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As I wrote in my Jacobin piece on 'why #shadowbanking is bigger than ever', where I understand shadow banking as financial globalisation, there are three reasons for its resilience in the age of authoritarian/nationaist regimes. jacobinmag.com/2018/11/why-sh…
1. A sensationalist narrative of GFC that downplayed its structural roots.
Since 1980s, states encouraged shift towards market-based, globalised finance as necessary infrastructure of new anti-Keynesian macroeconomic order.
Since 1980s, states encouraged shift towards market-based, globalised finance as necessary infrastructure of new anti-Keynesian macroeconomic order.
why: competing for global investors in government bond markets, replacement of welfare state with asset-based welfare via pension funds/insurance co, tax revolt of elites and corporations.
LTCM didnt reverse states' commitment to financial globalisation. Neither Lehman, although initially v ambitious structural reform: European FTT, FSB rules on shadow banking, European Bank Structural Reform Initiative, despite what Lagarde termed 'ferocious industry pushback'
2. Neither central banks nor politicians have institutional incentives to pursue structural changes that would reverse financial globalisation: we get austerity instead of structural reform.
financial globalisation/shadow banking entangles monetary, fiscal and financial stability policies. As ECB’s Benoît Cœuré put it: sovereign debt is “vital to the functioning of the financial system, analogous to the function of money in the real economy,” (2016)
if sovereign debt represents money for market-based financial system, the safe assets issued by the Treasury (sovereign debt) are as important for financial capitalism as the safe assets issued by the central bank (bank reserves or high powered money).
If the central bank is mandated to defend financial stability, then globalised finance structurally requires that mandate to include defending the safe asset status of government debt — that is, protecting governments from volatility in sovereign bond markets
this questions theoretical basis for central bank independence, and entire edifice of modern macroeconomics, which views fiscal policy as an obstacle to optimal monetary policy and economic stability in general (Blanchard a notable departure there).
central banks turned this entanglement to their advantage, creating a discretionary regime for intervening in sovereign bond markets (QE, OMT, market-maker-of-last-resort) that tacitly recognises the fundamental role sovereign bonds s play as safe havens for globalised finance
entanglement paralysed elected politicians, still operating under gamble made with financial globalisation in the 1990s: more market-based finance = more liquidity
Confronted with spectre of illiquid markets & increased financing costs while central banks discretionally rationed interventions, politicians dropped ambitions for structural reforms and embraced austerity, even though financiers protested the ensuing shortage of safe assets.
The turn to austerity reinforced structural drivers of financial capitalism: hesitant taxation of big capital, reduced state spending on public goods, asset-based welfare and passive index investment for middle class citizens, debt and stagnating real wages for poor households
the alternative to austerity is reversal of these drivers of financial globalisation through: taxation of big capital, big state, nationalise pension funds (byebye asset management), increase minimum wages. A political manifesto no progressive party has yet dared to embrace
what we got instead - as @adam_tooze put it
the only successful episode of re-nationalising global finance started with Pecora Inquiry in the US
fundamentally I think, the Fed in 1933 did not oppose, and did not have the political clout to do it, the recommendations of the Pecora Inquiry that gave us the Roosevelt (investment) banking reforms
3. To avoid the political struggles necessary to reverse financial capitalism, politicians in the Global North now working with global finance to re-engineer financial systems in Global South
This is what World Bank/G20 'Maximising Finance for Development' does. It seeks to open up new spaces for financial capitalism in the Global South ftalphaville.ft.com/2018/10/29/154…
I call this #WallStreetConsensusthus: re-imagining international development interventions as opportunities for global finance. Through multilateral development banks, global (shadow) banks will influence the terms on which poor countries join the global supply of securities
Jim Yong Kim, WB president (2018) “We have to start by asking routinely whether private capital, not government or donor aid, can finance a project. If conditions are not right for private investment, we need to work w our partners to de-risk projects, sectors & entire countries"
so @rodrikdani consensus on financial globalisation stronger than ever, political coalitions to push it in poor countries under slogan of 'Development Aid is Dead, Long Live Private Finance' stronger than ever.
in short, it's the political power of global finance.
in short, it's the political power of global finance.
critiques of financial globalisation need to be translated into effective political strategies that can grapple with the forces connecting central banks to global (shadow) banking on the terrain of sovereign bond markets. Climate crisis may render those easier.
