Financial regulation in the light of the current global economic crisis

Abstract

The regulation or non-regulation of finance and its extent and forms has always been an issue in the historical development of capitalism. This issue is crucial for the system's modus operandi since in capitalism money (and its provision, i.e. finance) operates as capital (i.e. the provider of the means for entrepreneurial activities), whereas its importance in previous socioeconomic systems was significantly less. This paper argues that there is an inherent insoluble contradiction between capitalism's tendency to unleash finance and its need to rein in the resulting instabilities. The paper argues that although the crisis shows the need for re-regulation, there are significant vested interests that deny this need. The rampant internationalization of money and capital markets in recent decades has created a global power structure that favours internationalized finance. This global power structure has promoted national reforms that have curtailed regulation and led to extreme open-market practices (i.e. the model of private banking). The crisis signifies the failure of this model. However, the global power of international finance remains and thus blocks any moves to circumvent it. The paper ends with a call for public banking as a means of reforming the financial aspects of the current crisis to the benefit of labour.

Keywords:

• finance
• regulation
• sub-prime crisis
• private banking
• public banking

Notes

¹For the imposition of liberalization in emerging markets and the developing world, see Mavroudeas and Papadatos (2007).

²Specifically, the ‘savings and loan’ crisis in the United States in 1990, the Mexican ‘tequila’ crisis of 1994–95,the Asian crisis of 1997, the Argentine crisis of 2001, the Turkish financial crisis of 2004, and the Russian crisis of 2008.

³Rating agencies are specialized financial institutions which assess the creditworthiness of financial instruments and financial institutions.

⁴The Tobin tax refers to the proposal, originating with the late Professor James Tobin, for the imposition of a tax on international financial transactions.

⁵Private banking consists of banking, investment and other financial services provided by banks to private individuals who invest sizeable assets. The term ‘private’ refers to customer services rendered on a more personal basis. Private banking, at least until recently, largely consisted of banking services (deposit taking and payments), discretionary asset management, brokerage, limited tax advisory services and some basic concierge-type services, offered by a single designated relationship manager.

⁶Note that the failure of mortgage-backed securitization is not inherent in the technique itself, but rather due to the private and competing nature of the commercial and investment banks involved. The large state-sponsored organizations of the US housing market (Federal National Mortgage Association, Federal Home Loan Mortgage Corporation) used securitization for decades without comparable problems. Disaster was induced by the large-scale entry of commercial and investment banks into mortgage securitization in the early 2000s.