Financial Regime Change?

Robert Wade in The New Left Review:

The downward spiral of credit contraction is being driven by a pervasive collapse of trust in the entire structure of financial intermediation that underpins capitalist economies. With debt levels running high and the economic climate worsening, many enterprises in the real economy must be close to bankruptcy; hence lenders and equity buyers are staying out of the market. Governments have therefore moved to stabilize credit markets by taking steps to encourage buyers to re-enter the market for securities—most notably the us Treasury, with its $700 bn bail-out scheme. Several European states have moved to steady the banking sector, with Ireland, Greece, Germany, Austria and Denmark guaranteeing all savings deposits in early October 2008. Competition rules have been set aside, as governments foster mega-mergers. In the uk, the recent merger of hbos and Lloyds tsb creates a bank with a 30 per cent share of the retail market.

The sheer monopoly power of such new financial conglomerates is likely to prompt a stronger regulatory response. Another key area to watch in terms of gauging the robustness of governmental responses is the market for Over the Counter (otc) derivative contracts—which Warren Buffet famously described in 2003 as ‘financial weapons of mass destruction’. Buffet went on to say that, while the Federal Reserve system was created in part to prevent financial contagion, ‘there is no central bank assigned to the job of preventing the dominoes toppling in insurance or derivatives’. In the event that more regulation of the otc market is implemented—even in the minimal form of requiring the use of a standard contract format and registration of the details of each contract with a regulatory body—Brooksley Born will have some satisfaction. She was head of the Chicago Futures Trading Commission in the late 1990s, and proposed in a discussion paper that the otc market should come under some form of regulation. Alan Greenspan, sec Chairman Arthur Levitt and Treasury Secretary Robert Rubin were so angry at her for even raising such an idea that they sought Clinton’s permission to have her fired; in January 1999 she duly resigned for ‘family reasons’.

by the banks’ demise.