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Send for Dr Who!

Regulate! Regulate! Regulate! This is the cry heard with increasing stridency on both sides of the Atlantic as the global financial crisis continues to take its toll on both bankers and ordinary people’s lives. This sounds plausible enough, even mildly anti-capitalist. But in truth, regulation is a non-starter when it comes to dealing with the depth and breadth of the meltdown.

Firstly, a correction. It’s not actually about regulation as such but more about re-regulation. The financial sector was actually heavily regulated and controlled in the period 1945-1980, when the character of the world economy was international rather than globalised in character. There were fixed exchange rates and tight controls on the movement of capital. Credit was difficult to come by and mortgages were relatively rare.

These restrictions had been imposed in a bid to stabilise the world economy at the end of World War II and prevent a return to the slump of the 1930s. But the contradictions inherent within the capitalist system of economy undermined the controls and they collapsed amid rampant inflation, massive unemployment, class warfare and the end of the post-war political consensus.

These are the conditions that gave rise to the transition to the present-day globalised economy, where regulations were abandoned in a process referred to as “liberalisation”. The subsequent growth in production was driven by fewer and fewer corporations operating transnationally, fuelled by an entirely new phenomenon – an electronically-driven, 24-hour, borderless financial system.

So herein lies the first problem for commentators like the Financial Times’ Martin Wolf – who says the period of liberalisation is over - The Guardian’s Larry Elliott, who is a fan of (re)regulation and Professor Peter Dreier, Occidental College, California, who wants tough action against rogue financiers. In essence, they favour a kind of return to a period of capitalism when states and governments exercised greater influence over finance. Leaving aside the abject failure of this approach by governments of the 1960s and 1970s, the question is: can you actually go backwards in history? Is it possible to turn the clock back to a pre-globalisation period? Well, we’d all like to travel back in time. So far, only 'Dr Who' and the stars of the movie 'Back to the Future' have succeeded.

The chorus of calls and plethora of proposals for regulatory reform to stop such things ever happening again cover every aspect of the system, including: accounting standards, rating agencies, the ratio of capital held by banks to the credit they issue, limits on what financial institutions are allowed to do, and not least, bankers’ bonuses. But even these were undermined by simultaneous publication on Wednesday 26 March of the Financial Services Authority report on its supervision of Northern Rock and governor of the Bank of England, Mervyn King’s warning that the financial crisis had entered “a new and different phase”.

The FSA’s failure of oversight wasn’t due to a problem with the regulatory regime itself, apparently, but with management failure in applying it. And there’s no way that the FSA can compete for the specialised staff needed to understand the new products the banks and non-banks invent to subvert and evade control. In the case of Bear Stearns, its regulator, the Securities and Exchange Commission, says that the bank was operating according to national and international standards.

The lessons of the growth of hedge funds, off-shore private equity funds and exotic, toxic financial products is that they were designed to bypass whatever system of regulation remained after the progressive dismantling of the post-war system. They are not “excesses” but have been integral to the expansion of globalised capitalism, especially in terms of funding consumption. So the second, underlying problem, is that the crisis in the financial system is inevitably related to and driven by the recession in the productive side of the economy. And no amount of regulatory proposals can fix that.

Gerry Gold & Paul Feldman
Co-authors, A House of Cards – from fantasy finance to global crash
28 March 2008

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