There are plans afoot to establish structures for global regulation of high finance. Some of these plans were adumbrated recently at a G20 conference in Pittsburgh last week. What form these plans will be take and when is anyone’s guess; but the trend of the past few decades suggests that these globalization measures, over time, do accumulate deployable power, until eventually they become part of the structure of supra-national government.
Historians will likely record that the globalization of finance capital inevitably led to the globalization of government. The panic of 2008 acted as the shock that provided clarity: and now it is clear the features of finance capitalism were as much an instrument of state policy as they were a genuine example of free enterprise.
These huge conduits by which capital from all over the world was plowed into the American real estate market, and before that the tech bubble, can be seen in political science terms as a vital element of the consolidation of government on an ever larger scale, which is the distinct trend of modernity.
Structurally-mercantilist countries like China, Japan, Germany, oil rich Gulf states, etc., with their highly-productive manufacturing or commodity wealth, generated enormous piles of capital, which naturally sought after profitable fields of investment. Financiers speak in terms of “basis points” — hundredths of a percentage point — because when one operates in hundreds of millions or billions of dollars, even a difference that small means serious cash. So capital from around the world, some private, some public, some a kind of hybrid of the two, was chasing after higher yields. Its facilitators were a collection of institutions operating in arcane securities and instruments which, in time, became “the biggest U.S. export business of the 21st century,” as Bloomberg News put it.
This system of finance — encompassing traditional banks, private funds, industrial corporations with massive finance arms, and also government entities — wielded enormous political influence. Its power spanned the political spectrum and it was no respecter of party. Globalization flies on both wings, left and right; and the financiers cared little whether their interests were advanced by ostensibly socialist or capitalist factions. High finance was integral to globalization, and state policy shaped it and was shaped by it. Its power has often appeared on this account irresistible. Governments and private enterprise worked together toward a union of blessed global cooperation. Only anarchists and reactionaries opposed it.
It is possible to point to this story as the quintessential story of the post-Cold War era. It is possible, even, to point to this story as the culmination of the modern project itself. Certainly many moderns believed it to be. An entire decade and more of academic opinion was obsessed with the glories of this end of history, this culmination of all that was promised by classical liberalism.
The strongest philosophical critique of the classical school of political economy is that its great teachers and expounders simply presupposed a structure of order by which contracts and property could be secured against breach and theft. In other words, they looked upon a contingent and particular set of conditions (early modern England) and supposed those to be universal. They were insufficiently alert to how much the circumstances of their day and age became assumptions underlying their teaching.
It would be as if a philosopher writing today constructed his system upon the assumption that banking and high finance must be global in reach, and then worked his way to the conclusion that all government less extensive than the whole earth is perilously inadequate. The only tolerable kind of government, concludes our hypothetical philosopher, is World Government. He would be quite right on his own terms, but anyone who lived through the last few years can see that his assumption is open to dispute, and thus his conclusion dubious.
But we can argue until we're blue in the face that regulation of compensation by some panel of bureaucrats in Geneva (or wherever) is an offense to free enterprise, or that rescuing borrowers of every size and shape is moral hazard, or that allowing a securities firm (or gargantuan industrial corporation with a vast finance arm) to “borrow” the balance sheet of the FDIC in order to issue cheap debt, is reckless corporatism -- we can argue thusly and be perfectly right; and perfectly impotent. The die was cast decades ago. The first securitization contracts were inked in the mid-1980s. By 1997, when the hedge fund Long Term Capital Management failed, the securitization market was sufficiently huge and integral — and fragile — to bring all of world finance to its knees at the collapse of any one of its larger players. LTCM was rescued by private capital (facilitated by the Fed) but smart investors had already espied the lineaments of the doctrine of Too Big to Fail well enough: Off at the end, governments of the world would intervene to rescue high finance from its own excess.
Off at the end, in other words, the project of globalization would continue whether or not it was economically workable. How workable it was can perhaps be glimpsed in the astonishing character of some of the specific detonations of the collapse.
Iceland hosts a population of about 350,000 souls. Last year its banks were exposed as carrying balance sheets with assets in excess of $200 billion. All three major banks were nationalized. The town council of Wingecarribee, Australia, outside of Sydney (pop. 42,000), bought $20 million worth of securities from Lehman Brothers Holdings Inc., the demise of which securities firm touched off the panic last year. Wingecarribee came out with pennies on its dollars. The crumbling of Lehman Brothers also touched off a run on money market funds so severe as to bankrupt the first and oldest money market fund and force the US Treasury and Federal Reserve to intervene in the commercial paper market. AIG, despite its collection of highly-profitable enterprises, was ruined by collateral calls on its derivative portfolio. General Electric nearly met a similar fate, from the other side of the derivative’s trade, last March. Here were two titans of American industry which, by exposure to high finance, were laid low and required rescue from the government.
These stories could be spun out at great length. The usury crisis of 2009 simply made explicit what had been implicit. High finance and globalization are interwoven. A union of commerce and state policy, developing over the course of a generation, produced a very peculiar system of hi-tech finance. This system facilitated the movement of extraordinary sums of capital, moment by moment, from around the world, into fields of speculative investment, above all American real estate. But far from enhancing stability as many promised, globalization of finance capital resulted in extreme fragility. Once broken by a crisis severe enough, the system’s fundament was disclosed to all: it rested, in the end, on the promise or expectation of government support.
In sum, it is idle to speak of the high finance we have known as if it were the authentic consequence of a free enterprise system. It would be better to say that it was an imposition by government. At any point of serious pressure, the withdrawal of government support would have resulted in ruinous collapse; the kind of collapse that no statesman could, in good conscience, forbear to move against. It is not too much to say, in other words, that central bankers and treasury secretaries were under a positive obligation to move, or resign their posts. To imagine a Federal Reserve Chairman approaching this disaster with a policy of studied neglect is to imagine a War Secretary who is a committed pacifist, or a Foreign Minister who has abjured all diplomacy.
But it would perhaps be best to follow Hilaire Belloc and say that the union of finance capital and state-globalization produced a third thing: a kind of postmodern Servile State, where all financing debts, in the end, fall upon the taxpayers, and decisions are made by a global government, plutocratic in character, mild but extensive in its despotism, obscure in its mechanisms, and unchallenged in its power.