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Slippin' & Slidin'
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Our New Financial Architecture And Theirs
a previous article (“New Global Architecture' Poses Questions for the
Left”), we argued that popular movements, progressives, and the left should
develop their own program for a “new architecture” for the global economy
and demand that policymakers bargain with them. While the global economy needs
radical alteration in all its structures, this article focuses on the more
limited question of what a left alternative for the global financial system
extraordinary dynamism, capitalism has been marked throughout its history by
cycles of boom and bust. Capitalism is based on unplanned interactions among
independent “market players.” It lacks an adequate coordinating mechanism
to create and restore balance other than through periodic crises. The
paradoxical result is that a capitalist society may have idle productive
capacity, unemployed people eager to work, a glut of products, and people in
desperate need of those products—all at the same time.
This problem is intensified
by markets that exchange not money and products but money and
money—financial markets. Financial markets can aid the production of goods
and services in the “real economy” by mobilizing and channeling resources
across lines of space, time, and ownership. But in practice they tend to draw
vast resources into attempts to make money out of money rather than out of
real production. They are prone to their own booms and busts that can
aggravate those of the real economy.
Through most of their
history, capitalist societies have attempted to create organized mechanisms to
deal with these problems through regulation. But it is usually difficult,
since each capitalist firm is always motivated to pursue short-term individual
gain at the expense of the system as a whole. Efforts to impose some degree of
social responsibility on firms have usually been driven by multi-interest
coalitions that include representatives of capital itself, government, and
groups that are adversely affected, such as workers and farmers.
Capitalism grew up alongside
a system of nation states and the nation state was and remains the primary
mechanism used to attempt to organize and regulate capitalism. Coordination
beyond the nation state was long left largely to imperial armies, colonial
administrators, and the market—notably the market for gold.
In response to repeated
banking crises, capitalist countries developed central banks to regulate money
and credit. In the U.S., for example, the Federal Reserve Act required
commercial banks to maintain a proportion of their deposits with the U.S.'s
central bank, the Federal Reserve System (the “Fed”). The Fed can also buy
and sell money on the open market. These techniques allowed the Fed to
increase the supply of money and lower interest rates to stimulate economic
activity—or to do the opposite (“monetary policy”). The Fed also
regulates banks to limit imprudent speculation.
In response to the Great
Depression of the 1930s governments also began to apply a strategy, promoted
by British economist John Maynard Keynes, of using national government budgets
to regulate economic cycles and compensate for inadequate demand (“fiscal
policy”). They also expanded the regulation of markets through legislated
rules and government agencies. The result has been called “nationally
At the close of World War II,
the victorious Allies, dominated by the U.S., attempted to establish a degree
of regulation that went beyond the individual nation state. The 1944 Bretton
Woods Conference established the International Monetary Fund (IMF), which
supported fixed exchange rates among different national currencies. It also
established a World Bank to aid reconstruction and development. John Maynard
Keynes, the chief British delegate, advocated the creation of a world central
bank to regulate global growth via an international monetary policy. The
United States—which dominated the global economy with 40 percent of the
world's production—insisted instead that the U.S. dollar be the reserve
currency for the whole system. This let the U.S. Treasury function as a world
central bank, printing money as it saw fit.
Regulated capitalism and the
Bretton Woods system contributed to the unprecedented period of sustained
growth in the world capitalist economy from World War II to the early 1970s.
But in the early 1970s capitalism entered a sustained worldwide crisis. Global
economic growth fell to 2.5 percent, half its former rate.
In 1973, faced with a
plunging dollar, the U.S. decided to renounce the quarter-century old Bretton
Woods system of fixed exchange rates. Thus ended history's most successful
effort to organize and regulate capitalism globally.
The subsequent 25 years have
been marked by deregulation or “marketization.” Interest rate
restrictions, lending limits, reserve requirements, capital controls, and
other means for national regulation of financial markets were largely
dismantled. Banks became less important than weakly regulated institutional
investors like pension funds, life insurance companies, mutual funds, and
investment trusts. In the U.S., the share of total financial sector assets
held by institutional investors rose from 32 percent in 1978 to 52 percent in
1993; similar though less extreme shifts occurred in other countries. These
funds largely escaped the regulation that remained for banks.
