Aula 15 A Grande Depressão

Eichengreen ,Golden Fetters,

Resumo da Introdução .

1)  O sistema capitalista sofreu uma crise neurológica. O great crash de 1929 foi seguida por colapos de finstituições financeiros e implosão na atividade financeira. A redução subsequente do nivel de atividade foi chamada de a Grande Depressão. A grande catástrofe econômica dos tempos modernos.

2)  Fenômeno global. Apesar de impressão de ser fenomeno americano, a grande depressão foi severa porque afetou muitos países ao mesmo tempo.Tôdas enfrentaram dificuldades financeiras e muitas experimentara crises financeiras.Tem sentido, portanto, procurar a chave do quebra cabeça da Depressão nas insituições que ligam os mercados financeiros de diferentes paises.

3)  Aqui entre ao padrão ouro.Por mais de um quarto de século antes da I grande guerra  o padrão ouro era estrutura das relações monetárias internacionais e domésticas. As moedas eram conversíveis em ouro e ligadas internacionalmente por taxas fixas de câmbio. Embarques de ouro eram a último recurso para liquidar (settle) balanços de pagamentos. Foi mecanismo extremamente eficiente . Nenhuma crise financeira semelhante a de 29 havia disrupted o sistema financeiro e nenhuma depressão igual a dos anos 30 em termos de produção e emprego havia ocorrido.

4)  Os elementos centrais deste sistema foram destruidos com o começo da grande guerra. Mais do que uma decada foi necessaria para completar a reconstrução. Logo ficou evidente, que o sistema do padrão ouro reconstruido depois da guerra era menos capaz de recuperação ou elástico do que o seu predecessor.Logo em 1929 o sistema começa a desmoronar ( se esmigalhar, crumble). Inflações elevadas  forçaram paises produtores de commodities primarias a suspender a conversibilidade. Problemas de pagamento se espalharam em seguida para os países industrializados. No verão de 31 Austria e Alemanha sofreram crises de pânico bancário e impusream controles de cambio, suspendendo a convertibilidade. Grã Bretanha,  junto com os Estados Unidos e a França , pais do centro do sistema financeiro internacional abandona o padrão ouro no outono de 31.Os Estados Unidos em 1933. França ficou até o amargo fim em 1936.

5)  Geralmente, afirma-se que o colapso do sistema financeiro internacional foi o culpado por transformar uma crise modesta e doméstica em uma depressão sem precedentes. Se o padrão ouro tivesse se mantido, a crise seria mais uma crise cíclica. Mas o colpaso do sistema do padrão ouro levou a desconfiança no sistema financeiro, gerando fuga de capitais e insolvência no sistema financeiro.A crise pulou de país em país ,levando para baixo o nível de atividade .A remoção do padrão ouro agravou a crise, diz este tipo de argumento. A remoção do padrã ouro engendrou políticas protecionistas e de desvalorização cambial competitiva que intensificaam a crise .

6)  O padrão ouro convencionamente descrito como sinonimo de estabilidade financeira. A mensagem central deste livro é precisamente o oposto. O padrão ouro era a principal ameaça a estabiidade financeira e a prosperidade econômica durante os anos entre as duas guerras.

7)  Para entender por que: primeiro, entender porque o sistema de padrão ouro funcionou tão bem antes da Primeira Guerra e tão mal depois. Depois, analisar conexões entre padrão ouro e a Grande Depressão.Finalmente, mostrar como a remoção do padrão ouroestabeleceu pré condições para a recuperação .Estas, as tres tarefas do livro.

Como o padrão ouro funcionava.

1)  Existe considerável consenso para explicar funcionamento tão bom antes da I Grande Guerra e tão ruim depois. Explicação dominante- Charles Kindleberger, que atribue bom funcionamento  ao bom gerenciamento do sistema pela Inglaterra , membro líder da economia mundial antes da Guerra. A Grã Bretanha e o Banco da Inglatera ,diz-se ,estavam sempre dispostos a aumentar os empréstimos externos quando o nível de atividade se reduzia, reduzindo a amplitude dos ciclos. Teria funcionado como emprestador de última instância .Depois da I Grande Guerra , a Grã Bretanha estava muito fraca para continuar executando esta missão . Teoria da estabilidade hegemonica.

2)  Capítulo 2 desafia este argumento.Não havia hegemonia no periodo anterior a Guerra. Nem umpaís isolado  administrava o sistema financeiro internacional. O sistema de padrão ouro era decentralizado e multipolar. Sua operação suave não pode ser atribuida a intervenções estabilizadoreas da potência dominante.

3)  A estabilidade do sistema de padrão ouro era devida, antes, a dois fatores: credibilidade e cooperação. Credibilidade- confiança do público no compromisso do governo com uma determinad apolítica. Derivava da prioridade atribuida ao equilíbriono balanço de pagamentos.Inglaterra, França e Alemanha tomariam qualquer medida que fosse necessária para garantir a conversibilidade , defender as reservas de ouro do banco central,.Se aposição de um destes bancos se tornasse mais fraca,  haveria momvimentos de recursos financeiros do exterior em antecipação dos ganhos de capital que seriam obtidos quando as autoridades tomassem as medidas necessárias para reequilibrar as reservas. Movimentos de capital eram estabilizadores´por que havia credibilidade no compromisso oficial de manutenção da conversiblidade em ouro.

4)  Por que havia credibilidade no compromisso de conversibilidade?  a-pouca consciência de que politicas de equilibrio externo eram inconsistente com equilibrio e prosperidade internas. O desemprego apareceu como um problema social e economico só no final do século XIX.Na Inglaterra Vitoriana, desemprego- pauperismo, vagrancy e destittution. Nos Estados Unidos, sem trabalho, ociosos ou preguições mas raramente desempregados. Na França e Suecia, vagrancey e vagabondism. Desemprego tido como problema individual.sem compreensão de como estava associado ao trade cycle.

5)  Mesmo observadores que ligavam desemprego ao ciclo, raramente relacionavam ciclo a polític monetária ou taxas de juros. Não havia teoria bem articulada sobre com política do BC afetava a economia. Aqueles que faziam a relação, como Hawtrey,  argumentavam que política monetária ampliava amplitude do ciclo. Ao invés de advogar política monetária ativa, advogavam política passiva e previsível.

6)  Classe trabalhadora , com pouco poder político, incapaz de desafiar estado de negócios. Sindicatos ainda limitados em muitos paises. Partidos de trabalhadores mesmo quando exisitam tinham influência limitada. Pressões políticas domésticas não ameaçavam a credibilidade do compromisso com o ouro.

7)  Argumento não deve ser exagerado. Na primeria década do século XX desemprego era questão social proeminente. A difusão do sindicalismo e do sindicatos havia aumentado a influência dos trabalhadores. Havia um consenso crescente  que as taxas altas de juros desencorajavam investimentos e deprimiam o comércio. Banqueiros centrais não eram insensíveis. Mas mesmo assim, tendo que escolher entre objetivos externos e internos , não hesitavam.

8)  Policymakers não acreditavam que deficits públicos ou gastos maiores  pudessem ser usados para estabilizar a economia. Mantinham orçamentos equilibrados e quedas de receitas geravam reduções de gastos. Nunca precisavam controlar deficits públicos para evitar saida de ouro, pois deficits públicos não existiam.Carga tributária estabelecia por normas estáveis.- tarifas de importaçõao, impostos sobre a renda ou atividade doméstica eram pouco frequentes e não importantes e dificieis de cobrar. Tarifas de importação geralmente pagas por compradores de bens importados, geralmente assalariados com pouco poder político. Necessidade de reduzir deficits não levava a problema político sobre quem deve pagar. O governo podia prometer dirigir política fiscal e monetária em funçaõ do balanço de pagamentos.

9)  Assim- constelação particular de poder político , reforçado por instituições políticas e uma visão particular do funcionamento da economia eram o fundamento do padrão ouro clássico. Eram a base da creditibildiade do sistema.

10)               Mas, em útlima palavra, a credibilidade do sistema dependia da cooperação internacional. Quando o movimento de capitais estabilizador e a intervenção doméstica eram impotentes para acomodar o desequlíbrio, o sistema era estabilizado pela cooperação internacional entre governos e bancos centrais. Problemas menores eram reseolvidos por cooperação tácita. Em casos maiores, que requeriam um afrouxamento geral de crédito, o ajustamento era feito simultanemante por diferentes bancos centrais.Ações unilaterais eram arriscadas. Se um bc reduzisse a taxa de juros isoladamente e outros não fizessem corria o risco de perder ouro e ser obrigado a voltar atrás. A coordenação nestes casos era do Banco da Inglaterra . O Banco da Inglterra consituia o ponto focal para a harmonização da política monetária do sdiferentes paises.

11)               Crises maiores entretanto requeriam diferentes respostas de diferentes bancos centrais.O país perdendo ouro deveria aumentar juros para atrair recursos de outros paises, e outros bancos centrais deveriam reduzir as taxas  para que movimento pudesse ocorrer mais efetivamente. A política de siga o chefe não funcionava  nestes casos. Havia, nestes casos, cooperação aberta e consciente entre bancos centrais e governos.

12)               Assimn, o que tornava o padrão ouro crível não era apenas o compromisso nacional de conversibilidade, mas a credibilidade e o compromisso de todos os paises envolvidos.

13)               A cooperação é diferente da idéia convencional que enfatiza o papel do Banco da Inglaterra. A diferença não precisa ser superdimensionada. Em periodos de tranquilidade, o Banco da INglaterra tinha uma liderança reconhecida tacitamente por outros bancos centrais. Em tempos de crise, esta lidernaça era insuficiente para resolver a crise. Durante as crises maiores particularmente 1890 e 1907 o Banco da INglaterra, ao invés de líder, era ele proprio, refem da cooperação internacional, e ao invés de emprestador de ultima instancia era um tomador de empréstimo de úlitma instancia.

14)               Na década  antecedendo a I Grande Guerra, cooperação internacional era cada vez mais frequente e regular. A liderança do Banco da Inglaterra era desafiada e a cooperação, mais importante.

