When There is Little Left for a Radical to Say
By Robin Hahnel
ZNet Commentary
June 16, 1999
Paul A. Volcker is best known as the conservative, inflation fighting Chairman of the Board of Governors of the Federal Reserve System from 1979 through 1987. Prior to that he served Presidents Kennedy, Johnson, and Nixon in a variety of capacities. After retiring from the Fed he became Chairman of James D. Wolfenson & Co. Inc. and is the Henry Kaufman Visiting Professor at New York University’s Stern School of Business. Paul Volcker is exactly the kind of person I would expect to be invited to make the luncheon address to the Overseas Development Council Conference on Making Globalization Work (March 18, 1999). But I did not expected him to have this to say:
“Everybody talks about globalism these days to the point we are all sick of the term. But what has been too little emphasized is that the process has lots of problems. Here we are, about a decade after the downfall of the old Soviet Union, trumpeting the striking ideological triumph of democratic capitalism and open markets. But looking around the world right now, things are not so benign.”
Since the official “Washington View” of the US Treasury and IMF is that neoliberal globalization has produced spectacular global efficiency gains that have trickled down to almost everyone, it is surprising to hear a high ranking member of the economic establishment admit otherwise. Volcker went on to say:
“My position is that the dramatic succession of international financial crises is a reflection of deep-seated systemic problems. I do not think the pervasiveness of these crises can be traced primarily to particular human or institutional failings in the emerging world. Of course, there is no doubt such failings exist. But beyond those particulars, there are destabilizing forces at work, forces inherent in the organization (or lack of organization) of the international financial system in a world of free capital and money markets.”
Since the official “Washington View” is that crony capitalism, corruption, flawed accounting practices, unsound banking systems, lack of transparency, and irresponsible economic policies by governments in the affected countries were the causes of their crises, it is surprising – and refreshing – to hear an emeritus professor of financial regulation admit that the official explanation is total hogwash.
“Ponder a bit what went wrong in the emerging market countries. How is it, with their weak banking systems, the lack of transparency and their lack of accounting standards the emerging countries of Southeast Asia, for decades, managed really extraordinary rates of growth – 6,7 or even 8 percent a year? Only in the late 1990’s have they collapsed in one big pile together. What is different now than before?”
How refreshing to encounter a master logician among the cognicente: When there is a different consequent, look for a different antecedent!
“First of all, international markets are much larger and more fluid than ever before. More of the participants have a short-term, transaction orientation, and the new technology means they can act quickly to move large amounts of funds. What has been less recognized and commented upon is how small the financial markets are in most of the emerging economies, particularly small relative to the exponential growth of the international financial markets. Those small and weak financial markets are a reflection of the small and undiversified nature of most of their economies. My favorite example has been Argentina where I happened to visit at the time of the Mexican crisis and its so-called Tequila effect. I’m supposed to have some familiarity with these things, but I was nonetheless startled to learn that the aggregate amount of deposits in the Argentine banking system in 1994 was some $45 billion. At that time, that was about equivalent to the size of the second largest bank in Pittsburgh, Pennsylvania. The speed with which those small open economies have opened their financial markets is really amazing. It mainly is a phenomenon of the 1990’s. What gives pause is the fact that here, less than a decade later, they are in mass distress.”
Yes. Even the larger emerging market economies have financial sectors that are dwarfed by the explosion of liquid global wealth which has become like the proverbial 900 pound gorilla who sits where ever it wants. Then, when a derivative tickles, the global wealth gorilla picks up its derrier to search for a greener or safer patch leaving economic ruin in its wake. But this is Paul Volcker, not Paul Sweezy, dismissing the standard explanations for the economic crisis and arguing instead that the crisis was caused by nothing more than the predictable functioning of unbridled global capitalism itself.
“You, I am sure, are familiar with the general pattern: their economic success and enormous potential led to large capital inflows. The capital inflows in turn put a rosy glow on their economic cheeks; interest rates stayed relatively low; their currencies were strong; investment was stimulated and sooner or later a real estate boom and excess capacity developed. Then something unexpected comes along, a presidential candidate gets assassinated as in Mexico; a currency is deemed overvalued, as in Thailand; capital gets frightened because of a neighbor’s difficulty, as in Indonesia. Then money flows out faster than it came in. The exchange rate goes through the floor, interest rates skyrocket, and a financial crisis becomes an economic debacle.”
How delightfully simple the true explanation of the cause of the global financial crisis turns out to be! But Volcker goes on to comment on consequences of the crisis that would naturally be of special interest to someone with his background: changes in the banking sectors of emerging market economies.
“What is happening in the banking sector is striking. Let me return to Argentina, that banking market of $45 billion in 1994. I learned this morning that it has now become substantially larger; it has perhaps reached $80 – 90 billion in four years. But the really important change is structural. Today there is only one privately owned bank of any size left in Argentina that is not owned or substantially controlled by a large foreign bank. We see the same phenomenon at work in Mexico: four out of the five largest Mexican banks are owned by, or have substantial ownership interests, by foreign banks. Mexico is a country that only a few years ago, you will recall, took the position in the NAFTA negotiations that “the one thing we want to preserve is Mexican ownership of Mexican banks. That is an essential element of our sovereignty, we must not give it up.” Two of the largest banks in Korea, which has had a nationally insulated banking system heretofore, are now in the process of being bought by foreigners. Thailand’s financial system is being penetrated by foreign ownership. Surprisingly enough even Japan, not exactly a small emerging economy, in the midst of all this distress is apparently willing to accept some foreign ownership of banks and certainly of other financial institutions.” This is Paul Volcker, not Fidel Castro, pointing out that Western banks have profited from the economic distress to amass a global financial empire at a speed that would have been unthinkable only two years ago. But while Chairman Volcker leaves radicals like myself little to say in some regards, his attitude toward what he understands all too well leaves everything to be desired. He starts his speech by saying:
“There is no disputing the inevitability and irreversibility of the technology that makes it all possible, and I’m not going to deny the potential for speeding growth.” And he disapproves of governments who try to resist the trend:
“I think it is promising that, even with so much financial turbulence, countries haven’t generally turned inwards. There are only few exceptions, and even Malaysia seems to be easing its capital controls. That is encouraging.”
Paul Volcker will be no Ramsey Clark – who went from being US Attorney General and chief law enforcement officer of the US Department of Injustice to being one of the most consistent critics and opponents of unjust US policies everywhere in the globe for over 30 years since leaving office. Volcker is not going to join the 50 Years Is Enough Campaign and fight to reverse the tide of corporate sponsored globalization. For insights about how to stop globalization from above until equitable and sustainable globalization can be built from below we will have to look to others. But still… I never thought I’d hear Paul Volcker say what he just said!
TFF warmly recommends ZNet Magazine at http://www.zmag.org
