Is this another step in the ongoing “war” between the southwest US and Mexico? or is it, more ominously, a shift to a military approach to the war on terror at home? or is it…well, just Texas?
Since we in the US are thinking of taxes today….
A tax on currency transactions was proposed in 1972 by economist James Tobin (hence, it is often referred to as a Tobin tax). Wait, don’t roll your eyes at a post on tax and finance! This gets better. Tobin argued that imposing this tax would slow down the speed of financial flows, discourage speculators, and cushion small bankers, which would help them adjust. After multiple financial crises, the idea has been revived–along with a popular campaign featuring a much more catchy label and a YouTube video with Bill Nighy that you really must watch! But, what is the likelihood that a global tax on financial transactions is adopted? Zilch!
The campaigners basically argue that we can kill two birds with one stone: prevent financial crises, and fund all sorts of programs addressing poverty, climate change, and health and education. As their website proclaims, “Turning a crisis for the banks into an opportunity for the world!”
In theory, it sounds perfectly reasonable to me. But politically? The campaigners, based in the UK, argue that the British government should pass such a tax on financial transactions. But of course, that would simply shift most financial activity out of Britain and into other financial centers. The same would be true of the entire EU passed such a tax. The ideal would be to impose a global tax on financial transactions, of course. Who would administer this tax? Who would distribute the funds collected? The UN? Well, I think we all know that the likelihood of sovereign states handing over an independent source of income to the UN, or any other international organization, is anathema to most policymakers!
But, in a related development– ok, it’s only somewhat related, it’s still on finance– the Triple Crisis blog has been talking about how the IMF is shifting its position on capital controls. In other words, the Washington consensus is truly dead. The size and scope of financial crises had to get this big before the IMF finally considered that at times it is reasonable policy to impose capital controls to slow down or prevent speculative finance.
Just a shout-out to NPR Planet Money for sharing the rock ‘n roll reference in the Dodd financial reform proposal, or at least, Dodd’s summary of it. A “no escape” clause for companies seeking to evade supervision is called the Hotel California Provison. Yup, it’s right there in the text. We assume it’s referring to the line about how “you can check out any time you want…but you can never leave.” (although “we are all just prisoners here…of our own device” could also work).
Glad to know the people fighting the good fight for financial regulatory reform are totally cool folks. Now, whether they can get any bill passed is something else again.
Are we doing better or worse than in the Great Depression? Are we coming out of it, or still sinking… or, is there worse to come? Should I be frightened?? Recent reports of millions more foreclosures made me wonder what direction we are going in. A couple of things I’ve been reading recently:
Over at Vox, Eichengreen and O’Rourke answer the question on a lot of minds: is this crisis as bad as the Crash and Great Depression of the 1930s? They provide nice graphs of output, trade, and stock markets for both periods. Two things stand out to me: the collapse in trade and stock markets in the last two years was even scarier than in the past–sharper, faster, deeper (output tracks the 1930s slide pretty closely); but, all three trend lines have turned up again pretty quickly. Not recovering anywhere near to previous levels, mind you, but heading in the right direction. Eichenbreen and O’Rourke believe policy action– the stimulus–is what is saving us this time around. When the stimulus runs out, what happens?
My colleague Carmen Reinhart and co-author Kenneth Rogoff look at the aftermath of asset bubbles and really don’t give me much hope. (also see their recent book on eight centuries of financial crises) Looking at a broad range of countries in the post WWII years, they show that after a financial crisis housing assets take about six years to recover, sinking by 35%, and equity collapses over 50% in about 3.5 years. Unemployment rises and output declines, not surprisingly. And government debt explodes– not due to bailouts but due to a decline in government revenues. But bailouts will become politically more and more difficult as government debt expands.