15)               Os dois eixos (lihcpins) –credibilidade e cooperação- que prevaleceram anters da Guerra, foram erodidos depois da Guerra. Credibilidade foi desafiada por conjunto de mudanças políticas e econômicas que estraçalharam (shattered) a constelação particular de poder plíticos que permitiam política anterior a 1913. Para conseguir tranquilidade na area trabalhaista, durante a Guerra, governos incentivaram o sindicalismo. Questões que estavam fora da arena poítica anteriormente, como fixação de salários e emprego, se tornaram politizadas. Aumento da sindicalização e crescimento dos partidos polítcos dominados por trabalhadores intensificaram as pressões para adaptar as politicas a metas de emrpego. Quando havia conflitoe entre equilibrio interno e externo, não estava mais claro quem venceria. A duvida sombreou a credibilidade do padrão ouro.Os fluxos de capital deixaram de ser estabilizadores. Ao contrário, passaram a ser desestabilizadores. A ersosão da credibilidade transformou o sistema vulnerável a choques desestabilizadores.

16)               As decisões dos bancos centrais passaram a ser “moídas no moinho político”. Criticadas a esquerda, por aumentarem o desemprego e a direita, por atenderem as massas. A insulação dos bancos centrais foi perdida.

17)               Quando a independência dos bancos centrais foi perdida, apareceram inflações explosivas. Incapazes de controlar o orçamento fiscal, a oferta de meios de pagamentos aumentava. Em alguns países, os episódios inflacionários e as crises duraram até 1926. As lições do periodo ilharam os bancos centrais da França, Alemanha e outros paises. Os novos estatutos impediam que os bancos centrais cooperassem. Os novos estatutos destinados a aumentar a credigilidade do padrão ouro acabaram por ter o efeito pervesrso de impedir a cooperação.

18)               A política fiscal tinha menos proteção ainda que os bancos centrais. A guerra desmoronou o entendimento sobre a distribuição da carga tributária que existia antes de 1913. O nível e a composição da carga tributáira se alteraram radicalmente. Grandes redistribuições de renda. Guerra fiscal de atrito entre todos os contribuintes. Cada facção tinha a esperança de que a outra cederia. Mesmo onde os BCs despolitizados, a política fiscal  era politizada. Ausencia de consenso sobre a distribuição de carga fiscal acabaava com a garantia de que os impostos poderiam ser usados para defender o equlibrio fiscal e o padrão ouro. A vítima foi a credibilidade.

19)               O tema deste livro- a conexão entre política e economia internacional. Padrão ouro sistema político e economico.A estabilidade do padrão ouro dependia de constelação particular politica e econômica. A instabilidade depois da guerra é atribuida também a nova constelação política e econômica. A política entra em dois níveis:  primeiro, pressão política interna influencia escolha de politicas economicas internacionais; segundo, pressões pooliticas internas influenciam a credibilidade do compromisso do governo com políticas econômicas.

20)               Com a erosão da credibilidade, cooperação internacional mais importante do que antes. Mas a cooperação mais dificil: restrições políticas internas disputas políticas internacionais e estruturas conceituais diferentes entre os países. Interesses políticos domésticos conseguiam postergar ajustamentos na politica economica que ajudariam a cooperação internacional. A disputa internacional sobre pagamentos de reparação e dividas de guerraa sombra escura sobre todas as negociações internacionais. Conceituações diferentes, estruturas conceituais diferentes impediam governos de chegar a compreensão comum dos problemas e muito mais, a uma solução.

21)               A natureza das estruturas conceituais pode ser explicada em termo da experiência histórica das diferentes nações. Dioferntes experiencias com inflação criava diferentes visões sobre as conexoes entre finanças, e o papel da política monetária. França que soferu inflação persistente acrditava que politica monetária discricionaria era causa de inflação . Inglaterra que tinha evitado inflação  e restaurara a paridade cambial de antes da guerrra, reconhecia a importancia da cooperação internacional e da intervenção. Aos olhos franceses, credito excessivo e a violãção do padrão ouro eram responsaveis pelo colapso economico e financeiro pós 29. Para os isngleses, a falta de liquidez internacional resultante da aderencia irrestrita as regras do padrão ouro eram responsáveis pela crise. Não havia cooperação possivel .

22)               As divisões conceiturais não eram apeans entre paises. Grupos políticos internos eram igualmente importantes. Nos Estados Unidos que estabeleceram finalmente um banco centyral em 1914, os banqueiros de Nova York tinham percepção mais adequada das finanças internacionais do que os colegas de Washington. Disputas entre Washingont e Nova York tornaram a instituição imprevisível. Até o Banking Act de 1935 que consolidou o poder , havia excessiva influencia dos banqueiros domésticos sem experiencia ou simpaita por questoes financeirass internacionais. A chegada dos novos participantes acabou com a clubby atmosphere de cooperação entre banaqueiros centrias.

23)               Um encontro formal entre os participantes poderia ter ajudado. Nos anos 20, foram propostas a criação de instituições internacionais tão importantes quanto as de Bretton Woods em 1944. Mas o BIS criado apos conferencias de Bruxelas em 1920 e de Genova em 1922 não foi importatne. As responsabilidades internacionais do Bis focalizaram os pagamentos de reparação da Alemanha. Mas os Estados Unidos não puderam tomar parte por causa das relações entre dividas de guerra que tinhamn a receber e os pagametnos de reparação alemães.

24)               Ainda seria possível que os banqueiros centrais se reunissem informalmente e consultasse. Mas as disputas internacionais impediam acordos locais como as tentatias de garantir um emprestimo para Alemanha e Áustria em 1931. O emprestimo para Áustria falhou por causa da insistencia francesa para que a Austria abrisse mão da uniao aduaneira com a alemanha. O empréstimo para a Alemanha falhou por causa das disputas sobre os pagamentos de reparação alemães. Além disto, restrições políticas internas.

25)               O argumento portanto é que a credibilidade e a cooperação foram centrais para a operação suave do padrão ouro.E ambos eram impossíveis depois da Primeira Guerra. A instaibilidade do padrão ouro era inevitável depois da guerra.

As Causas da Grande Depressão.

1)  Dada a instabilidade criada pelo padrão ouro no periodo entre guerras, falta explicar como o padrão ouro leva a grande depressão.Esta ligação leva amudanças de balanços de pagamento herdadas da primeira grande guerra. A guerra fortaleceu o balanço de pagamentos dos EUA e enfraqueceu o as outras nações. Nos mid 20s, o equilibrio do balanço de pagamento da outras nações era tênue e mantido graças a fluxos de capital dos Estados Unidos. Se os empréstimos americanos fossem interrompidos, a fragilidade destes equilibrios se reveleava. Conforme perdiam ouro e reservas em moeda estrangeira, a conversibilidade das suas moedas era ameaçacada. Os bancos  centrais então estariam forçados a cortar crédito doméstico, cortes de gastos públicos e levavam a economia a recessão.

2)  É o que aconteceu no outono de 28 quando o Fed adotou politica monetária restritiva. Por azar, o corte monetário dos Estados unidos coincidiu com maciço movimento de ouro para a França onde a política monetária era restritiva por outras razões. Assim, EUA e França drenaram ouro de outras partes do mundo. Grande contração monetária nos outros paises. Acompanhada de restrições de política fiscal em partes da Europa e da América Latina. Mudanças de política nos Estados Unidos e nos outros países coincidiram e criaram o palco para a queda de 29.

3)  Estas explicações não aparecem na literatura.

4)  Para entender, analisamos efeitos econômicos da Primeira Guerra. A guerra fortaleceu a posição competitiva dos Estados Unidos na industria. Setor agricola americano, extremamente produtivo. Resultado: balanço de pagamentos americano acumulava grandes superaits. Fluxo de capital reforçava esta tendência.Depois da Guerra, pagamentos de dividas vinham da Alemanha para os Aliados e dos Aliados para os Estados Unidos. Seriam necessários empréstimos dos Estados Unidos para a Europa Central  para recilar estes fluxos . A América Latina precisava de emprestimos para compensar a queda dos preços dos produtos primários. e o hemisfério ocidental precisava de emprétimos de reconstruçao pos guerra.

5)  No começo, o processo funcionou suavemente. Emprestimos generosos dos Estados Unidos . A Alemanha e novas nações da Europa Oriental  receberam emprestimos americanos que possibilitou combater hiperinflação em compenssação pela adoção de medidas de austeridade fiscal. Hiper acaba sem grandes recessões. Emprestimos para a Inglaterra permitiram o restabelecimento da paridade préguerra a custos reduzidos. Tudo facilitado pela politica monetária americana generosoa e a juros baixos. A expansão do crédito domestico americano evitava compras maciças de ouro pelos Estados Unidos.

6)  A política monetária acomodaticia dos anos 24-27 não é vista, em geral, com bons olhos, pois deu incio o boom de Wall Street criando o cenário para o crash de 29  que iniciaria a Depressão.Não há evidencia, entretanto, de que a politica monetária é responsável pelo boom da bolsa da epoca. Mais provável o contrário- que o boom da bolsa expandiu a política monetária. A partir de 28 Federal Reserve se preocupa com a orgia especulativa da bolsa e começa a apertar a política monetária.

7)  Juros americanos crescentes cortam empréstimos americanos externos. Efeitos no verão de 28. Conforme emprestimos se reduziam, políticas monetárias restritivas eram adotadas  para defender paridade do ouro e pagamentos da divida. Muitas vezes, as mais draconianas medidas não eram suficientes e devedores eram obrigados a abandonar o padrão ouro.

8)  Serviço da divida era mantido na esperança de acesso posterior ao mercado financeiro internacional. Mas a queda da bolsa foi seguida pela grande depresão.Comércio internacional implodiu. Protecionismo nos Estados Unidos e em outros países agrava problema dos paises da Americ Latina. Default na America Latina em 31, na Europa Central em 32, na Alemanha em 33. Grande decepção para credores. Para a Inglaterra que dependia de rendas do exterior, default agrava problemas de balanço de pagamentos criando a crise do libra esterlina  em 31.

9)  Inicio da queda do nivel de atividade nos Eua é uma especie de misterio, deux ex machina. Não há consenso sobre causas. Aperto da política monetária em 28-29 paree modesto para explicar queda do GNP de 29 e 30 a uma taxa duas vezes mais rapida do que a tipica para inicios de recessão. Desequilibrios estruturais na industria americana- queda na venda de automóveis? Impacto da perda de riqueza pela queda da Bolsa?

10)               Debate sobre origens do Crash sem resolução.Não é surpresa- pois analise se concentra nos fatores internos da economia americana. Não é possível explicar sem levar emconta ligação com outras economias do mundo. A virada americana em 1929  já era evidente antes em outros países do mujndo. As exportações americanas começaram a cair antes da produção industrial. Não havia a alternativa para industria de desviar produção para exportaçõees. Por isto virada foi tão severa.

