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Governance, Regulation & Financial Market Instability: The Implications for Policy Sue Konzelmann & Marc Fovargue-Davies (Frank Wilkinson & Duncan Sankey)

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Presentation on theme: "Governance, Regulation & Financial Market Instability: The Implications for Policy Sue Konzelmann & Marc Fovargue-Davies (Frank Wilkinson & Duncan Sankey)"— Presentation transcript:

1 Governance, Regulation & Financial Market Instability: The Implications for Policy Sue Konzelmann & Marc Fovargue-Davies (Frank Wilkinson & Duncan Sankey) REFGOV / DEMOGOV Brussels May 2010

2 Introduction & Overview Galbraiths 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

3 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

4 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 Roosevelts New Deal intervention … although it takes World War II to bring full recovery

5 Episode 1: the British experience The 1920s doldrums – the years of semi- stagnation (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

6 Episode 2: The Golden Age Widespread commitment to Keynesian full- employment 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

7 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

8 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

9 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 Market Liberalization in London and New York

10 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 Episode 3: Financial Alchemy & the American Sub-prime bubble

11 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 … Conclusions & Implications for Policy

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13 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 … Conclusions & Implications for Policy


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