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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
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
‘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
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
Episode 1:
the British experience
• The 1920’s ‘doldrums’ – the ‘years of semistagnation’ (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
Episode 2:
The ‘Golden Age’
• Widespread commitment to Keynesian fullemployment 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
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
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
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
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
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 …
National debt as % of GDP: 1900 to 2010
250
200
150
100
50
0
00 03 06 09 12 15 18 21 24 27 30 33 36 39 42 45 48 51 54 57 60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08
19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20
National debt as % of GDP
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 …