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Governance, Regulation, & Financial Market Instability: Policy Implications

Explore shifts in policy, economic impacts, and theories since 1919 with implications for current policy options, considering globalization, deregulation, debt levels, and financial sector importance. Analyzing episodes and implications for the national debt, market regulation, and economic recovery.

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Governance, Regulation, & Financial Market Instability: Policy Implications

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  1. Governance, Regulation & Financial Market Instability: The Implications for Policy Sue Konzelmann & Marc Fovargue-Davies (Frank Wilkinson & Duncan Sankey) REFGOV / DEMOGOV Brussels 26-28 May 2010

  2. Introduction & Overview • Galbraith’s ‘conventional wisdom’ • Shifts in policy, economic impacts & theory • ‘Galbraithian Episodes’ since 1919 • Current policy options constrained by: • Effects of globalization and progressive de-regulation • Increasing political and economic importance of the financial sector • excessive levels of debt • Conclusions and implications for policy

  3. ‘Conventional Wisdom’ • ‘Conventional wisdom’ is inherently conservative and gives way not to new ideas, but to ‘the massive onslaught of circumstances with which it cannot contend.’ (Galbraith 1999: 17) • Galbraithian Episodes since 1919: • The end of World War I to the end of World War II • The end of World War II to the 1970s • The 1970s to 2007 • 2007 to the present

  4. Episode 1: From ‘laissez faire’ to state stimulus in America • The ‘Roaring 20s’ – ‘an astonishing boom’ (Arndt 1944) • Rapid organizational & technical development, high levels of investment and a boom in construction and consumer spending • 1929 economic slowdown, exacerbated by stock market crash, leads to Great Depression • Roosevelt’s ‘New Deal’ intervention … although it takes World War II to bring full recovery

  5. Episode 1: the British experience • The 1920’s ‘doldrums’ – the ‘years of semi-stagnation’ (Arndt, 1944; Howson 1975) • 1931: Britain is forced off the Gold Standard and interest rates are cut to reduce the 1917 War Loan • Cheap & plentiful money triggers a house building & consumer durables boom • 1937 re-armament leverages the recovery

  6. Episode 2:The ‘Golden Age’ • Widespread commitment to Keynesian full-employment and the welfare state in Britain • Post-war reconstruction of Europe and Japan fuelled economic prosperity in America • Macro-economic performance characterized by full-employment, non-inflationary growth and rapidly rising living standards

  7. Episode 3:The rise of Neo-liberalism • Macro-economic theory & policy postulates: • monetary causes of inflation • Efficiency & welfare benefits of free markets • Industrial organization and corporate governance theory & policy argues: • Large firms the result of – & reward for – success in competitive markets • Stock market an efficient ‘market for corporate control’ • Central bank responsible for inflation and Central government for market freedom

  8. Episode 3:1970s-1980s –Neo-liberalism unleashed • The collapse of Bretton Woods and the relaxation of international money movements • Growing importance of multi-national firms and the onset of de-industrialization • Confidence in markets & ‘re-regulation’ of the real and financial sectors of the economy • Strengthening of the shareholder model • Leveraged buy-outs, foreign competition & inflation hollow out the ‘real’ economy whilst the finance sector achieves dominance

  9. Episode 3: Financial Market Liberalization in London and New York • ‘May Day’ 1975 (New York) & 1986 ‘Big Bang’ (London) • Failure to revitalize the industrial base: • strengthens reliance on the financial sector • limits export and investment opportunities outside of the financial sector • provides incentives for financial ‘innovation’ involving risk and increases the national debt • Globalization & financial market ‘innovations’ have outpaced the capacity to supervise & regulate

  10. Episode 3: Financial Alchemy & the American Sub-prime bubble • Presence of the pre-conditions for financial crisis • Consumer boom less comfortable for the internationalized banks in London and New York • Financial ‘innovation’ & exploitation of the American sub-prime real estate market • In liberalized global financial market, loss of confidence precipitates crisis • Financial market crisis has re-bound effects on the real economy & the recession deepens

  11. Conclusions & Implications for Policy • The current debate: How to pay down the national debt by cutting government expenditure • Starving the economy of funds through policy of austerity is likely to undermine economic recovery • UK National Debt as a % of GDP since 1900 …

  12. Conclusions & Implications for Policy • Reminiscences of Britain during the 1920s? • Stimulus would be better aimed at longer-term re-balancing • National debt associated with bank bailouts should stand as a levy on the banking system • Reform must be co-extensive with the market • Ironically, Britain is once again – as in 1919 – grappling with enormous government debt …

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