About Grahame Thompson
Grahame Thompson is Professor at the Copenhagen Business School and Emeritus Professor of political economy at the Open University.
Articles by Grahame Thompson
Crises always expose the underlying character of situations and events. They are intriguing - even attractive - occasions since they provide a glimpse into the very structure of the system. Indeed, there is probably a subliminal desire for crises: they enable decisive actionto be taken, leadership to be exercised, hands to be rung, mistakes to be exposed, blame to be apportioned. They break the normal pattern of the mundane. Thus the media loves them; it chases them, constructs them, and revels in them: ‘breaking news’, ‘global tremors’, ‘the worst day on Wall Street since….’, etc. Crises are enthusiastically embraced when they erupt.
Crises are periodic‘events’. But what exactly is an event? Things are always happening but events seem something more, something beyond the ordinary – an eruption. In the social world events display two related aspects: first they break on-going processes by establishing ‘differences’ between before and after; second they draw together ‘dispersions’, seemingly creating a momentary unity amongst arange of different instances and contexts -- but at the same time precisely preserving that dispersion by exposing its distribution. Summing up, events might be described as an occasion for the‘dispersed unity of differences’.
How is any of this pertinent from the point of view of the present financial crisis? Iti s an event in this sense, and its understanding as such will shapeour responses to it.
The Nature of Money
First it exposed thereal nature of the monetary system. The extreme measures adopted by the authorities -- the ‘nationalization’ of large sections of the financial system -- indicates a basic structural truth of capitalism. The only way to gain control of the money supply is for there to be a socialized financial system. In a capitalist system where credit is the basic form of money, controlling the money supply is always both crucial but also problematical.
The money supply (credit) is crucial because that economic agent who has money has command over resources. As a result there is always an intense political struggle over controlling the money supply; between ‘the authorities’ on the one hand and private economic actors in the financial system on the other.
This was exposed very acutely during the debate about ‘monetarism’in the 1970s and 80s. The “political monetarists” (to borrow BradDeLong's characterisation) argued you could ‘manage’ the economy simply by controlling the money supply. The central bankers knew differently, however. Though they never quite couched it in these terms, the central bankers knew they could not control the money supply. That was in the hands of private economic agents – who, of course, jealously guard this capacity at all costs. To control the money supply would have meant socializing the financial system, the complete opposite of the political monetarist’s policy prescription of liberalization and de-regulation.
But therein lies theparadox. Instead, the central bankers tried to manage the financial system, and influence private economic actors – and the economy beyond – via an interest rate policy. But interest rates affect the demand for money and the profitability of banking in the first instance, not its supply. Thus the authorities never implemented ‘monetarism’ proper because they knew they could not. As we have seen subsequently, however, private economic agents relished their renewed capacity to ‘control the money supply’ by indulging in an orgy of credit creation.
This orgy of credit creation was brought to a sudden halt by the ‘credit crunch’.Indeed, credit creation (the supply of money) almost stopped. This provided the opportunity - and indeed the very necessity - for the authorities to confirm the basic truth of the above remarks by nationalizing large sections to the financial system so as to kick start the money supply process again.
The call today for banks to pass on interest rate cuts to customers is precisely this tussle between the new shareholder's interests and the private shareholders of banks. Banks are making losses, and interest rate policy needs to reduce the input cost of banking in order to restore profitability which will eventually restore lending and money creation. Monetary policy needs profitable banks.(Hat tip David Beckworth)
In extremis deep structural characteristics are revealed. And as a consequence of this nationalization administrative means of distributing credit are emerging. Indeed, these administrative mechanisms were written into the very terms of the nationalization moves. The commercial banks and other financial institutions involved were instructed to allocate credit in various ways: to existing mortgagees (delay or abandon foreclosures) or to small businesses. And many more claims along these lines – for administrative allocation in a very general sense -- are to be anticipated.
Thus we can expect other vulnerable financial institutions to seek help, and large industrial companies radically undermined by the recession to claim their share of support. All this is a consequence of nationalizing the financial system; administrative methods for the creation and allocation of credit take over from the market. So expect, through the financial crisis, policy makers and lobbyists to brush off the last Keynesian era writing on industrial policy.
The Nature of National Leadership
The economic crisis is a genuine event in that it has galvanized all parties into action. And in a ‘period of the exception’ the location of sovereign power was once again posed. Gordon Brown almost became a ‘Schmittian sovereign’ for a while (“He who decides in the exception” –in his New York Times column on 12 October Paul Krugman described Brown’s decisive action in the UK as the potential saviour of the world financial system!). This is somewhat of an exaggeration, of course, since the very existence of the UK state was not in question (though it might have been in the case of Iceland’s Geir Haarde).
But it was nation-states that came to the rescue of their financial systems, not some mythical global response. And this also exposed the basic dispersion of the so called ‘global’ financial system. In its core the international financial system remains just that – still an inter-national one organized between national economies. This does not prevent contagion of course: lots of contagion. But such contagion has been going on since the tulip crisis of 1637.