11)               Portanto, a virada debilitante de 29-30 não resultava apenas de uma mudança interna da politica americana mas de uma politica restritiva no mundo inteiro. Politica economica ligada no mundo inteiro pelo sistema do padrão ouro. Mudança nos Estados Unidos gera muidança no mundo inteiro por causa do tremendo impacto nos balanços de pagamentos. Autoridades fiscais tinham que entricheirar-se para cortar gastos domesticos e limitar a demanda de importações.

12)               Os policy makers americanos, por outro lado, não tinham que reagir a melhoria do balanço de pagamentos soltando as redeas. Enauqnato o boom da bolsa continuava , o Fed aumentava taxas de juros ao inves de reduzilas.Assim, os aumentos de juros nos outros países precisavam ser reinforçados para compensar o aumento americano. A assimetria do sistema de padrão ouro era a ultima coisa necessária no periodo 28 29.,

13)               Talvez salários e outros custos podeiam cair para compensar a redução da oferta de meios de pagamntos. Fizeram isto apenas modestamente. Rigidez das hipotecas fixadas com juros nominais, rigidez dos alugueis fixados nominalmente, bonds pagavam juros nominalmente fixos . Sem mecanismo de coordenação, nenhum preço nominmal caia.

14)               Nada disto explica por que os governosforam tao lentos para reagir a grande depressão.Se salários não caiam politica monetaria poderia ter expandido. Se consumo não aumentava, gastos públicos poderiam ser aumentados. Mas politica monetária e fiscal continuava limitada pelo padrão ouro. A politica fiscal era contracionista e reduziu gasto publico.A politica acentuou o declínio da demanda.

15)               Resposta perversa mas não paradoxal. Não havia outra coisa a fazer dado o compromisso com o ouro. Politica monetaria expansionista teria tornado as moedas inconversiveis. Enquanto não desvaloirzassem a moeda politicas expansionistas eram obrigadas a voltar atrás. A Inglaterra aprendeu isto em 1930, os Estados Unidos em 31-33, a Belgica em 34 e a França em 34-35. Mesmo os paises lideres nas reservas de ouro eram cosntrangidos pela regra do padrão ouro.

16)               O dilema era se o sacrificio pelo padrão ouro para reflacionar a economia  ou forçar todas as medidas que eestabilizassem o padrão ouro e estabilizssem a economia. Para isto, era necessária cooperação internacinal  Se todos expandissem , poderiam salvar o padrão ouro.Sob o padrão ouro, reinflação requeria cooperação internacional.

17)               A lição foi aprendida da forma mais dificil. Pressões politicas exigiam politicas de reinflação. O padrão ouro era ameaçado . Caso da França sob Flandin e Laval em 34-35. Nos Estados Unidos, opern market expansionista  levaram aperda de reservas na pimavera e noverao de 32. O problema não era a falta de liderança dos EUA mas a falta de cooperação.

18)               Oportunidade de cooperação-  Conferencia Economica em Londres em 33. A qiestão das dívidas de guierra, ainda iressolvidas, complicavam as negociações. Interesses minoritários bloqueavam as negociações. Policymnakers tinham diagnósticos diferentes da situação. Ingleses percebiam a recessão como resultado de taxas de juros muito altas desde 1925. Os franceses que haviam passado por inflações de dois digitos em 1926 acusavam a depressao como resultado de politicas expansionsitas. Os americanos pareciam com os franceses enquanto Herbert Hoover era presidente e até FDR virar presidente. Não havia forma de chegar a consenso e coordenar politicas de difernees paises.

19)               Até agora, temos explicação para o impulso desestabilizador e sua propagação.

20)               Mas o que ampliou o efeito desestabilizador? Instabilidade financeira começando na setgunda metade de 30. Falencias bancaraias e caos que levaram a liquidação de depositos bancários .

21)               Esta resposta gera outra questão. Por que policy makers não agiram para evitar o colapso do sistema financeiro ? Porque o padrão ouro criava barreiras intransponíveis para ação unilateral. Injetar liquidez acabaria com as reservas do pais. Defesa da conversibilidade  obrigava autoridades  a não fazer nada para salvar o sistema bancarios como o FRB tentou em 31 e no começo de 33.

22)               Mesmo quando arriscavam a conversibilidade para intervir como emprestadores de ultima instancia, o funcionamento do padrão ouro tornava suas inciativas contraprodutivas. O risco da inconversibilidade  fazia com que investidores corressem para tirar o dinheiro do pais. Liquidez adicionada desparecia em depositos que fugiam para o exterior.

23)               Estas ligações desestabilizadoras entre o sistema financeiro nacional e internacional era maior quando depositos estrangeiros eram mais importante. Caso da Europa era este. Bancos alemaes mantinham depositos em Vioena. Bancos austriacos tinham depositos na Alemanha. Conta de capital do balanço de pagamentos logo se tornava instavel. Antecdipação de desvalorizações cambiais  levavam a conversão de depositos em ouro. Simultaneidade de panicos bancários e conversisbilidade eram sitemáticas e não coincidentes apenas.

24)               Alemanha é bom exemplo. Reichsbank obrigado a manter cobertura de ouro de 40%. A taxa de cobertura  era baixa  devidoa  fraqueza da balança alemã. A crise na Áustria foi a palha que quebrou as costas do camelo. Depositos alemaes na Austria congelados, a crise se espalhou pela Hungria e outros paises da Europa Central. Cobertura caiu logo para minimo legal. Credores do pagamento de reparação  escreveram em 1930 no Tratado de Hague Haia cláusulas exigindo que a Alemanha pedisse permissão para o BIS e para o Tribunal Arbitral do Plano Young antes de mudar a lei do padrão ouro..O Reichsbank foi obrigado a recuar e esperar que a crise bancária seguisse seu curso.

25)               Forças analogas nos Estados Unidos em 33 e na Belgica em 34 para citar dois exemplos. Paises fora do padrão ouro como Dinamarca e Suecia que deixaram o padrão ouro em 31 tinham liberdade para agir.O padrão ouro não era garantia de estabilidade, mas, ao contrario, o maior impecilho para a sua manutenção.( bulwark- muralha)

26)               Uma vez mais, o dilema requeria cooperação internacional. Credito itnernacional poderia ter evitado crises. Maior a demora para agir, maior o credito necessário. O emprestimo pedido pelo Reichsbank em 31 teria exaurido as reservas de ouro americanas. Podeioa ter sido oferecido por vários paises. Mas- pagamentos de reparação, disputas, e desacordos doutrinários impediam a cooperação.

27)               A estrutura especial do padrão ouro do entreguerras aumentava a vulnerabilidade do sistema. O sistema de entreguerras  admitia reservas em muitas moedas. Bancos centrais eram autoridados a manter, em adição ao ouro, uma porção das reservas em moedas conversivies. Mantinham resrvas em ouro, dolar, francos, e libras. Qualquer mudança naestas moedas gerava rapidas mudanças na composição das reservas dos bancos centrais.

28)               Suplmentar o ouro com moedas conversiveis não era inovação recente. Mas a pratica havia se generelizado e se expandido.

29)               Ameaças ao padrao ouro que se reinforçavam é a metodologia deste livro.

O fim do padrão ouro e o fim da Depressão.

1)  Se o padrão ouro complicou a depressão, o fim do padrão ouro ajudou? Consenso atual – desvalorização decorremte do fim do padrão ouro não conseguiu melhorar as condições e exacerbou a depressão. Nada mais contrario a evidência. Onde houve desvalorização , houve estimulo a recuperação;

2)  Vantagem da desvalorização- libertou politica monetária e fiscal. Não era mais necessário cortar gastos publicos . “Ha poucos ingleses que não se regojizaram com o fim dos grilhões de ouro” disse Keynes quando a Inglaterra foi obrigada a desvalorizar em 1931.

3)  Não era apenas padrão ouro como instituição que era obstáculo a recuperação da economia. mas também o padrão ouro como ethos. Abandonar o padrão ouro era necessário mas não suficiente. Um pais poderia abandonar o padrão ouro e não abandonar a ortodoxia financeira. Somente quando os principios da ortodoxia financeira eram abandonados havia recuperação.

4)  Na Belgica, abandono do padrão ouro permitiu expandir credito domestico e gastos domesticos. Produção e emprego responderam rapidamente a demanda. Como expansão de credito aumentou preços domesticos, desvalorização não causou mudança na taxa de cambio real. Houve pouca aumento de competitivdade internacinal.

5)  Na Tchecoslováquia, depreciaçãonão levou a criação de credito domestico. Exportações aumentaram . Expansão das exportações levou fortalecimento do balanço de pagamentos importação de ouro e expansão do crédito domestico. Produção e emprego crescerma mais lentamente. Inglaterra, entre estes dois casos extremos. França desvalorizou e cortou credito domestico que neutralizaram beneficio da desvalorização.

6)  Maior parte dos paises mais rapidos em desvalorizar do que em abandonar o ethos do padrão ouro. Passavam seis meses antes que desvalorização levasse a expansão do credito domestico. O intervalo era necessário para convencer o publico que abandono do padrão ouro não elvava a inflação.

7)  Assim, a failure na adoção de politicas expansionistas e não a depreciação foram responsáveis por recuperação lenta. A enfase nos efeitos saudaveis da desvalorização é muito diferente da avaliação negativa que a literatura faz. Outros autores enfatizam a politica de beggar thy neighbor. Estes efeitos existiram. A magnitude destes efeitos depende da politicas expansionistas adotadas ou não conjuntamente com desvalorização.

8)  Paises que sofreram mais, sofreram mais por conta propria. Poderiam ter escolhido desvalorizar e reinflacionar. Na ausencia do padrão ouro, a cooperação internacinla não era mais necessária.

9)  Não ha duvida que  a forma confusa pela qual se deram as desvalorização complicaram a situação. Paises que ainda estavam no padrão ouro usaram medidas protecionistas como tarifas e quotas. Frequentemente estas mediodas levavam a retaliação Produtores protegidos criaram interesses politicos na manutençao do protecionismo. Retaliação tornou dificil cooperação e coordenação de polítcas que reduzissem a depressao.

10)               Desvalorização não prevista encorajou a liquidação de reservas internacionais. Conforme paises competiam por obter mais ouro para suas reservas, pressões nos paises que ainda estavam no padrão ouro eram ainda mairoes. Desvalorizações ordenadas teriam evitadoo isto. como a desvalorização negociada pela frança em 36.

