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Governance, Regulation
& Financial Market Instability:
The Implications for Policy
Sue Konzelmann & Marc Fovargue-Davies
(Frank Wilkinson & Duncan Sankey)
Re-engineering the Corporation
London 26 March 2010
Introduction & Overview
• Galbraith’s ‘conventional wisdom’
– Shifts in policy, economic impacts & theory
– ‘Galbraithian Episodes’ since 1919
• Policy options constrained by:
– globalization and progressive de-regulation
– increasing importance of financial sector
– excessive levels of debt
• Conclusions, implications for policy & next
stage of the research
‘Conventional Wisdom’
• ‘Conventional wisdom’ is inherently
conservative and gives way not to new ideas,
but to ‘the massive onslaught of circumstances
with which it cannot contend.’ (Galbraith 1999: 17)
• Galbraithian Episodes since 1919:
– The end of World War I to the end of World War II
– The end of World War II to the late 1970s
– The late 1970s to the present
Episode 1: From
‘laissez faire’ to government stimulus
•USA
– The ‘Roaring 20s’ – ‘an astonishing boom’ (Arndt 1944)
– Economic slowdown, Crash, & the Great Depression
– Roosevelt’s ‘New Deal’ intervention … although it
takes World War II to bring full recovery
•UK
– The 1920’s ‘doldrums’ (Howson 1975)
– 1931 interest rate cut accidentally triggers house
building & consumer durables boom
– 1937 re-armament leverages the recovery
Episode 2:
The ‘Golden Age’
• Widespread commitment to Keynesian fullemployment and the welfare state
• Macro-economic performance characterized
by full-employment, non-inflationary growth
and rapidly rising living standards
Episode 3:
The rise of Neo-liberalism
• Macro-economic theory & policy postulates:
– monetary causes of inflation
– Efficiency & welfare benefits of free markets
• Industrial organization and corporate governance
theory & policy argues:
– Large firms the result of – & reward for – success in
competitive markets
– Stock market an efficient ‘market for corporate control’
• Central bank responsible for inflation and Central
government for market freedom
Episode 3:
Neo-liberalism unleashed –
the return of laissez faire
• Confidence in markets & de-regulation
• Strengthening of the shareholder model &
relaxation of the money supply
• Securitization & expansion in debt funding …
vulnerability to shifts in confidence
• Leveraged buy-outs, foreign competition &
inflation hollow out the ‘real’ economy whilst
the finance sector achieves dominance
Episode 3:
The Financial Market Crisis &
Economic Downturn
• Failure to revitalize the industrial base strengthens
reliance on the financial sector whilst the absence of
other export opportunities increases national debt
• Globalization & financial market ‘innovations’ have
outpaced the capacity to supervise & regulate
• Loss of confidence in financial mkt precipitates crisis
• Financial market crisis has re-bound effects on the
real economy & the recession deepens
Conclusions
& Implications for Policy
• The current debate: How to pay down the national
debt by cutting government expenditure
• Starving the economy of funds through austerity
policy is likely to undermine economic recovery
• Stimulus better aimed at longer-term re-balancing
• National debt associated with bank bailouts
should stand as a levy on the banking system
• Reform must be co-extensive with the market
National debt as % of GDP: 1900 to 2010
250
200
150
100
50
0
00 03 06 09 12 15 18 21 24 27 30 33 36 39 42 45 48 51 54 57 60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08
19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20
National debt as % of GDP