Globalisation by media
The third point to make is that the ‘global’ character of the crisis was largely a media constructed event, though it was aided by politicians who have bought into the globalization story for basically domestic political reasons: it provides an excuse when necessary for them to off-load blame and to discipline their citizens in the name of ‘international competitiveness’.
Almost every ‘City’commentator has a vested interest in claiming global aspect to the crisis since this bolsters the scope of their activities. But also –and perhaps most disappointingly -- many academic commentators fell for this story since they are themselves mesmerised by the prospects and spectacle of a new epochal rupture, one that allows them to indulge their skills as critical analysts of profoundly changing events. Never ones to miss an opportunity for hyperbole and exaggeration, for all of these parties a ‘global crisis’ sounds so much better than an ordinary and boring multi-domestic or inter-national one.
The real concern should be over the kind of response that many of these reactions are likely to provoke. We should not hold out too great a hope for the prospects of the Washington meeting in mid-November. This will provide a preliminary occasion for the important powers to declare their initial positions. But already there is profound disagreement between Nikolas Sarkozy and Gordon Brown and George Bush (let alone Obama's administration-in-waiting). And this is before China and India have even declared their positions, which will be enormously important for the future of the international financial system.
There will be no quick reformof voting rights in the IMF because the USA is still strong enough to prevent this. Larger and important issues like global warming and sustainability are probably off the immediate agenda until the dust settles on the current turmoil, which could be several years.
And if the system still remains far from ‘global’ (despite contagion -- as argued here)-- and the events of recent weeks a temporary ‘dispersed unity of differences’ – then recognition of this needs to be appreciated before serious regulatory lessons are proposed and rolled out. Whist it will be difficult for those states that have socialized large sections of their financial systems to return these to private ownership quickly, this is a priority. But not before a newly formulated regulatory regime is installed that can effectively deal with the continued dispersed character of the international financial system are prepare for the resilience necessary to deal with new unexpected eruptions as they happen. They will happen whatever is done.
The crisis in the international financial system is still unfolding and continued short-term policy firefighting is absolutely necessary. But what about the longer-term response: how should the authorities react in terms of new regulatory initiatives? The answer depends in part on an analysis of the nature of the crisis, and of what is happening in the system more generally.
Grahame Thompson is professor of political economy at the Open University. He is the co-author (with Paul Hirst) of Globalisation in Question: The International Economy and the Possibilities of Governance (1999) and Between Hierarchies and Markets: The Logic and Limits of Network Forms of Organisation (2003)In addressing this more fundamental question, I want to propose two arguments that contest the dominant assumptions underlying much current commentary. The first is that this is not a "global" crisis at all - rather, it is almost exclusively confined to the United States and certain countries in northwestern Europe.
The second point follows: if the crisis is not global, this must be reflected both in the "geography" of the reactions to it and the character of any regulatory regime that might be installed in light of this sense of its scale.
The implication of these two arguments is, again, twofold: that the authorities' emphasis should be on supranational regional responses rather than global ones per se; and that if financial crises are fundamentally "irrational" (driven by "excessive exuberances", "animal spirits", "bandwagon effects" and the like) then there is a need to prepare in quite a different way for the next crisis - because there will one.
The limits of the "global"
The first argument can be illustrated by noting the extent of the damage inflicted by the credit-crunch on commercial banks. This was estimated in early August 2008 as around $265 billion in terms of write-downs or outright failures. The sum has since increased by $25-$30bn after several large financial institutions were absorbed into other banks or effectively nationalised: among them Fannie Mae and Freddie Mac, Lehmann Brothers, AIG, Bradford & Bingley, and Fortis.
These losses, taken together, have been incurred by thirty-five separate financial institutions. However, only one of these was outside of the United States or Europe (the National Bank of Australia, involving just under $1bn). There may be further failures and some contagion beyond the transatlantic world, but this is likely to be limited - as it has been so far.
What are the reasons for this concentration in the north Atlantic region? The main one is that this reflects the dominance in capital flows of this region and the "greater Europe" area (that is, the eurozone and other areas of western and eastern Europe, including Russia). Despite all the talk about the global nature of the crisis, some 70% of the world's financial flows and domestic financial assets remain tethered to these two regions (see McKinsey Global Institute, Mapping Global Capital Markets: Fourth Annual Report: 2008). This suggests that there is not yet anywhere near a truly global financial system - and indeed I would suggest this is an impossible dream.
If the system were truly global then losses of this magnitude would already have had a devastating "global" impact on commercial banks in countries beyond the core regions affected - but this has not happened. The absence of this global impact is also rooted in the structural disjuncture between domestic and international financial systems - which will remain unbridgeable as long as there are different currencies tied to different domestic financial systems (in other words, while there is no single global currency); no proper global central bank to act as lender of last resort for this single currency; and only a few countries that can borrow on the international markets in their own currency to finance their economic activity, while the vast majority of other countries must borrow in someone else's currency.
