal, Spain and Italy remained creditworthy on the fundamentals but fell afoul of the spreading crisis of confidence in the markets, which has yet to take its last victims.  There are some parallels with the East Asian financial crisis.  The current crisis is worse partly because it has struck the major financial sectors of the western world and we now face the question of who will rescue those who normally do the rescuing.

How optimistic/pessimistic are you about the ability of national democratic procedures to provide solutions to the current economic crises in Europe and in the US? What do you think of the recent proliferation of technocratic governments in Greece and Italy? Does the current crisis expose some basic tensions between capitalism and democracy? If so, how exactly?

In this as in every other case, as Winston Churchill once said ‘democracy is the worst form of government except for all those other forms that have been tried from time to time’.  The notion that governments led by geriatric Eurocrats will resolve their countries economic problems more readily than elected governments is another of those illusions that bedevil the Eurozone.  They have legitimacy in Brussels but imposing austerity is ultimately a task that demands domestic political legitimacy.  I see this as a stop-gap solution that might, at best, persuade officials in Brussels and Berlin that everything has been tried and they must pay more heed to the pain and demands of national electorates.

It is obvious that the cumbersome decision-making procedures of the European Union are not up to the task of heading off a crisis in the financial markets.  But that is not a problem with democracy.  It is a problem of international negotiation.  Democracy enters the picture to the extent that the views of national electorates limit the willingness of their governments to share the costs of adjustment, and that is admittedly a problem for Europe.  A continent so proud of the ways in which its social policies reflect ‘social solidarity’ has been unable to summon up the sense of continental solidarity that would justify a more equitable and efficient solution to the crisis.  But social solidarity does not simply bubble up from below.  It is created by inventive political leadership and we are still waiting to see if the political leaders of Europe are capable of that.

On the larger question, my view is that the global financial crisis has thrown into stark relief the importance of the state in any democratic system.  The crisis itself is rooted in failures of financial regulation that can be linked to the unwillingness of governments to assert the authority of the state on behalf of the people against powerful financial interests.  And the inadequacy of the response to the crisis, especially in the U.S., can be attributed, in some measure, to the widespread reluctance on the part of many people to trust the state with their resources.  In many respects, that is the legacy of the neo-liberal era that followed the economic crisis of the 1970s, when many policy-makers and citizens became disillusioned with the capacity of governments to direct the economy.  Hence, the American government faces the current crisis hobbled by rising levels of distrust in government.  It is not acting more forcefully on the fiscal front partly because large segments of the American population are willing to vote for politicians who claim that government is the problem rather than the solution.

What are your views of the nascent protests (Occupy Wall Street, Indignados) developing in response to the introduction of austerity packages in Europe and the US? Are these movements a continuation of or a break with the anti-globalization movements of the past? Are they likely to fundamentally change public perceptions and government policy or will they have only a very small lasting impact?

There have been two notable political responses to the current economic crisis.  One is marked by a backlash against immigration, in both the U.S. and Europe, reflected in the growing popularity of radical right parties in Europe and the salience of immigration to national political debates in the United States.  This is a familiar feature of economic crises.  The U.S. has a long history of nativist movements.  The other is reflected in the Occupy Wall Street movement and its European analogues.  I can only hope that the former is contained and the latter encouraged.

It is difficult to see how these sporadic protests can be translated into any immediate changes in policy, not least because they have yet to articulate clear political demands.  However, I think they are having an impact.  They have struck a chord in popular opinion.  They bring issues of unemployment and inequality to the fore.  In the short term, I think that may influence voters in American elections next year, and, over the medium term, I believe that even these limited protests will help to shift political discourse in directions that favor those seeking to address issues of inequality and unemployment.

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