The Role of Vested Interests

The last sentence introduces the issue of vested interests, which include national interests.

Extrapolating Keynes’s sentence cited in section 1 from its historical context we should be led to think that the laissez-faire policy counterrevolution was mainly the product of old or new modes of thought, not of vested interests.

In the previous pages the terms “globalization,” “global actors” and “global markets” have been used as synonyms of generalized cross-border activities. The term global refers to the almost-free international movements of goods, services, capital and firms, not to stateless entities. In the global laissez-faire system tensions may exist between the inter­ests from which national politicians derive their legitimacy and the interests of national private economic and financial actors that are allowed to operate globally. From both points of view, the international arena is not a “natural” level playing field. Asymmetries in political and market power are the norm. Because the features of the global arena descend from a (noncomplete) set of common rules, the nature, or partial absence, of such rules is thus not neutral across the different actors. Formally, international political agreements have produced common rules. The question is why the outcome of these agreements were laissez-faire friendly rules and why current revisions do not contem­plate radical changes notwithstanding the disasters they have produced.¹⁴ In the short space of this chapter, I am not able to give a detailed answer. However, I will try to give a convincing one.

The starting point of the counterrevolution in financial regulation may be dated back to the 1970s, with the collapse of the Bretton Woods system (BWS). As the result of asymmetrical powers in the negotiation, an instance where Keynes’s more reasonable plan succumbed to US interests, the BWS produced an asymmetrical system where the adjustment of current account imbalances was charged only to deficit countries. When, as Robert Triffin had foreseen, the US position exceeded the gold convertibility of its international reserve currency, the system collapsed and a new public order was not forged, also due to the illusion nurtured by some countries to force a symmetric multi­lateral arrangement. While external imbalances were multiplied and generalized by the two petrol shocks, the inability or unwillingness to reach a new supranational agreement left private international banks in charge of the job previously done by the International Monetary Fund (IMF), but on a more grandiose scale.¹⁵ Flexible exchange rates with lib­eralized international financial flows were unable to eliminate large external imbalances, often increasing them. Substituting IMF loans with lending granted following private criteria, ex ante constraints on imbalances were replaced by ex post foreign debt and by financial and currency crises. The IMF de facto became the lender of last resort for funding the exit of foreign private capital, while imposing asymmetrical conditionality based on what was later named the Washington Consensus.¹⁶

Obviously, a system based on the international operation of private interests had to be based on market-friendly rules. Domestic financial deregulation and reregulation along microprudential lines permitted international inflows to be directed to real estate and securities sectors, fueling booms and bursts. The cause of a walk increasingly dis­seminated by systemic crises have been ascribed not to the model but to local realities not complying with the model, especially when those realities consisted of poor or emerging countries.

It would be rather naive to believe that the ideas purported by the academic resurrec­tion, manipulation and elegant presentation of old theories were the autonomous spring that, after winning the minds and hearts of policy makers and managers, have led to the globalization of laissez faire. They were surely a means, but they were also forcefully nur­tured by a flood of private funds that were directed at creating powerful think tanks and influencing the media and political elections and decisions.¹⁷ It would be wrong to look at this as a conspiracy stemming from homogeneous and well-knit interests. More simply, it is the result of letting powerful private interests emerge, as Henry Simons denounced, and of the convergence of such interests on a few basic points regarding their global reach.

The consolidation of the system also produced the consolidation of a large set of dispersed “subordinated” vested interests. The market-friendly rules from which the laissez-faire system derives its existence and strength have been worked out with decades of efforts by international public and private institutions whose respectability depends on avoiding radical changes. These actors do not need much encouragement to defend the foundations of their past proposals and decisions, even after the recent crisis has hit the most developed countries, that is, the strategic center. The various IMF, World Bank, Organization for Economic Cooperation and Development, Basel Committee, International Organization of Securities Commissions, national regulatory and supervi­sory agencies and so on have not reacted by questioning the general design. As popular outrage recedes, minor lapses from the original design are being repaired (counterre­forms). This while, by any serious analysis, financial fragility is higher than before the 2008 crisis.

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