This is the structural basis of all the uncertainties and risks in the international financial system; and these conditions will not go away in the foreseeable future. These structural constraints inhibit the formation of a genuinely global financial system, leaving a much more differentiated system of national domestic and international financial relationships and interactions that need to be viewed in their specificity and singularity rather than as a single "system".
The financial-innovation cycle
The lesson to be learned from this analysis is that further "global" rules to try to tame the financial beast are very unlikely to be successful. This is not an argument against strong regulation - but only against this regulation always being conceived as necessarily global in scope because the financial system is thought to be global. If it is not - and indeed will continue not to be so - then a different response is called for.
My analysis of the financial system - and of the "real" economy beyond -- is that this still remains largely supranationally regional in organisation and not global (see PQ Hirst, G Thompson & S Bromley, Globalisation in Question [Polity, 3rd edition, 2008]). If this is so, a supranational regional response would be more sensible. This would allow for the responses to be tailored to the specific conditions and features of such regional or national financial configurations; enable agreement on what to do to be reached more easily, since fewer players are involved; and encourage "regulatory innovation", since different frameworks would arise.
It is clear that the present financial crisis is deep and very serious. For the banking sector in particular it may be the worst crisis since the 1930s, and it threatens to spill over into the real economy of those countries most closely affected. But financial crises come and go - and the typical "financial-crisis cycle" as a whole contains regular phases and features that can be analytically useful. The phase involving "financial innovation", a central part of present concerns, is an example.
Such financial innovation always raises many fears as it takes hold; these are well documented and discussed at the time, with warnings offered as to their likely downside effects, which however are never properly headed by authorities or regulators. This then leads to another phase as a crisis -brought about largely by these innovations - hits the system. This results in a great deal of firefighting where authorities try - amid a lot of hand-wringing, soul-searching and recrimination - to gain control of the crisis and prevent it spreading.
As the crisis subsides this is followed by a longer, analytical and diagnostic post-mortem phase: what were the reasons for the crisis; who or what was to blame; what lessons can be learned and what done to prevent a further crisis? This is a difficult phase because there is never agreement about causes or consequences. However, alongside or just behind it, the authorities begin to act, putting in place frameworks to discuss measures needed to prevent another crisis of this type.
This phase requires a political mobilisation to gather momentum amongst the affected parties - a difficult and lengthy process. Eventually, some consensus is reached, usually entailing a very watered-down and minimalist set of regulatory responses which is agreed and gradually implemented. Meanwhile, the system has moved on and a new set of financial innovations has taken hold - so the responses to the previous crisis now operating look as though they are unnecessary or addressing yesterday's problem. Meanwhile, the fact that the authorities are still grappling with the regulatory consequences of that previous round of innovations means their focus is not on the existing round or the threats these now pose. So the cycle goes on...
The forms of regulation
I was once at a conference where I asked a panel of regulators and central-bank governors what could be done, if anything, to break this cycle. Their response was intriguing: they said that this was an "existential question" and that such questions could not be answered!
On reflection, however, I think this answer should be taken seriously. Perhaps the mindset of such bank governors and regulators is so focused on traditional responses that they cannot get out of this way of thinking and see that the system is actually "existential" in the sense that it is "irrational". It is not, therefore, amenable to systematic and calculative responses, where the IMF or BIS simply begins another round of negotiations for a comprehensive and consistent set of new global regulatory norms and rules to be adhered to by everyone. Rather what is needed is a realisation that financial insecurity is going to continue (amid the exuberances and bandwagon effects referred to above) to be a fact of life. If this is so, what is needed is to organise a highly flexible regulatory regime of "distributed preparedness" and "system resilience", that does not presume a single centre from which a new elaborate global regulatory regime emanates (see Collier & Lakoff, 2008).
This approach would have to pay particular attention to the necessarily fragmented nature of financial regulation in an attempt to forestall any exploitation of the gaps within it. This would involve a lot of contingency planning and attempts to coordinate the disparate array of "local" (supranationally-regional in this case) organisational and partial initiatives, requiring the application of improvisational skills and ingenuity. The task would be to map the vulnerabilities and network the relationship between them. And this regulatory world would always need to expect the unexpected.
Such a response is less likely than that the traditional financial-crisis cycle will recur. But imaginative thinking about the future - to try to create a robust alternative conception - is absolutely necessary, even if the precise terms of what has been suggested here proves wanting.
The issue of "responsibility" has increasingly become a defining feature of the current era of neo-liberal globalisation. At every level of governmental and social policy, and in many contexts of political and media discussion, the notion can be used to convey a potent sense both of empowerment and policing, of autonomy and control. How far can a close examination of the idea illuminate contemporary forms of power and governance?
An opportunity to think about this question in some detail was provoked by a conference in London on 20-21 July 2007 focusing on issues of corporate accountability and limited liability under globalisation. In the event, the thorough discussion of the complex question of what limited liability involves was matched by a central concern with "responsibility".