Jayati Ghosh reminds us of Galbraith‘s work on financial euphorias, and our own role in them. After a crisis, according to Ghosh/ Galbraith, we point the finger of blame away from ourselves–yet, remember how we admired and fawned over the financial “titans” we now deplore? (on a side note, I’m not sure about the timing of Wall Street 2) Our own euphoria encourages financial speculation, and markets respond with asset bubbles. We think the problems are only caused by greedy and unscrupulous people, not the market itself. Ghosh argues that the solution is to re-think capitalism itself. But, as someone recently pointed out (can’t remember who), during the Great Depression, there were a number of readily available alternative models– fascism, communism– what is the alternative today? Populism a la Chavez? I don’t think so…
So, should I be scared? I think I’ll have to just hold my breath and wait and see.
Recently I assigned my students to identify the nationality of different global companies. The results were interesting. No matter what information they looked at– from the nationality of CEOs and managers, to the location of most employees– major global companies had clearly identifiable nationality even when the majority of sales were abroad. Some companies seemed to try to hide their background when marketing abroad–hello, did you know T Mobile is DeutscheTelekom? Most of my students didn’t– but their actual operations remained culturally distinct. This not a new observation (see the work from a decade ago of my grad school pals Doremus, Keller, Pauly and Reich), but the myth of the global corporation persists. I’m pretty sure my students were surprised by the results.
Does it matter? Well, Clay Ramsay recently brought to my attention a Financial Times article about why Canada is not suffering a big financial crisis. One reason: Canadian bankers are “either too nice or too dull to indulge in the no-holds-barred capitalism that created such a boom, and such a bust, in more aggressive societies.” And, don’t we wish American bankers would act a little more…well, Canadian?
For a long time now, there has been talk of a borderless world in which global corporations are untied from the shackles of their national base–from Kenichi Omae writing two decades ago to Thomas Friedman today. But apparently, Canadian banks are very… Canadian: as one investment banker tells it, Canadians have a “being nice” institutional culture, where decorum, amiability, and collegiality are important values. In other words, these are not the selfish risk-taking sharks that are likely to take down the global financial system. The Canadian government did not have to bail out its financial sector, and the Canadian banking system is rated the world’s soundest. In other words, Canadian corporate culture mattered big time.
Chrystia Freeland, the author of the FT article, starts with corporate culture, but then goes on to make an institutional argument, too. She points to the comprehensive, effective, and yet not too heavy-handed Canadian regulatory system, especially when it comes to mortgages. And the bankers mostly went along with it.
Aha, you say, then what we needed was more regulation! But the debates in the US over regulatory failures typically focuses on too much regulation (e.g. US government efforts to expand home ownership led to massive subprime lending; but see this interesting article on contrary evidence). OR perhaps it was the total lack of regulation of speculative hedge funds (which were not regulated because policymakers thought that people who invest millons of dollars know what they are doing–I’m not joking, that really is the reason policymakers give for not regulating…)
Getting back to corporate culture, I think the Canadian regulatory framework made a huge difference… but, and here’s the hitch: American corporate culture makes it very difficult if not impossible to replicate it in the US. From the perspective of scholarship, institutions and culture are not opposing explanations, but intertwined. From the perspective of policymaking, well, I guess I should start hiding my meagre pots of money under the bed, ready for the next financial crisis….
I know I was asked to comment here on international political economy issues, but how can I pass up the opportunity to point you all to the Online Security Jam?
Yes, on February 4, you too can participate in an online discussion of important security issues. You will “help make the world a safer place…online.” The Jam is being co-produced by the European Commission and NATO, who are just so..so..cutting edge, yes? Well, ok, it’s actually being organized by Security and Defence Agenda, a think tank, and IBM. The goal is to engage literally thousands of experts and non-experts alike in “widening the debate” beyond military concerns. As they say, “No one person has the solution. We all do.” They even have a “Guide to Jamming,” complete with a video, for those of us who are not so of-the-moment, not so part of the online social community.
Actually, I do applaud the idea of widening the debate. And the organizers are sensitive to the increasing influence of NGOs in security issues, which has not always captured the attention of the powers that be. I will be interested in seeing what comes out of the Jam session. Although, frankly, I am not confident that crowdsourcing is the way to solve security issues, even in the 21st century.