Closely related to
deregulation was a globalization of finance. In 1980, the daily average
foreign exchange trading was $80 billion; today, more than $1.5 trillion flows
daily across international borders. International bond and equity transactions
of the G-7 (excluding the UK) increased from 35 percent of GDP in 1985 to 140
percent of GDP a decade later.
With exchange rates floating,
the IMF lost its original function. As the debt of third world countries
soared, it took on management of the debt crisis. The IMF began to require
debtor countries to accept structural adjustment programs as conditions for
new loans. It became, in effect, the global enforcer and collection agent for
the world's creditors.
Capital mobility undermined
the ability of national governments to regulate money and credit and to pursue
Keynesian growth policies. As economist Jane D'Aristo concludes, “the most
damaging effect of the liberalization of global financial markets may be the
loss of central banks' power to implement counter-cyclical policies.”
The weaknesses of a system
which might be described as “disorganized globalized capitalism” have long
been easy to see for those with eyes to see them—and not just to critics on
the left. In 1994, a group of international bankers, former top financial
officials, and monetary experts from the world's richest countries, headed
by former U.S. Federal Reserve Board chair Paul Volcker, circulated a proposal
to give the IMF “a central role in coordinating economic policies and in
developing and implementing monetary reforms.” They argued that “there has
been no reliable long-term global approach to coordinating policy, stabilizing
market expectations, and preventing extreme volatility and misalignments among
key currencies.” They proposed several immediate measures, to be followed by
“a more formal system for managing exchange rates.” According to Kenneth
H. Bacon of the Wall Street Journal, “The Volcker commission's plan
would, in effect, require countries to relinquish some of their economic
sovereignty.” The Volcker plan quickly evaporated.
The results of the
disorganization of capitalism—aka globalization and deregulation—were less
than stellar. For the quarter century after the collapse of the Bretton Woods
system, global growth remained at half its previous rate. The financial system
lurched from crisis to crisis with only sporadic efforts at correction—and
with devastating effects on people around the world.
for What and for Whom?
for a “new global financial architecture” have suddenly reemerged in the
context of the 1997-1998 global financial crisis. Many of the mainstream
proposals are primarily directed toward risk reduction for investors. A recent
academic proposal, for example, states that “The predominant task of
international financial regulation is to minimize systemic risk arising from
the operations of securities and futures markets.”
The left should take a very
different view of “the task of international financial regulation.” It's
not the left's job to fix capitalism. It is the left's responsibility to
try to make economic structures benefit common people as much as possible and
create the most favorable conditions for their expanding grassroots
Further, the left should view
change in the global financial system not as an end or a solution in itself,
but rather as one part of a wider process of social change.
This suggests the spirit in
which the left should approach proposals from economist Jeffrey Garten and
others who advocate a global central bank. Actually existing central banks are
profoundly undemocratic institutions. It is not just that they are insulated
from day-to-day shifts in public opinion and legislatures. They are largely
unaccountable to democratic institutions in their basic policies and
objectives. Indeed, central banks don't even represent the interests of
capital as a whole so much as the specific interest of bankers and investors.
Some of the functions
performed by central banks, however, are greatly to the advantage of ordinary
people and of society as a whole, not just of capitalists. These include their
counter-cyclical role (“monetary policy”) and their regulation of
financial institutions to prevent them from destructive speculative excesses.
These are precisely the
functions that have been undermined by globalization and financial
deregulation. They are the ones the left should aim to restore via its new
global financial architecture.
new financial architecture the world needs is radically different from the
current IMF. To make that clear the left should propose a new
institution—for purposes of discussion let's call it a Global Financial
Facility—rather than a modification of the IMF. (That does not deny the
likelihood that, in practice, the emergence of such an institution may occur
via modifying the IMF.) To make clear that it will address the needs of all
the world's people, the GFF should be established as part of the United
Nations system through negotiation among governments with major representation
As democrats, the left should
advocate a one-person-one-vote structure for all new economic institutions
unless there is a good reason to deviate from it. Neither the IMF/World Bank
one-dollar-one-vote model nor the UN General Assembly one-coun- try-one-vote
model comes even close. As an alternative, the left should propose that all
nations joining the Global Financial Facility will be represented on its board
of directors. Voting on the board will be weighted in proportion to the
population represented. Representatives of civil society will have
consultative status. Programs in specific geographical areas will develop
means of accountability to the people they affect.
