Regulation, deregulation and structural reform in a globalised world

  • Created by: sikemi__
  • Created on: 30-05-21 17:33

Markets versus states

  • Smith spoke about the 'invisible hand' in the Wealth of Nations - called for govts to not interfere in private decision making
  • But Smith also recognised the limits of markets - didn't always allocate resources efficiently and market failure occurred
  • Sees markets as political constructs that are socially embedded
  • Discusses the myth of free markets as all markets operate within a structure of regulatory institutions
  • A false dichotomy between market and state
  • Murphy spoke about 'the cowardly state' (2011) that sees responsibility and runs away from it
    • Thatcher and Reagan left a legacy that whatever a politician does, however well-intentioned, will always make matters worse in the economy as the govt can never outperform the market which will always allocate resources better and increase human wellbeing more
    • The alternative - the 'courageous state' - we need "politicians with the courage to work out when the market is absolutely the right mechanism for delivering what society needs and which backs those who wish to partake in the market openly, honestly and accountably by providing them the environment they need so that they can flourish, while delivering all the resources required to curtail those intent on market abuse' (Murphy, 2011)
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Regulatory capture

  • Influence of leading banks on public agencies and public policy
  • A permissive regulatory environment, placing faith in the self regulating character of markets, ignoring the systemic nature of risk and historical context
  • A world regime of capital mobility that allows easy entry and exit everywhere (capital account liberalisation)
    • E.g. Asian financial crisis 1997-98 - crisis of deregulation as firms borrowed in international capital markets, accompanied by loosening of controls on capital market transactions. Crisis of confidence as capital rushed out (more than 10% of combined GDP of East Asian economies in 1996-97)
    • Showed that countries which held onto some controls of their financial capital markets e.g. China and India who chose not to deregulate, didn't suffer as much
  • "a powerful phalanx of international organisations and multinational corporations devoted to maximising the freedom of financial capital around the world" (Wade)
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The myth of efficient markets

  • Efficient markets hypothesis-
    • Financial markets always get prices right given available information
    • Because financial markets always get prices right, corporate managers should focus on maximising shareholder value
    • Mathematically-sophisticated asset pricing models (idea that stock market essentially prices the share value of a company based on the value that it is adding to the economy) resulted in Merton & Scholes receiving 1997 Nobel Prize in Economics for creating "a new method to determine the value of derivatives"
  • Became economic orthodoxy
  • Contrasted with Keynes' comparison of financial markets to newspaper beauty contests - stock markets follow herd like instincts and fashion rather than acting rationally
  • But the myth was short lived as Merton & Scholes promoted a hedge fund in1994 that lost US$4.6 billion in 1998 during the Russian financial crisis
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Links between public and private sector

  • Flow of individuals between public and private sectors
  • 'COlonisation' of regulatory agencies which are captured by private interests - dysfunctional incentive structure for regulators (they might be looking for a job in a bank that they are trying to regulate in the future so aren't as harsh)
  • Wall Street-Washington corridor e.g. from Goldman Sachs to Treasury/Federal Reservce
  • Also occurs in the UK e.g. Sunak, Chancellor of Exchequer used to work at Sachs
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Role of ratings agencies

  • Ratings agencies are meant to provide independent ratings of credit worthiness of different institutions e.g. banks, govts, unis
  • Way that they were paid shifted from 'net margin' banking to fee/commission based trading
  • Need for institutional investors to buy investment grade securities as certified by allegedly independent credit rating agencies
  • Conflict of interest as credit rating agencies were paid by bankers but also advising banks on riskiness of products
  • Not required by US law to undertake due diligence so just believed what bankers told them
  • Day before Lehman Brothers collapsed it received a favourable credit rating from Standard & Poor's
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Impact of deregulation of state and rating agencie

  • Re-regulation - market was out of control
    • Number of G20 meetings in 2009 to restart growth, reflate economies out of recessions and restore faith in global credit markets
    • Need for fiscal stimulus and re-regulation
  • However, election of conservative govt under coalition in UK in 2010 occurred - they blamed overspending by Labour Party leading to debt
    • George Osborn launched decade of austerity in 2010 to 'raise from the ruins of an economy built on debt a new, balanced economy where we save, invest and export. An economy where the state does not take almost half of all our national income, crowding out private endeavour' (Osbourne, 2010)
  • Contrast to the US where Obama had become president and wanted to 'Hit the Reset Button' through an American Recovery and Reinvestment Act (2009) of $787 billion
    • Opposed by Republicans and some economists but also criticised for not doing enough by the Left
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Impacts of austerity

  • Austerity cuts hit the poorest families hardest according to the Guardian in 2012
  • Institute of Fiscal Studies report from 2012 stated that the poorest 20% of households expected to see incomes fall by 1.5% in 2012-13
  • Whereas...
    • Barclays chief Bob Diamond received £17 million in pay, shares and perks in 2011
    • 238 senior Barclays executives received an average of £1.2 million
    • These are the people who were bailed out by the govt
  • Racially disparate impact
    • Measures adopted by govt between 2010 and 2017 estimated to result in a 5% loss in income for black household which is double the loss for White households (UN docs)
  • IMF (2016)
    • Austerity policies not only generate substantial welfare costs, they also hurt demand and thus worsen employment and unemployment
    • The short run costs in terms of lower output and welfare and higher unemployment have been underplayed
    • The increase in inequality engendered by financial openness and austerity might itself undercut growth, the very thing that the neoliberal agenda is intent on trying to promote
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A postneoliberal era?

  • Uncertainty about the future of neoliberal globalisation
    • But remember this was never a homogenous process
  • Peck et al (2010) - transformative potential of progressive, postneoliberal alternatives may be constrained by the macroeconomic and macro-institutional conditions that ensured neoliberal ascendancy
  • What made post 2010 recovery different? Growth in developing countries crucial to global recovery
    • Troubled banks in US and Europe being bailed out by capital from developing countries
    • Civil society and social movements that hoped to reclaim power from the 1% or the emergence of populism?
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