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

Introduction & Overview Galbraiths 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

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

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

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

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

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

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 Episode 3: The Financial Market Crisis & Economic Downturn

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 Conclusions & Implications for Policy