Legacy of rampant deregulation
by William Keegan
In The Redesign of the Global Financial Architecture, a commendably concise examination of events before, during and after the financial crash of 2007-08, Stuart Mackintosh has produced something very close to a masterpiece.
Let us face it: financial regulation is hugely important. But books and articles about it seldom make for exciting reading, not least when they are written by economists whose mastery of mathematics tends somehow to interfere with their prose style.
True, as a central part of his thesis, Mackintosh has to make frequent use of that terrible word ‘paradigm’. But he does not get bogged down in too much jargon, and has written a book that ought to be essential reading for politicians, historians and the intelligent lay person, not just the financially and economically initiated.
‘Shamelessly irresponsible deregulation’
His main point is that, after the era of shamelessly irresponsible deregulation that began with Margaret Thatcher and both presidents Reagan and, alas, Clinton, there has been a ‘paradigm shift’ under which, as the book’s subtitle proclaims, we have witnessed ‘the return of state authority’ in banking and the financial sector generally.
Mackintosh, a member of the OMFIF Advisory Board, is executive director of the Group of Thirty, which is indubitably one of the most prestigious international think tanks.
In this position, he has had close contact with leading central bankers and financial leaders, both public and private sector, and studied the evolution of their thinking and practice.
He covers the way that the financial sector grew too big for its boots, with official connivance, indeed encouragement, until the onset of the crisis.
Mackintosh laments how ‘neoclassical economic beliefs – in market equilibrium, in rational actors, and in the efficiency of liberalised markets – were championed and behavioural economics languished, notwithstanding the latter’s greater explanatory power regarding the business cycle and the nature of booms and busts.’
Historical memories had been forgotten. Almost none of the existing policy-making community had experienced severe crises: ‘Instead, they viewed events discretely, individually, not systemically as a whole and across entire markets.’
In the era of rampant deregulation, too much trust was placed in the supposed wonders of the financial sector, and the spurious claim that it was spreading risk rather than intensifying it. In one of his most biting pieces of sarcasm, JK Galbraith headed one of his chapters in The Great Crash, ‘In Goldman Sachs We Trust’.
The bulk of Mackintosh’s book explains how governments and central banks came to the rescue from 2008 onwards, with the restoration and improvement of banking and financial supervision playing a vital role, most notably via the work of the Financial Stability Board.
Such moves constituted what the author hopes is a ‘paradigm shift’. But he notes that some critics maintain the reforms were either too slow to qualify as a paradigm shift or did not go far enough.
However, while Mackintosh is reasonably happy in his belief that much has been achieved on the ‘macroprudential’ front, he forensically analyses the way that, after the great macroeconomic rescue operation in 2008-09, culminating in the G20 London summit on 2 April 2009, things began to fall apart at the G20 summit in Toronto in 2010. This was not least because of the baleful influence of pre-Keynesian German policy-makers, aided and abetted by George Osborne, the new UK chancellor of the exchequer.
Growing wealth inequalities
Mackintosh makes clear that the return of state authority has most certainly not been exercised to the full on the macroeconomic front.
In his final chapter, he expresses the wish that ‘the visibly destructive macroeconomic results (such as secular stagnation) of growing inequalities in wealth, may lead to action instead of wringing of hands’.
Perhaps, he concludes, ‘the next crisis may more fully expose... the grossly unacceptable societal costs and outcomes borne by the state and the voters of private decisions by the wealthy few.’
William Keegan is Senior Economics Commentator for The Observer.