Governance, Regulation & Financial Market Instability: The Implications for Policy

1. Governance, Regulation & Financial Market Instability: The Implications for Policy Sue Konzelmann & Marc Fovargue-Davies (Frank Wilkinson & Duncan Sankey) Re-engineering the Corporation London 26 March 2010

2. Introduction & Overview • Galbraith’s ‘conventional wisdom’ • Shifts in policy, economic impacts & theory • ‘Galbraithian Episodes’ since 1919 • Policy options constrained by: • globalization and progressive de-regulation • increasing importance of financial sector • excessive levels of debt • Conclusions, implications for policy & next stage of the research

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 late 1970s • The late 1970s to the present

4. Episode 1: From ‘laissez faire’ to government stimulus • USA • The ‘Roaring 20s’ – ‘an astonishing boom’ (Arndt 1944) • Economic slowdown, Crash, & the Great Depression • Roosevelt’s ‘New Deal’ intervention … although it takes World War II to bring full recovery • UK • The 1920’s ‘doldrums’ (Howson 1975) • 1931 interest rate cut accidentally triggers house building & consumer durables boom • 1937 re-armament leverages the recovery

5. Episode 2:The ‘Golden Age’ • Widespread commitment to Keynesian full-employment and the welfare state • Macro-economic performance characterized by full-employment, non-inflationary growth and rapidly rising living standards

6. 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

7. Episode 3:Neo-liberalism unleashed – the return of laissez faire • Confidence in markets & de-regulation • Strengthening of the shareholder model & relaxation of the money supply • Securitization & expansion in debt funding … vulnerability to shifts in confidence • Leveraged buy-outs, foreign competition & inflation hollow out the ‘real’ economy whilst the finance sector achieves dominance

8. Episode 3: The Financial Market Crisis & Economic Downturn • Failure to revitalize the industrial base strengthens reliance on the financial sector whilst the absence of other export opportunities increases national debt • Globalization & financial market ‘innovations’ have outpaced the capacity to supervise & regulate • Loss of confidence in financial mkt precipitates crisis • Financial market crisis has re-bound effects on the real economy & the recession deepens

9. Conclusions & Implications for Policy • The current debate: How to pay down the national debt by cutting government expenditure • Starving the economy of funds through austerity policy is likely to undermine economic recovery • Stimulus 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