11)               Em ultima analise,  a questão é saber porque paises reulutaram tanto em abandonar o ouro e perseguir politicas expansionistas mais agressivas. A pergunta leva a questões anteriores- a importãncia da politica domestica e a herança duradoura dos acontecimentos economicos dos anos 20; Em parte , decisoes diferentes refletiam diferenças no equilibrio de poder  entre credores que se beneficiavam da deflação e devedores que sofriam com ela., ou entre produtores de tradables ee de non tradables.Os trabalhadores eram ambivalentes: podiam se mover entre os dois setores  e duvidavam que a desvalorização pudese aumentar o emprego.

12)               As decisões politicas refletiam tambem a experiencia historica de cada pais. No caso da Alemanha, Austria, Huingria e Polonia  a instabilidade de preços dos anos 20 levou a hiperinflações. No caso da França, Belgica e Italia, embora a inflação não tenha chegado a niveis comparaveis, a herança era a mesma. Oss policy makers e o publico continuavam a ver no padrão ouro e estabilidadede preços como sinonimos. E continuava a ver muito tempo depois de 29-31. Desvalorização e inflação eram palavras intercambiaveis sem consciencia de que o seus significado era diferente. A suspensão da conversibilidade levantava o especto da explosão de preços.

13)               Ironia- inflação medo dominante na profundeza da depressão quando o problema presente e real era a deflação. Por que o medo era tão difuso  sua importãncia não pode ser exagerada.

14)               Estados Unidos, INglaterra e Suecia que nao havia passado pela inflação dos anos 20 não viam desvalorização e inflação como fenomenos semelhantes. Medo, sim, mas não fobia.

15)               Politicos alemaes e franceses eram obsecados com a inflação porque levava a divisoes sociais mais profundas. Refletiam a desintegração dos acordos anteriroes a guerra, sobre a distribuição de renda  ede carga tributaria.

16)               A inflação era sintomatica desta guerra fiscal de atrtio. Quanto mais longos fossem os deficits fiscais, mais os publico receava comprar dividia publica. O padrão ouro era o compromisso . Abandonalo siginifca a ameaça de reabrir a disuputa  e reabrir a espiral inflacionaária.

17)               Dificuldade em distinguir desvalorização e inflação não resultava de negligencia intelectual, mas do conjunto comum de pressoes politicas que haviam gerado o fenomeno nas vesperas da guerra.

18)               A guerra de atrito era mais distrituvia e exercia mais influencia inibidora nos paises onde o acordo anterior a guerra havia sido mais desafiado, onde a propriedade havia sido mais destruida e onde as rendas haviam sido mais radicalmente redistribuidas. precisamos de considerações adicionais.

19)               As mais importantes considerações estrutrua da insituições politicas – onde sistema eleitoral proporiconal prevalecia, era mais facil que minorias obtivesem assento nos parlamentos. representando insteresses minoritários e especiais. O governo era sempre por coalizaão. Mais dificil equilibrar orçamento

20)               Paises com representação majoritaria, em contraste, partidos menores nao tinha voz legislativa. Maiores perspectivas de conseguir maioria legislativa e para posições moderadas que representassem maioria do eleitorado. Mais facil aumentar impostos e reduzir transferencias para minorias.

21)               Há uma correlação sugestiva entre crises inflacionárias e representação proporcional. A Primeira Guerra  é atribuida popularmente a nacionalismos reprimidos e ao mal tratamento das minorias. Os arquitetos da estrutura política de pós guerra criaram diversas naçoes a partir do antigo imperio austro-hungaroe encorajaram a adoção da representação proporcional para dar voz as minorias. A Alemanha de Weimar adotou o sistema proporcional. A França modificou o sistem para adotar elementos de proporcionalidade. Estes paises foram os que mais sofreram com a crise inflacionaria. Os Estados Unidos  e o Reino Unido tinham sistema sleitorais baseados em representação majoritária. Não é coincidência que nos anos 30, França, Belgica, Polonia e Itália e Alemanha todos com representações proporiconas sofreram mais com inflação nos anos 20, mantiveramo padrão ouro e impuseram controle de cambio,mesmo depois que outros paises haviam abandonado o padrão ouro.

22)               Paises com sitemas politicos que tiveram maior dificuldade de chegaf a estabilidade política, tinha mais medo da inflação e maiores dificuldades para responder a grande depressão.Mesmo paises como a frança que mudou o sistema eleitoral para reduzir a importancia da proporcionalidades, tinha medo de abandornar o padrão ouro. A memoria histpóriaca oferecia a estrutura para interpretar os eventos economicos .

23)               Ouros autores notaram a tendencia de policy makers usarem a historia como estrutura de referencia mesmo quando as condições mudaram radicalmente. O ponto aqui é diferente. O publico continua a usar a hjsitoria desta maneira. Isto da a policymakers racionais um incentivo para agir na mesma direção.Um publico que tem medo de abandonar o padrão ouro porque provocaria inflação  pode vender seus ativos finaneiros se isto ocorrer tornando tais receios selffullfilling. Policy makers tem toda a razão em procedfer cautelosamente  ao tomar decisões.

24)               Policy em geral e policy com respieto ao padrão ouro em particular tiverm papel pivotal na Grande Depressão. Central no começo da Grande Depresssão. E forma a chave da recuperação. Mas policy não é formulada no vacuo. Policmakers vivem e moram num lugar e num tempo. A experieincia historica- -primeiro com o padrão oujro clássico, depois com a primeira grande guerra e finalmente com a inflação dos anos vinte, modlo suas percepções e condiciiou suas ações com profundas implicações para os eventos subsequentes.

Artigo do Peter Gowan sobre a Crise e o Mercado Financeiro

PETER GOWAN

CRISIS IN THE HEARTLAND

Consequences of the New Wall Street System

The long credit crunch that began in the Atlantic world in August 2007 is strange in its extraordinary scope and intensity. Mainstream discourse, referring to a ‘sub-prime’ crisis, implies that the credit crunch has been caused, rather than triggered, by a bubble in the real economy. This is at best naïve: after all, the bursting of an equally large bubble in the Spanish housing market led to no such blow-out in the domestic banking system. [1] The notion that falling house prices could shut down half of all lending in the us economy within a matter of months—and not just mortgages, but car loans, credit-card receivables, commercial paper, commercial property and corporate debt—makes no sense. In quantitative terms this amounted to a credit shrinkage of about $24 trillion dollars, nearly double usgdp. [2] Erstwhile lenders were soon running not just from sub-prime securities but from the supposedly safest debt of all, the ‘super senior’ category, whose price by the end of 2007 was a tenth of what it had been just a year before. [3]

An understanding of the credit crunch requires us to transcend the commonsense idea that changes in the so-called real economy drive outcomes in a supposed financial superstructure. Making this ‘epistemological break’ is not easy. One reason why so few economists saw a crisis coming, or failed to grasp its scale even after it had hit, was that their models had assumed both that financial systems ‘work’, in the sense of efficiently aiding the operations of the real economy, and that financial trends themselves are of secondary significance. [4] Thus the assumption that the massive bubble in oil prices between the autumn of 2007 and the summer of 2008 was caused by supply-and-demand factors, rather than by financial operators who, reeling from the onset of the crisis, blew the price from $70 a barrel to over $140 in less than a year, before letting the bubble burst last June; a cycle with hugely negative ‘real economy’ effects. Similar explanations were tendered for soaring commodity prices over the same period; yet these were largely caused by institutional investors, money-market and pension funds, fleeing from lending to the Wall Street banks, who poured hundreds of billions of dollars into commodities indices, while hedge funds with their backs against the wall pumped up bubbles in coffee and cocoa. [5]

Breaking with the orthodoxy that it was ‘real economy’ actors that caused the crisis carries a political price: it means that blame can no longer be pinned on mortgage borrowers for the credit crunch, on the Chinese for the commodities bubble, or on restrictive Arab producers for the sudden soaring of oil. Yet it may allow us to understand otherwise inexplicable features of the crisis; not least, as we shall see, the extraordinary growth of sub-prime itself. We will thus take as our starting point the need to explore the structural transformation of the American financial system over the past twenty-five years. I will argue that a New Wall Street System has emerged in the us during this period, producing new actors, new practices and new dynamics. The resulting financial structure-cum-agents has been the driving force behind the present crisis. En route, it proved spectacularly successful for the richest groups in the us: the financial sector constituted by far the most profitable component of the American and British economies and their most important ‘export’ earner. In 2006, no less than 40 per cent of American corporate profits accrued to the financial sector. [6] But the new structure necessarily produced the dynamics that led towards blow-out.

This analysis is not offered as a mono-causal explanation of the crisis. A fundamental condition, creating the soil in which the New Wall Street System could grow and flourish, was the project of the ‘fiat’ dollar system, the privatization of exchange-rate risk and the sweeping away of exchange controls—all euphemized as ‘financial globalization’. Furthermore, the system could not have risen and flourished if it had not offered answers—however ultimately pathological—to a range of deep-seated problems within American capitalism overall. There is thus a rational, dialectical kernel in the superficial distinction between financial superstructure and the ‘real’ us economy. In what follows, I will first sketch the main elements of the New Wall Street System, and briefly show how its crisis took such spectacular forms. I will then argue that, to understand the deeper roots of the malaise, we do indeed need to probe into the overall socio-economic and socio-political characteristics of American capitalism as it has evolved over the past twenty-five years. I will raise the possibility of systemic alternatives, including that of a public-utility credit and banking model. Finally, I will consider the international dynamics unleashed by the present crisis and their implications for what I have elsewhere described as the Dollar–Wall Street Regime. [7]

i. the new wall street system

The structure and dynamics of Wall Street banking changed dramatically in the quarter of a century after the mid-1980s. The main features of the new system include: (i) the rise of the lender-trader model; (ii) speculative arbitrage and asset-price bubble-blowing; (iii) the drive for maximizing leverage and balance-sheet expansion; (iv) the rise of the shadow banking system, with its London arm, and associated ‘financial innovations’; (v) the salience of the money markets and their transformation into funders of speculative trading in asset bubbles; (vi) the new centrality of credit derivatives. These changes mutually re-enforced each other, forming an integrated and complex whole, which then disintegrated in the course of 2008. We will briefly examine each of them in turn.

