With national regulators caught in the midst of change brought on by forces
of financial innovation and integration beyond their control, attention
shifts to the possibilities of internationally negotiated systems of
control. Two very different international institutions have been engaged in
financial regulation, namely the Bank for International Settlements (BIS)
and the International Monetary Fund (IMF). By the late 1990s, while the BIS
was effectively abdicating regulatory authority to the banks themselves, the
IMF was increasingly acting as the world's lender of last resort. The
IMF also suffers from various limitations on its role as guardian. It is
accustomed to dealing with governments, with finance ministry officials who
often share professional and ideological mind sets with staff missions and
are therefore inclined to cooperate. There is also the concept of deposit
insurance as a means of maintaining confidence in the financial system in
times of trouble.
This chapter presents five simple conclusions that are drawn from the
foregoing account of what has happened to affect money, finance and
governments since the mid-1980s. The first is that 'finance calls the
tune'. The second is that governments of states have less control over
their economies and societies than they had ten, twenty or thirty years ago.
The third conclusion is concerned with mergers and acquisitions. The fourth
is about moral contamination. The fifth conclusion is that there are
widening income gaps. The chapter also presents three ways in which old gaps
in power and wealth have widened. The first would be the point about rich
and poor. Second would be the widening gap between big business and small
business. Third, the gap in power and influence between states is also
widening. The chapter aims to figure out some broad scenarios, possible
directions in which the future might develop.
The Western financial system is rapidly coming to resemble nothing as much as a vast casino. Every day games are played in this casino that involve sums of money so large that they cannot be imagined. At night the games go on at the other side of the world. In the towering office blocks that dominate all the great cities of the world, rooms are full of chain-smoking young men all playing these games. Their eyes are fixed on computer screens flickering with changing prices. As in a casino, the world of high finance today offers the players a choice of games. Instead of roulette, blackjack, or poker, there is dealing to be done – the foreign exchange market and all its variations; or in bonds, government securities or shares. In all these markets you may place bets on the future by dealing forward and by buying or selling options and all sorts of other recondite financial inventions. Some of the players – banks especially – play with very large stakes. These are also many quite small operators. There are tipsters, too, selling advice, and peddlers of systems to the gullible. And the croupiers in this global financial casino are the big bankers and brokers. They play, as it were, ‘for the house’. It is they, in the long run, who make the best living.
We are looking for the key decisions which have altered the course of world economic history in recent times, and which have shaped the development of the world economy and determined shifts in the costs and benefits, the profits and losses, the risks and opportunities amongst nations, classes and other social groups. But it is important at the start to be clear as to what we mean by a key decision and what we should be prepared to look for and include. In the first place we are analysing the monetary system. Decisions here are not quite the same as in the study of international diplomatic relations, for instance. There, states decide to make war or to make peace, to make alliances and to intervene in the affairs of others. The action is between foreign ministers and diplomats and the key decisions are up to them. Monetary systems are different. In the real world – though not always in the fairyland of economic theory – a monetary system must have both political authority and a market. The market is essential whenever economic exchange between buyers and sellers is not all done by command of a third party. If buyers and sellers are free to exercise some degree of choice, however limited, and if their transaction is not conducted through barter, there must be money. But a monetary system cannot work efficiently unless there is political authority to say what money must be used or may be used; to enforce the execution of agreed monetary transactions; and to license, and if necessary support, major operators in the system.
If we look beyond the literature that deals specifically with money and finance, we find a much wider range of interpretations of the causes of our present troubles. To underline the point that decisions in international money and finance have generally been accorded too limited a place in our understanding, it may be useful to attempt a sort of plain person’s guide to the full range of contending interpretations of the events of recent years. This is the more necessary because many people deeply concerned with our predicament have neither the time nor the patience to go through them all at length, and also because people tend to read the literature of their own profession or field of interest and that of their own political persuasion. A guide that takes in as wide range of prejudices and perceptions as possible may therefore be useful. The interpretations that tend to dismiss the monetary and financial aspects of world economic disorder as unimportant seem to fall into two groups: those that put the main stress and blame for disorder on weaknesses in trade policies, and those which avoid putting the blame anywhere in particular by offering one or other form of determinist versions of recent economic history.
Instead of offering some protection against the uncertainties of life, money has itself become the cause of new uncertainties. Not only is there uncertainty over the duration of the world depression, we do not know when or if inflation will ever return. We can only guess what will be the divergence in the exchange rates between the dollar and other currencies. Oil prices in 1990 are anyone’s bet. At a time when the most secure jobs are apt suddenly to vanish and still more people are made redundant, the capacity of the monetary system to offer – as it should – a secure store of value that people can use to cushion themselves against such misfortunes or against illness or old age, seems less than ever it was.
We have seen that increased uncertainty has produced a marked hypertrophy of financial markets and financial dealing, much of it speculative in character. It has also increased the inequality in competition between large enterprises and small ones. And it has altered the balance – so vital to any stable market system – between authority and market, with the result that authority has been undermined and markets made more volatile. Yet these consequences were masked for too long by some important misperceptions, mostly promulgated by academics, about what was really going on and what consequences followed. Some of those misperceptions have been shown up. Other persist. But the general effect has been gradually to extend the area of significant ignorance – significant, that is, from the point of view of political control and supervision of the economic and financial system. That control and supervision requires knowlege, and as change accelerates and the markets and national monetary systems become more integrated into a global system, the nature of the required knowledge increases and changes. It is in the light of these broad conclusions that we have to review and weigh the various remedies and reform plans that have been put forward to bring the system under better control.
Potential solutions to the world financial crisis are considered and rejected. This in turn raises the prospect that world economic recovery will be a long time in coming. And in that case more of the same is going to mean that the system survives more or less intact, but that the costs of adjusting to a smaller shrunken credit structure are predominantly borne by the politically weak and the economically dependent, both within the industrialized countries and in the international system. Many developing countries are going to have their IMF missions around for a long time to come. Awareness of the high price of regaining the confidence of foreign bankers is going to grow. Either, government becomes stronger and thus more repressive of opposition, more authoritarian and militarist – in which case the prospects of peace, democracy or of free economic enterprise diminish. Or, government remains weak and unstable; foreign confidence in the country flags, leaving it in a continued state of debt, depression and disorder. This too holds little attraction for the still prevailing Western liberal cast of mind. In the short term, the United States could, it is true, continue to enjoy certain privileged immunities through the use of its considerable bargaining power as military protector (or interventionist) and as trading partner. But in doing so it would risk a dangerous alienation of large areas of the world economy. In the long term this would damage its own economic future no less than the rest of the system.
The problem of managing and stabilizing a financial system that is fundamentally out of order and control is a global one. But the solution is a national one. It is absolutely no use looking to international organizations to wave a magic wand and restore financial order and with it world prosperity. Any survey of recently proposed solutions (as in the last chapter) leads to the conclusion that the reform must start with a change of mind in Washington.