The purpose of the GFF will
be to regulate the international financial system to avoid global recessions,
promote sustainable economic development, ensure full employment, reverse the
polarization of wealth and poverty, and support the efforts of polities at all
levels to mobilize and coordinate their economic resources.
proposals from the left (and even Keynes's original Bretton Woods proposals)
provide global analogues to national monetary and fiscal policy. They
generally propose some kind of banking facility to regulate the supply of
money and credit and some kind of fund designed to provide counter-cyclical
The GFF should establish an
international bank to perform functions of monetary regulation currently
performed inadequately by national central banks. It should:
- establish, in cooperation with national regulators, a
system of minimum reserve requirements on the consolidated global balance
sheets of all financial firms. Reserve requirements for non-bank financial
institutions and the transnational operations of corporations and banks
would bring regulation to the huge unregulated financial sectors that have
burgeoned in the era of globalization and deregulation. Such regulation
could help contain destructive speculation. It could also help counter the
boom-and-bust cycle by restoring control of the national and global money
- coordinate efforts to reduce fluctuations in currency
exchange rates through complementary national fiscal and monetary
policies. (This is what the Bretton Woods Agreement originally created the
IMF to do—and what it did rather well until the abolition of fixed
exchange rates in the early 1970s.)
The GFF should also establish
a public international investment fund. The purposes of the fund shall be
- to meet human and environmental needs and ensure
adequate global demand by channeling funds into sustainable long-term
- to counter global economic cycles by appropriate
expansion and contraction of fund activities.
Jane D'Arista has outlined
one approach to such a fund. It would be structured as a closed-end investment
fund which would issue liabilities to private investors and buy stocks and
bonds of private enterprises and public agencies in developing countries in
consultation with their governments. Its investment objectives would focus on
“the economic performance of enterprises and countries rather than
short-term financial performance.”
With daily international
financial transactions now running at more than $1.5 trillion daily, an
obvious source of support for the GFF would be a small tax on all
international financial transactions. Known as a “Tobin tax” after its
inventor economist James Tobin, such a tax would reduce destabilizing
short-term international financial flows while providing funds for investment
in long-term environmentally and socially sustainable development in poor
communities and countries.
GFF must follow policies radically different from those the IMF and World Bank
have pursued for the past decade. It would:
- encourage countries to pursue economic policies based
on domestic economic growth and development, not domestic austerity in the
interest of export-led growth.
- encourage the shift of global financial resources from
speculation to useful, environmentally positive, sustainable development.
- encourage the G-7 countries to work together to
stimulate domestic demand and prevent global deflation.
- help countries adjust currency exchange rates without
- encourage a return to more stable exchange rates in
order to achieve the original purposes of the Bretton Woods agreement.
- develop means for assuring global liquidity, such as
an expansion of the system of Special Drawing Rights, in order to protect
the global economy, especially poorer countries, from liquidity crises.
- establish standards for and oversee the regulation of
banks and all other financial institutions by national and international
- pursue other measures to ensure global demand adequate
to provide full employment and a rising standard of living.
The competition among
corporations and national capital groupings is costly and destructive for the
common people of the world. The question is, can the common people force them
to limit their self-aggrandizement and conform to a somewhat greater extent to
the needs of people and planet?
Systems of public regulation
of markets can help or hurt common people. The left should not either oppose
or support government or regulation in the abstract. Rather it should oppose
those interventions which hurt and disempower common people and support those
which help and empower them. Further, it should “push the envelope” to
demand as progressive a content to regulation as the power of the left and its
allies allows. Finally, it should view such regulation not as an end in
itself, but as one piece of a broader process aiming to empower ordinary
people. The same principles apply to international as to national regulation.
Supporting a GFF doesn't mean the left
should abandon grassroots struggles—far from it. Indeed, the left should
support such an institution primarily because—and only if—it improves the
conditions for such struggles.