Trading models

For most of the post-war period, Wall Street investment banks engaged in very little securities trading on their own account, as opposed to trading on behalf of clients; while the big depository commercial banks shunned such activity. But from the mid-1980s on, proprietary trading in financial and other assets became an increasingly central activity for the investment banks, and for many commercial banks, too. This turn was connected, firstly, to the new volatility in foreign-exchange markets after the dismantling of Bretton Woods; and then to the opportunities created by domestic financial liberalization, above all the scrapping of capital controls and the opening of other national financial systems to American operators. These changes offered opportunities for a massive expansion of Wall Street trading activity, which would become a crucial source of profits for the investment banks. [8] The turn towards speculative proprietary trading was pioneered by Salomon Brothers, whose Arbitrage Group was established in 1977 and acquired extraordinary profitability under John Meriwether during the 1980s. [9]

As well as trading on their own account, the Wall Street banks became increasingly involved in lending funds for other bodies to use in their trading activities: hedge funds, so-called private equity groups (trading in companies), or special investment vehicles (sivs) and conduits, created by the investment banks themselves. [10] Such lending, known in the jargon as prime brokerage, was also an extremely profitable activity for the Wall Street banks: for many, their single greatest earner. [11] This turn to the lender-trader model did not mean that the investment banks ceased their traditional activities in investment banking, broking, fund management, etc. But these activities acquired a new significance in that they provided the banks with vast amounts of real-time market information of great value for their trading activity. [12]

Trading activity here does not mean long-term investment, Warren Buffett-style, in this or that security, but buying and selling financial and real assets to exploit—not least by generating—price differences and price shifts. This type of ‘speculative arbitrage’ became a central focus, not only for the investment banks but for commercial banks as well. [13] So, too, did the related effort to generate asset-price bubbles. Time and time again, Wall Street could enter a particular market, generate a price bubble within it, make big speculative profits, then withdraw, bursting the bubble. Such activity was very easy in so-called emerging market economies with small stock or bond markets. The Wall Street banks gained a wealth of experience in blowing such bubbles in the Polish, Czech or Russian stock markets in the 1990s and then bursting them to great profit. The dot.com bubble in the us then showed how the same operation could be carried through in the heartland without any significant loss to the Wall Street banks (as opposed to some European operators, notably insurance companies, eager to profit from the bubble but hit by the burst).

Both the Washington regulators and Wall Street evidently believed that together they could manage bursts. [14] This meant there was no need to prevent such bubbles from occurring: on the contrary it is patently obvious that both regulators and operators actively generated them, no doubt believing that one of the ways of managing bursts was to blow another dynamic bubble in another sector: after dot.com, the housing bubble; after that, an energy-price or emerging-market bubble, etc. This may seem to imply a formidably centralized financial power operating at the heart of these markets. Indeed: the New Wall Street System was dominated by just five investment banks, holding over $4 trillion of assets, and able to call upon or move literally trillions more dollars from the institutions behind them, such as the commercial banks, the money-market funds, pension funds, and so on. The system was a far cry from the decentralized market with thousands of players, all slavish price-takers, depicted by neo-classical economics. Indeed, the operational belief systems of what might be called the Greenspan-Rubin-Paulson milieu seems to have been post-Minskian. They understood Minsky’s theory of bubbles and blow-outs, but believed that they could use it strategically for blowing bubbles, bursting them, and managing the fall-out by blowing some more.

Maximizing leverage

The process of arbitrage and bubble-blowing requires more of financial operators than simply bringing together the maximum amount of information about conditions across all markets; it also demands the capacity to mobilize huge funds to throw into any particular arbitrage play, in order to shift market dynamics in the speculator’s favour.

A striking feature of the New Wall Street System business model was its relentless drive to expand balance sheets, maximizing the asset and liabilities sides. The investment banks used their leverage ratio as the target to be achieved at all times rather than as an outer limit of risk to be reduced where possible by holding surplus capital. A recent New York Federal Reserve report demonstrates how this approach proved powerfully pro-cyclical in an asset-market bubble, driving the banks to expand their borrowing as asset prices rose. [15] In their illustration, the report’s authors, Tobias Adrian and Hyun Song Shin, assume that the bank actively manages its balance sheet to maintain a constant leverage ratio of 10. Suppose the initial balance sheet is as follows: the bank holds 100 worth of securities, and has funded this holding with an equity of 10, plus debt worth 90.

The bank’s leverage ratio of security to equity is therefore 100/10 = 10.

Suppose the price of the securities then increases by 1 per cent, to 101. The proportions will then be: securities 101, equity 11, debt 90. So its leverage is now down to 101/11 = 9.2. If the bank still targets leverage of 10, then it must take on additional debt (‘d’), to purchase d worth of securities on the asset side, so that the ratio of assets/equity is: (101+d)/11 = 10, i.e. d = 9.

The bank thus takes on additional debt worth 9, and with this money purchases securities worth 9. After the purchase, leverage is back up to 10. Thus, an increase in the price of the security of 1 leads to an increased holding worth 9: the demand curve is upward-sloping.

The mechanism works in reverse, too. Suppose there is shock to the securities price, so that the value of security holdings now falls to 109. On the liabilities side, it is equity that bears the burden of adjustment, since the value of debt stays approximately constant.

But with securities at 109, equity at 10, debt at 99, leverage is now too high: 109/10 = 10.9.

The bank can adjust down its leverage by selling securities worth 9, and paying down 9 worth of debt. Thus, a fall in the price of securities leads to sales of securities: the supply curve is downward-sloping.

A central mechanism through which the investment banks could respond to asset-price rises was borrowing in the ‘repurchase agreement’—or ‘repo’—market. Typically, the investment bank wishes to buy a security, but needs to borrow funds to do so. On the settlement day, the bank receives the security, and then uses it as collateral for the loan needed to pay for it. At the same time, it promises the lender that it will repurchase the security at a given future date. In that way, the bank will repay the loan and receive the security. But typically, the funds for repurchasing the security from the lender are acquired by selling the security to someone else. Thus, on the settlement day, the original lender to the investment bank is paid off and hands over the security, which is immediately passed on to the new buyer in exchange for cash. This kind of repo funding operation presupposes an asset-price boom. It has accounted for 43 per cent of leverage growth amongst Wall Street banks, according to the same New York Fed report. Repos have also been the largest form of debt on investment banks’ balance sheets in 2007–08. [16]

The question arises as to why the Wall Street banks (followed by others) pushed their borrowing to the leverage limit in such a systematic way. One explanation is that they were doing this in line with the wishes of their shareholders (once they had turned themselves into limited liability companies). ‘Shareholder value’ capitalism allegedly requires the ratio of assets to capital to be maximized. Surplus capital reduces the return on shareholder equity and acts as a drag on earnings per share. [17] But there is also another possible explanation for borrowing to the leverage limit: the struggle for market share and for maximum pricing power in trading activities. If you are a speculative arbitrageur or an asset-bubble blower, financial operational scale is essential to moving markets, by shifting prices in the direction you want them to go. In assessing which of these pressures—shareholder power or pricing power—drove the process, we should note how ready the Treasury, Fed and Wall Street executives have been to crush shareholder interests during the credit crunch, yet how resolutely they sought to protect the levels of leverage of the bulge-bracket banks during the bubble. By all accounts, Citigroup’s turn to maximum balance-sheet and leverage expansion for trading activities derived not from shareholder pressure, but from the arrival there of Robert Rubin after his stint as us Treasury Secretary. [18]

Shadow banking

The drive for scale and for increasing leverage leads on to another basic feature of the New Wall Street System: the drive to create and expand a shadow-banking sector. Its most obvious features were the new, entirely unregulated banks, above all the hedge funds. These have had no specific functional role—they have simply been trader-banks free of any regulatory control or transparency in their speculative arbitrage. Private equity groups have also been, in essence, shadow trading banks, specializing in the buying and selling of companies. Special Investment Vehicles (sivs) and conduits are similarly part of this system. In the words of the director of regulation at Spain’s central bank, these sivs and conduits ‘were like banks but without capital or supervision’. Yet, as a Financial Times report noted: ‘In the past two decades, most regulators have encouraged banks to shift assets off their balance sheets into sivs and conduits.’ [19]

The shadow banking system was not in competition with the regulated system: it was an outgrowth of it. The regulated commercial and investment banks acted as the prime brokers of the shadow banking operators, thereby gaining very large profits from their activities. This increasingly central feature of official bank activity was, in reality, a way of massively expanding their balance sheets and leverage. To tap the Wall Street banks for funding, the hedge funds had to hand over collateral; but through a practice known as rehypothecation, a proportion of these collateral assets could then be used by the prime broker as its own collateral for raising itsown funds. The result was the self-financing of hugely profitable prime brokerage activities by the Wall Street banks, on a vast scale, without any extra commitment of their own capital: an ingenious way of greatly enlarging their leverage ratios. [20] The debate about whether deregulation or reregulation in the financial sector has been occurring since the 1980s seems to miss the point that there has been a combination of a regulated and an unregulated shadow system, working dynamically together.

Shadow banking refers not only to institutional agents, like hedge funds, but also to the practices and products which allowed the investment banks to expand their leverage. Since the late 1990s an increasingly important part of this side of shadow banking has been the ‘over-the-counter’ credit derivatives market, notably collateralized debt obligations (cdos) and credit default swaps (cdss). The most obvious attraction of these lay in the regulatory arbitrage they offered, enabling banks to expand leverage. [21] Traditionally banks had to insure their credit operations and such insurance entailed supplying collateral. The beauty of cdss lay in the fact that, as shadowy ‘over-the-counter’ products, they did not require the commitment of appropriate tranches of capital as collateral, and thus facilitated more leverage. cds expansion began on a major scale after derivatives specialists from jp Morgan Chase persuaded aig to start writing them on cdos in 1998. [22]

cdos were also a clever solution to leverage problems. By acquiring large quantities of securitized loans and thus greatly expanding their balance sheets, banks should have expanded their equity base. But cdos famously bundled together dozens or hundreds of such loans, of very varied quality, enabling the banks to increase their leverage. The cdos were typically written by the rating agencies, for a fee, and then given a Triple A rating by the same agency, for a second fee. Such ratings allowed the banks’ equity commitments to be minimized. These securitized loans—mainly from the housing market, but also from credit-card debt and car loans—offered investors far higher rates of return than they could get in the money markets. The crucial point about these so-called ‘structured securities’ was not that they were securitized loans: these could in principle be perfectly safe; after all, a bond is, in reality, nothing but a securitized loan. But bonds have a clearly identifiable source, in an economic operator whose credit-worthiness and cash-flow capacities can be assessed; they also have clear prices in the secondary bond markets. The products bundled in cdos, however, came from hundreds of thousands of unidentifiable sources, whose credit-worthiness and cash-flow capacity was not known; they were sold ‘over the counter’, without any secondary market to determine prices, far less an organized market to minimize counterparty risk. In short, they were at best extremely risky because more or less totally opaque to those who bought them. At worst they proved a scam, so that within a few months of late 2007 the supposedly super-safe super-senior debt tranches within such cdos were being downgraded to junk status.

