There is an emerging consensus that globalization is reversing. Trade protectionism is on the rise and labour flows across borders are being resisted. But globalization is still going strong in one area. Madness in financial markets is global, and it shows no sign of stopping. There are six examples. Bonds trading at negative yields have recently crossed $13 trillion. Greek government 10-year bonds are trading at a yield of less than 2.5%. The yield, a few years ago, was at 44%. The Greek economy has not exactly been repaired. Investors are willing to lend more money to highly indebted borrowers with less protection. Austria floated another 100-year bond at a yield of 1.2% and it is now yielding 1.06%. Finally, Bitcoin is back. The common thread that binds all of these is financialization, and it has been fuelled by central banks.
The short financial history of recent decades can be defined largely in terms of three trends: Progressive financial market liberalization, excessive financialization, and the emergence of a new paradigm in monetary policy and the role of central bankers as the drivers of macroeconomic stabilization.
While unconventional monetary policy measures may have brought things to a head and exposed the depth of the challenge, these trends have been a result of long-term choices, especially those made by authorities and politicians in the US. The leadership of the Federal Reserve played a key role in the financialization of the economy. That, in turn, led to financial and capital account liberalization, globally. Bubbles became the norm and crises more frequent. As finance dominated, stock markets reached all-time highs and production retreated. Workers became poorer and inequality got entrenched.
The economic manifestations of these trends have been resource misallocation (of both human and physical capital) away from the real economy to financial markets, the concentration of market power and oligopolies across sectors, spillovers from monetary policy actions in the US and other developed economies, shorter cycles of asset bubbles and painful clean-ups, surges in cross-border capital flows followed by the inevitable sudden-stops that engender fiscal imbalances, exchange rate volatility, egregious executive compensations and tax advantages that favour capital over labour, the penalization of savers to benefit debtors and a widening of income inequality and concentration of wealth that matches the Gilded Age.
Public policy in general and crisis response in particular have become oriented towards monetary policy actions that prioritize the arrest of “contagion” effects through bailouts of “too big to fail” institutions with the hope that its trickle-down effects revive the general economy. Central bank policies have enriched a fabulously rich minority who invest actively in global financial markets at the cost of savings of the overwhelming majority of ordinary citizens, leaving a legacy of trillions of dollars in unfunded pension fund liabilities.
Recurrent bouts of overheating followed by pain, with the former benefiting the rich and the latter devastating the poor, largely driven by the dynamics of unfettered internal and external market liberalization, have become commonplace across developing countries. The difficulty of achieving an effective redistribution of the gains from globalization and trade has only amplified these problems.
Hopes for social and economic stability in several countries rest on the reversal of the current monetary policy paradigm to correct its excessive focus on equity markets and their “wealth effect”, embracing of a more symmetric response to the economic cycle and a mandate to focus on financial stability as much as on price stability. That is the cornerstone of the proposals in our book, The Rise Of Finance: Causes, Consequences And Cures. Alas, central bankers, finding themselves in a hole, are digging further.
Key to such a revision is the abandonment of the central role of asset prices in the US monetary policy framework. Much of the global economic woes and imbalances can be traced to that. Limited central banking and sovereign monetary system are partial but important solutions. A global monetary regime needs new rules of the game and an end to single-currency dominance, for it contributes to the synchronization of global economic and financial market cycles. The US president has heeded our message, for he appears to be working overtime to end the dominance of the dollar.
The fundamental changes demanded of modern capitalism go beyond economic policy shifts, and demand wholesale behavioural and cultural shifts. Overturning such hegemony requires powerful enough narratives that can build broad-based coalitions and sustain popular movements. Such transformations would require Wall Street leaders to champion the cause. The world needs capitalists with a conscience. Unfortunately, the social dynamics among the elites in modern societies appear to act as restraints against the emergence of such countervailing forces. They need counter-revolutions to create a new synthesis. Beyond flagging this concern, a primer for stoking such revolutions is beyond our abilities.