1. Governance, Regulation & Financial Market Instability: The Implications for Policy Sue Konzelmann & Marc Fovargue-Davies (Frank Wilkinson & Duncan Sankey) REFGOV / DEMOGOV Brussels 26-28 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

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