Leverage restrictions were also removed through public policy. Hank Paulson achieved a notable success in this area in 2004 when, as head of Goldman Sachs, he led the Wall Street campaign to get the Securities and Exchange Commission to agree to relax the so-called ‘net capital rule’, restricting leverage for large investment banks. Henceforth, firms were effectively allowed to decide their own leverage on the basis of their risk models. The result was a rapid rise in the big banks’ leverage ratios. [23] Importantly it enabled them to transfer their capital base to new activities, such as collateralized debt obligations, which subsequently became such a significant element in their trading activities.

London’s role

All these shifts are grouped under the euphemistic heading of ‘financial innovation’—changes in institutional arrangements, products, oversight structures, enabling Wall Street banks to escape regulatory restrictions and expand their activities and profits. Dozens of shifts of this sort could be documented. But one of the most fundamental was the construction of a large, new shadow banking system in London, alongside the ‘official’ regulated sector. By the early 1990s the American investment banks had wiped out their London counterparts and dominated the Square Mile’s asset markets, with the City acquiring an increasingly ‘wimbledonized’ role within the New Wall Street System. [24] Gordon Brown institutionalized the new relationship in 1997 by creating the unified Financial Services Authority, which claimed to operate according to ‘principles’ rather than binding rules: one central principle was that the Wall Street banks could regulate themselves. London thus became for New York something akin to what Guantánamo Bay would become for Washington: the place where you could do abroad what you could not do back home; in this instance, a location for regulatory arbitrage.

The term ‘Wall Street’ should therefore be understood to include London, as a satellite for these American operators. [25] Together London and New York dominate the issue of new shares and bonds. They are the centre of the foreign-exchange markets. Most significantly they have dominated the sale of over-the-counter derivatives, which make up the overwhelming bulk of derivatives sales. [26] In 2007, the uk had a global share of 42.5 per cent of derivatives based on interest rates and currencies, with the us handling 24 per cent. In terms of credit-derivatives trading, the us handled 40 per cent in 2006, while London handled 37 per cent (down from 51 per cent in 2002).

Funding speculation

The enormous expansion in the activities of the Wall Street banks and their shadow system required ever-larger amounts of funding. Such funding was classically supplied by the recycling of retail savings sitting in deposit accounts and, even more importantly, by the commercial banks creating large supplies of credit money. But in post-1980s America such retail savings were minuscule—a point to which we will return—and credit money from the commercial banks, though significant, was soon hopelessly inadequate. In these circumstances the trader banks turned to the wholesale money markets. At the heart of such markets were the inter-bank markets, with interest rates on, or just a few basis points above, the Fed’s policy rates. Historically these markets were used to ensure that the banks were able to clear smoothly on a daily basis, rather than as a source of new, large-scale funding, let alone funding of a speculative nature. There was also the commercial-paper market, typically used by the big corporations for short-term funding, again principally to smooth their operations.

But in the New Wall Street System, these money markets were transformed. They remained centres of short-term lending, but they were increasingly funding speculative trading activity. On the supply side, the funds available for lending to Wall Street were expanding rapidly, especially through the expansion of pension funds during the 1980s and 1990s. In rather typical American style, a small change in the tax code through amendment 401K in 1980 opened the door to this development. This amendment gave a tax break to employees and employers if they put money into pension plans; the result was a massive flow of employee income into these plans, totalling nearly $400 billion by the end of the 1980s. By the late 1990s it had climbed to almost $2 trillion. [27]

At the same time as becoming key sources for the liabilities of the investment banks through short-term lending to them, the mutual funds, pension funds and so forth also became increasingly important targets for Wall Street’s efforts to sell asset-backed securities, and in particular collateralized debt obligations. Thus the New Wall Street System attempted to draw the fund managers into speculative bubble activity on both the funding (liability) side and on the asset side, enabling ever-larger balance-sheet expansion.

ii. the causes of the crisis

It might, in principle, have been the case that the cluster of mutually re-inforcing innovations which we have called the New Wall Street System, were responses to the emergence of a housing-market bubble in the us from 2001. If so, we would have had a classic Minskian crisis linked to housing. In fact, all the key innovations were set in place before the onset of the bubble. Indeed there is ample evidence that the Wall Street banks quite deliberately planned a house-price bubble, and spent billions of dollars on advertising campaigns to persuade Americans to increase their mortgage-related debt. Citigroup ran a billion-dollar campaign with the theme ‘Live Richly’ in the 1990s, designed to get home owners to take out second mortgages to spend on whatever they liked. Other Wall Street banks acted in a similar fashion, with a great deal of success: debt in second mortgages climbed to over $1 trillion in a decade.

But the bubble that generated the credit crunch of 2007 lay not only—or even mainly—in the housing market, but in the financial system itself. The crisis was triggered not only by the scale of the debt bubble, but by its forms. In a normal over-lending crisis, when banks have ended up with non-performing loans (as in Japan in the 1990s), both the location and scale of the problems can be identified without much difficulty. But in 2007 the debt bubble within the financial system was concentrated in over-the-counter derivatives, in the form of individual cdos that had no market price or pricing mechanism—beyond the say-so of the ratings agencies—and which were distributed in their tens of thousands between the institutions at the summit of the financial system, as well as their satellite bodies such as sivs. Once this set of debt-accumulation arrangements was shown to be junk, in the two Paribas cases in August 2007, the suppliers of credit funding, such as money-market and pension funds, grasped that they had no way of knowing how much of the rest of the cdo mountain was also worthless. So they fled. Their refusal to keep supplying the handful of opaque Wall Street investment banks and their spin-offs with the necessary funds to keep the cdo market afloat was what produced the credit crunch.

The investment banks had initially spread the word that the effect of their securitization of debt had been to disperse risk widely across a multitude of bodies. But this seems to have been false: the Wall Street summit institutions themselves had been holding on to the so-called super-senior debt tranches, in tens of thousands of cdos. [28] They had been borrowing billions in the money markets to buy these instruments, gaining an interest rate on them some 10 basis points above their money-market borrowing costs. To continue to turn that profit they had to keep going back to the money markets to roll over their debts. Yet now the money markets were shutting down. [29] When investors in the money markets fled the recycling of short-term borrowing in the summer of 2007, the entire pyramid centred on the cdos began to crumble. When the Wall Street banks tried to off-load their cdos, they found there was no market for them. The insurance companies that had insured the cdos with cdss found their market collapsing, too.

Much remains obscure about the precise mechanisms through which the credit crunch acquired its scope and depth in 2007–08, mainly because the main Wall Street operators themselves sought to obfuscate both the nature of their plight and their survival tactics. But it is possible to trace a number of phases through which the crisis has passed. First, the attempt by the Fed and Treasury to defend the investment-bank model as the summit of the system, by acting as its lender of last resort. Second, with the fall of Lehman Brothers, the collapse of this effort and disappearance of the investment-bank model, producing a drive to consolidate a universal-bank model in which the trading activities of the investment banks would occur within, and protected by, the depository universal bank. In this phase, the Fed essentially substituted itself for the creditor institutions of the credit system, supplying loans, ‘money-market’ and ‘commercial-paper market’ funding for the banks. Between April and October 2008 this massive Central Bank funding operation involved about $5 trillion of credit from the Fed, the ecb and the Bank of England—equivalent to about 14 per cent of global gdp. Insofar as this state funding can continue without raising serious sovereign credit-worthiness problems, the most difficult and dangerous phase of the response to the crisis can get under way in a serious fashion. This will involve the deleveraging of the biggest banks, now in the context of negative feedback loops from deepening recessions. How and when this is achieved will give us a sense of the overall contours of the credit crunch.

Prevailing theories

Much of the mainstream debate on the causes of the crisis takes the form of an ‘accidents’ theory, explaining the debâcle as the result of contingent actions by, say, Greenspan’s Federal Reserve, the banks, the regulators or the rating agencies. We have argued against this, proposing rather that a relatively coherent structure which we have called the New Wall Street System should be understood as having generated the crisis. But in addition to the argument above, we should note another striking feature of the last twenty years: the extraordinary harmony between Wall Street operators and Washington regulators. Typically in American history there have been phases of great tension, not only between Wall Street and Congress but also between Wall Street and the executive branch. This was true, for example, in much of the 1970s and early 1980s. Yet there has been a clear convergence over the last quarter of a century, the sign of a rather well-integrated project. [30]

An alternative explanation, much favoured in social-democratic circles, argues that both Wall Street and Washington were gripped by a false ‘neo-liberal’ or ‘free-market’ ideology, which led them astray. An ingenious right-wing twist on this suggests that the problematic ideology was ‘laissez-faire’—that is, no regulation—while what is needed is ‘free-market thinking’, which implies some regulation. The consequence of either version is usually a rather rudderless discussion of ‘how much’ and ‘what kind’ of regulation would set matters straight. [31] The problem with this explanation is that, while the New Wall Street System was legitimated by free-market, laissez-faire or neo-liberal outlooks, these do not seem to have been operative ideologies for its practitioners, whether in Wall Street or in Washington. Philip Augar’s detailed study of the Wall Street investment banks, The Greed Merchants, cited above, argues that they have actually operated in large part as a conscious cartel—the opposite of a free market. It is evident that neither Greenspan nor the bank chiefs believed in the serious version of this creed: neo-classical financial economics. Greenspan has not argued that financial markets are efficient or transparent; he has fully accepted that they can tend towards bubbles and blow-outs. He and his colleagues have been well aware of the risk of serious financial crisis, in which the American state would have to throw huge amounts of tax-payers’ money into saving the system. They also grasped that all the various risk models used by the Wall Street banks were flawed, and were bound to be, since they presupposed a general context of financial market stability, within which one bank, in one market sector, might face a sudden threat; their solutions were in essence about diversification of risk across markets. The models therefore assumed away the systemic threat that Greenspan and others were well aware of: namely, a sudden negative turn across all markets. [32]

Greenspan’s two main claims were rather different. The first was that, between blow-outs, the best way for the financial sector to make large amounts of money is to sweep away restrictions on what private actors get up to; a heavily regulated sector will make far less. This claim is surely true. His second claim has been that, when bubbles burst and blow-outs occur, the banks, strongly aided by the actions of the state authorities, can cope with the consequences. As William White of the bis has pointed out, this was also an article of faith for Bernanke. [33]

iii. systemic options

The real debate over the organization of financial systems in capitalist economies is not about methods and modes of regulation. It is a debate between systemic options, at two levels.

A public-utility credit and banking system, geared to capital accumulation in the productive sector versus a capitalist credit and banking system, subordinating all other economic activities to its own profit drives.

An international financial and monetary system under national-multilateral co-operative control versus a system of imperial character, dominated by the Atlantic banks and states working in tandem.

We can briefly look at each of these in turn.

A public-utility model?

All modern economic systems, capitalist or not, need credit institutions to smooth exchanges and transactions; they need banks to produce credit money and clearance systems to smooth the payment of debts. These are vital public services, like a health service. They are also inherently unstable: the essence of a bank, after all, is that it does not hold enough funds to cover all the claims of its depositors at any one time. Ensuring the safety of the system requires that competition between banks should be suppressed. Furthermore, policy questions as to where credit should be channelled are issues of great economic, social and political moment. Thus public ownership of the credit and banking system is rational and, indeed, necessary, along with democratic control. A public-utility model along these lines can, in principle, operate within capitalism. Even now the bulk of the German banking system remains in public hands, through savings banks and Landesbanken. The Chinese financial system is overwhelmingly centred on a handful of huge, publicly owned banks and the Chinese government does indeed steer the credit strategies of these banks. It is possible to envisage such a public-utility model operating with privatized banks. The post-war Japanese banking system could be held to have had this character, with all its banks strictly subordinated to the Bank of Japan’s policy control via the ‘window-guidance system’. The post-war British commercial bank cartel could also be viewed as broadly operating within that framework, albeit raking off excessive profits from its customers.

But a private capitalist credit system, centred on banks, would operate under the logic of money capital—in Marx’s formula, m-m': advancing money to others to make more money. Once this principle is accepted as the alpha and omega of the banking system, the functional logic points towards the Greenspan apotheosis. This has been the model adopted in the us and the uk since the 1980s: making money-capital king. It entails the total subordination of the credit system’s public functions to the self-expansion of money capital. Indeed, the entire spectrum of capitalist activity is drawn under the sway of money capital, in that the latter absorbs an expanding share of the profits generated across all other sectors. This has been the model that has risen to dominance as what we have called the New Wall Street System. It has been a generator of extraordinary wealth within the financial system and has actually transformed the process of class formation in the Anglo-Saxon economies. This model is now in deep crisis.

The second debate centres around the underwriting of financial systems. Whether public or private, banking and credit systems are inherently unstable in any system where output is validated after production, in the market-place. [34] In such circumstances, these systems must be underwritten and controlled by public authorities with tax-raising capacities and currency-printing presses. Insofar as they are minimally public bodies—not utterly captured by the private interests of money capital—these authorities will aim to prevent crises by trying to bring the behaviour of the financial system roughly into line with broad (micro as well as macro) economic goals. At present, only states have the capacity to play this role. Rule books like Basel I or II cannot do it; neither can the eu Commission or the ecb.

Intriguingly, the Atlantic projects grouped under the name of ‘economic globalization’—the fiat dollar system, ending of capital controls, free entry and exit of big Atlantic operators in other financial systems—have ensured that most states have been deprived of the capacity to underwrite and control their own financial systems: hence the endless financial blow-outs in the South over the last thirty years. Atlantic business interests benefited from these crises, not only because their losses were fully covered by imf insurance—paid for later by poor people in the countries hit—but also because they were used as occasions to sweep open the product and labour markets of these countries to Atlantic penetration. But now the blow-outs have hit the metropolitan heartland itself. Obviously the Atlantic economies will want to keep this system going: the practices covered by ‘financial globalization’ constitute their most profitable export sector. But it is not so clear that the rest of the world will buy a formula for more of the same. The alternative would be some return to public control, along with public underwriting. This could only be achieved by individual national states regaining effective control, via new multilateral co-operative systems comparable to those that existed before 1971, implemented on a regional if not fully international scale.

Here, however, we will focus on the question of why the financial model centred on the New Wall Street System has achieved such complete hegemony within American capitalism over the past few decades. This takes us, finally, back out of the financial sphere into the wider field of socio-economic and socio-political relations in the us since the 1970s. Within this broader context, we can begin to understand how the New Wall Street System’s rise to dominance within the us could have been seen as a strategic idea for tackling the problems of the American economy.

Financial dominance as national strategy

From the 1970s through to the early 1980s, the American state waged a vigorous battle to revive the industrial economy, partly through a mercantilist turn in external trade policy, but above all through a domestic confrontation with labour to reduce its share of national income. This was the vision of such leaders as Paul Volcker; it was assumed that these measures would return American industry to world dominance. Yet the hoped-for broad-based industrial revival did not take place. By the mid-1980s, non-financial corporate America was falling under the sway of short-term financial engineering tactics, geared towards the goal of enhancing immediate ‘shareholder value’. What followed was wave after wave of mergers and acquisitions and buy-outs by financial operators, encouraged by Wall Street investment banks who profited handsomely from such operations. The legitimating argument that this was ‘enhancing industrial efficiency’ seems scarcely credible. A more convincing case would be that these trends were driven by the new centrality of the financial sector within the structure of American capitalism. [35]

A full explanation of this development is, I think, not yet available. But the trend produced some structural features of American capitalism that have been present ever since. On the one hand, a protected military-industrial sector remains intact, funded from federal and state budgets. Some high-tech sectors, especially in ict, were also strongly supported by state subsidies in the 1980s and 90s, and have involved real new industrial investment, without as yet playing a transformative role in the overall economy: the main impact of ict has been in the financial sector and retail. But the bulk of the American economy, on which growth depends, has been marked by stagnant or even declining incomes amongst the mass of the population and no growth motor from new investment, whether public or private. With the partial exception of ict investment in the late 90s, gdp growth in the us has not been driven by new investment at all. As is widely recognized, it has come to depend upon the stimulus of consumer demand; yet such household consumption was itself inhibited by stagnant mass incomes.

This circle was famously squared in two ways. First and most important, the problem of stimulating consumer demand was tackled through the sustained supply of credit from the financial system. Secondly, cheap commodities could be bought on an endless basis from abroad—especially from China—since dollar dominance enabled the us to run up huge current-account deficits, as other countries allowed their exports to the us to be paid for in dollars. The supply of credit from the financial system to the mass of consumers through the usual mechanisms of credit card, car debt and other loans and mortgages was, however, supplemented by the distinctive mechanism of asset-price bubbles, which generated so-called wealth effects among a relatively broad layer. The stock-market bubble of the 1990s raised the paper value of the private pensions of the mass of Americans, thus giving them a sense that they were becoming richer and could spend (and indebt themselves) more. The housing bubble had a double effect: it not only made American consumers feel confident that the value of their house was rising, enabling them to spend more; it was reinforced by a strong campaign from the banks, as we have seen, urging them to take out second mortgages and use the new money for consumption spending.

Thus the New Wall Street System directly fuelled the 1995–2008 consumer-led American boom, which ensured that the us continued to be the major driver of the world economy. This was backed by a global campaign to the effect that the us boom was not the result of debt-fed growth aided by highly destructive trends in the financial system, but of American free-market institutions. Here, then, was the basis in the broader social relations of American capitalism for the rise to dominance of the New Wall Street System: it played the central role in ensuring debt-fed growth. This Anglo-Saxon model was based upon the accumulation of consumer debt: it was growth today, paid for by hoped-for growth tomorrow. It was not based upon strengthening the means of value-generation in the economies concerned. In short, it was a bluff, buttressed by some creative national accounting practices which exaggerated the extent of the American boom and productivity gains in the us economy. [36]

The role of China and other Asian exporting economies in this growth model extended beyond their large export surpluses of consumer goods to the us. These export surpluses were recycled back into the American financial system via the purchasing of us financial assets, thus cheapening the costs of debt by massively expanding ‘liquidity’ within the financial system. The results of these trends can be summarized in the following figures. Aggregate us debt as a percentage of gdp rose from 163 per cent in 1980 to 346 per cent in 2007. The two sectors which account for this rise were household debt and internal financial-sector debt. Household debt rose from 50 per cent of gdp in 1980 to 100 per cent of gdp in 2007. But the really dramatic rise in indebtedness occurred within the financial sector itself: from 21 per cent of gdp in 1980 to 83 per cent in 2000 and 116 per cent in 2007. [37]

iv. implications

The ideological effects of the crisis will be significant, though of course far less significant than imagined by those who believe financial regimes are the product of intellectual paradigms rather than power relations. Yet the cant dished out in the past by the us Treasury and imf is over. American-style financial-system models are now grasped as being dangerous. No less risky is the eu banking and financial-system framework, which the crisis has shown to be a house of cards, even if still standing at the time of writing. The eu’s guiding notion is that banking systems are secured by good rules rather than by authoritative states with tax-raising powers. This has been shown to be a dangerous joke. The whole eu–emu project has encouraged banks to grow too big for their national states to save them, while offering no alternative at eu or even Eurozone level. Absurdly, the Single Market and Competition rules in the financial sector insist on free competition between banks at all costs, and proscribe any state aid for them; while if the stability criteria were respected, any full-blown credit crisis would necessarily be transformed into a 1930s-style depression. Obviously these rules are for the birds, yet they are simultaneously the principal planks of the eu political economy. [38]

This crisis of the American and European set-ups will no doubt have two intellectual effects. Firstly, to raise the credibility of the Chinese model of a state-owned, bank-centred financial system. This is the serious alternative to the credit models of the Atlantic world. The maintenance of capital controls and a non-convertible currency—which China has—are essential for the security of this system. Secondly, as the crisis unfolds, broader discussion of the public-utility model seems likely to return to political life, re-opening a debate that has been silenced since 1991.

Some predict much more sweeping short-term changes, such as the replacement of the dollar as the global currency or the collapse of Western leadership institutions within the world economy. A complete debauching of the dollar by the Obama Administration could, perhaps, lead to a stampede to dump it globally, along with a retreat into regional or narrow imperial trading blocs. [39] But no less likely could be a temporary strengthening of the use of the dollar over the next decade: a long stagnation in the us may well be combined with very low interest rates and a low dollar. This could produce a new dollar carry trade, in which everybody borrows in dollars to take them across the exchanges into higher value assets. This would produce a strong trend towards a decoupling of other exchange rates from the dollar, but it would not necessarily undermine the central element in dollar dominance: the readiness of other states to accept payments for their goods and credits in greenbacks.

We are also likely to see the intensification of the two basic structural trends in long-term credit-debt relations in the world economy. First, the creditor relations between the Atlantic world and its traditional South in Latin America, Africa and elsewhere, historically policed by the imf. This relationship weakened over the last decade but is likely to be re-inforced in the present crisis. Second, the contrary debtor relations between the United States and the East Asian New Growth Centre economies, which are also likely to deepen and tighten, particularly between China and the us. This is a power relationship in which China (and other creditors) can exercise real political leverage over Washington. We have seen this operating in both the timing and the form of the renationalization of Fannie Mae and Freddie Mac. [40] We will see it again as the us Treasury seeks buyers of its large new tranches of debt in 2009. The East Asian economies, above all China, will likely become ever more critical to global macro-economic trends, while the erstwhile centrality of the us will weaken during its long stagnation. The strengthened financial clout of China and other East Asian states could impinge upon the old imperial credit-debt relationships between the Atlantic world and the South, by offering the latter alternative sources of financial support. This threat is already prompting warnings in the Atlantic world for Washington to soften the predatory conditions it has traditionally imposed on Africa, Latin America and elsewhere. [41]

But whether this will mean that East Asia will start to build new market institutional arrangements for the world economy, challenging those of the Anglo-American world, remains unclear, for two reasons: first, the internal divisions within East Asia; and second, the question of China’s strategic priorities at the present time. Thus, East Asia has an obvious rational collective interest in building its own, centralized commodity and oil markets and promoting them to world leadership, ending the dominance of London and Chicago. Such new market frameworks have sprung up, but they are divided: one in Hong Kong, one in Japan and one in Singapore. As for China, it is currently overwhelmingly concentrated on maintaining domestic growth and carrying through the leap of dynamic capital accumulation from the coast to the interior. At present, it is showing not the slightest interest in challenging the Americans for leadership in shaping the institutions of the world economy. Thus the us has some breathing space. But such is the social and political strength of Wall Street, and the weakness of social forces that might push for an industrial revival there, that it would seem most likely that the American capitalist class will squander its chance. If so, it will enjoy another round of debt-fed gdp growth funded by China and others while the us becomes ever less central to the world economy, ever less able to shape its rules and increasingly caught in long-term debt subordination to the East Asian credit matrix.

---

[1] Leslie Crawford and Gillian Tett, ‘Spain spared because it learnt lesson the hard way’, Financial Times, 5 February 2008.

[2] The total debt owed by financial and non-financial private sectors in the us in 2008 has been calculated at $48 trillion. George Magnus, ‘Important to curb destructive power of deleveraging’, ft, 30 September 2008.

[3] David Patterson, ‘Central Banks must find or become buyers of system risk’, ft, 5 February 2008.

[4] For a useful survey of why most economists were completely incapable of grasping the crisis, see Chris Giles, ‘The Vision Thing’, ft, 26 November 2008.

[5] Javier Blas, ‘Commodities have proved a saving grace for investors’, ft, 6 March 2008; Chris Flood, ‘Speculators give a stir to coffee and cocoa prices’ ft, 5 February 2008. That these financial operators were able to build and burst such bubbles derived, of course, from the fact that the markets for oil and commodities are organized in London, New York and Chicago, with rules made to match the interests of American and British capital. As Jeff Sprecher, ceo of Intercontinental Exchange (ice), the London-based market whose rules enabled blowing the oil bubble, explained to the Financial Times, the market’s organizers could not understand why members of Congress should want to give up control over this sector by closing ice down. ‘View from the Top’, ft, 6 August 2008.

[6] Lawrence Summers, ‘The pendulum swings towards regulation’, ft, 27 October 2008. The figure of 40 per cent actually understates the share of profits accruing to the financial sector, since these are in part concealed by being transformed into huge employee bonuses, to reduce headline profits data; one reason for the bonus system that is often overlooked.

[7] For an earlier exploration of these issues see my Global Gamble, New York and London 1999.

[8] The bread-and-butter of Wall Street investment bank income had been fixed (cartelized) fees for trading securities on behalf of clients until 1975, when a change in the law limited such fees. At the start of the 1980s, this fee income was still greater for the investment banks than profits from trading on their own account. But from the mid-1980s, these banks plunged seriously into proprietary trading. By the end of the 1990s, trading income was a third bigger than income from commissions for trading on behalf of others. And some of the biggest banks earned over half their profits from such trading. See John Gapper, ‘The last gasp of the broker-dealer’, ft, 16 September 2008.

[9] On Salomon Brothers and the subsequent career of John Meriwether’s team in the 1990s, when they constructed ltcm under the sponsorship of Merrill Lynch, see Roger Lowenstein, When Genius Failed, London 2001.

[10] After the Enron scandal, sivs and conduits were initially not allowed to engage in active trading on their own account, but this restriction was soon lifted.

[11] James Mackintosh, ‘Collapse of Lehman leaves prime broker model in question’, ft, 25 September 2008.

[12] Philip Augar gives a vivid account of how key such informational centralization from all the main markets was in giving the investment banks a decisive competitive edge over their smaller or non-investment banking rivals. See his The Greed Merchants: How the Investment Banks Played the Free Market Game, London 2006.

[13] See Nasser Saber, Speculative Capital: The Invisible Hand of Global Finance, London 1999.

[14] Alan Greenspan, ‘We will never have a perfect model of risk’, ft, 17 March 2008.

[15] Tobias Adrian and Hyun Song Shin, ‘Liquidity and Leverage’, Staff Report no. 328, Federal Reserve Bank of New York, May 2008. The term ‘leverage’ refers to the relationship between a bank’s ‘equity’ or ‘capital’ and its assets—the sum that it has lent out. It is usually expressed as a ratio, so that if we say that Lehman’s leverage at the time of its collapse was 25, this means that for every one dollar of capital the bank had 25 dollars of assets. But this figure of 25 also means that for every one dollar of capital, Lehman had 24 dollars worth of borrowings—i.e. liabilities.

[16] Adrian and Song Shin, ‘Liquidity and Leverage’.

[17] The rewards of senior bank executives were often linked to changing earnings per share. See John Kay, ‘Surplus capital is not for wimps after all’, ft, 22 October 2008.

[18] See, among others, ‘Singing the blues’, Economist, 27 November 2008.

[19] Leslie Crawford and Gillian Tett, ‘Spain spared because it learnt lesson the hard way’, ft, 5 February 2008.

[20] James Mackintosh, ‘Collapse of Lehman leaves prime broker model in question’, ft, 25 September 2008.

[21] Christina Bannier and Dennis Hänsel, ‘Determinants of European Banks’ Engagement in Loan Securitization’, Deutsche Bundesbank Discussion Paper Series 2: Banking and Financial Studies no. 10/2008.

[22] Gretchen Morgenson, ‘Behind crisis at aig, a fragile web of risks. Tiny London unit set decline in motion’, International Herald Tribune, 29 September 2008.

[23] Stephen Labaton, ‘How sec opened path for storm in 55 minutes’, International Herald Tribune, 4/5 October 2008. In a classic manoeuvre, this was dressed up as a turn by the sec towards more regulation of the investment banks. From a formal point of view this was right: the sec acquired regulatory jurisdiction over them; but it simultaneously removed basic capital-base restrictions. Furthermore, from 2004 onwards the sec had seven staff to supervise the big five investment banks, which had combined assets of over $4 trillion by 2007.

[24] The annual tennis tournament in Wimbledon is widely considered, at least in the uk, to be the greatest in the world; yet for decades there has been no British finalist.

[25] There are some very large British commercial banks, but these should be distinguished from the City of London because, while some have participated heavily in the New Wall Street System, others such as the Hongkong and Shanghai Banking Corporation (hsbc), by some measures the largest bank in the world, and the Standard Chartered Bank, have been heavily focused on activities in East Asia.

[26] The Chicago Mercantile Exchange, however, dominates sales of exchange-traded derivatives.

[27] Roger Lowenstein, Origins of the Crash, New York 2004, pp. 24–5. This expansion of bank funding for speculative trading through the transformation of the ‘wholesale’ markets intersected, of course, with the ending of capital controls, enabling the growth of international wholesale borrowing by banks and the rise of ‘carry trade’ operations, such as that based on the yen: banks borrowing in yen, at 0.5 per cent or less, and taking the funds into the Icelandic krona, at 18 per cent. The funding of British commercial banks, overwhelmingly domestic at the start of the 1990s, had become largely based on overseas wholesale lending, to the tune of about £650bn, by 2007.

[28] Gillian Tett, ‘Misplaced bets on the carry trade’, ft, 17 April 2008.

[29] For a useful mainstream (and apologetic) account of the risks involved in cdos and over-the-counter derivatives like cdss, see the imf publication by Garry Schinasi, Safeguarding Financial Stability: Theory and Practice, Washington, dc 2006.

[30] There were tensions between Wall Street and New York state regulator Eliot Spitzer after the dot.com bubble burst, but this simply highlighted how strong was the consensus at a higher level.

[31] References to these kinds of debates can be found in Andrew Baker et al., Governing Financial Globalization, London 2005.

[32] See Greenspan, ‘We will never have a perfect model of risk’; Alan Beattie and James Politi, ‘Greenspan admits he made a mistake’, ft, 24 October 2008.

[33] Cited in John Cassidy, ‘Anatomy of a Meltdown: Ben Bernanke and the Financial Crisis’, New Yorker, 1 December 2008.

[34] Though this does not mean that they are all equally unstable.

[35] This is not to say that American industrial production disappeared: it remained large, notably in the defence-budget related sector as well as in cars, aerospace, ict and pharmaceuticals.

[36] A series of changes in us national accounting rules from 1995 onwards exaggerated both growth and productivity figures. Notable here was the use of so-called ‘hedonic indicators’.

[37] Martin Wolf, ‘Why Paulson’s Plan was not a true solution to the crisis’, ft, 24 September 2008.

[38] In addition, Western eu states made an unstated but real precondition for Eastern enlargement that the new entrants hand over the bulk of their commercial banks to their Western counterparts; a remarkable imperial move. These Western banks will now wish to starve the Eastern eu members of credit, as they seek every trick to deleverage and survive. Will the eu political authorities intervene in the market to block this? If so, how?

[39] A trend in this direction is evident in the us decision to give special treatment to Mexico, Brazil, Singapore and South Korea in terms of dollar-funding support.

[40] The Financial Times reported that us Treasury Secretary Paulson confronted the fact that ‘the Bank of China had cut its exposure to agency debt over the summer’ and thus: ‘found himself with a fait accompli. The federal government had to give reassurance to foreign investors in agency debt if it wanted to avoid chaos in financial markets and a run on the dollar. It smacks of debt crises past in Latin American countries, where the ultimate pressure for a bail-out came from foreign investors.’ John Gapper, ‘A us government bail-out of foreign investors’, ft, 8 September 2008.

[41] David Rothkopf, ‘The Fund faces up to competition’, ft, 22 October 2008.