Global ﬁnance | 6 | Global Finance | Robert Holton

ABSTRACT

This book is intended to make sense of global ﬁnance. There can be few topics of such immediate importance, whether to citizens, businesses, or governments. The recent global ﬁnancial crisis (GFC), which began in 2007, is still playing out in the sovereign debt crisis of a number of European countries and the USA, while many global banks remain subject to stress tests to determine whether they would withstand further ﬁnancial shocks if conditions deteriorate. Citizens ﬁnd they are paying many of the costs of ﬁnancial breakdown whether through unemployment, cuts to public services or increased taxation, while many businesses are ﬁnding credit hard to obtain. So how is it that this situation has arisen and what can be done about it? Global ﬁnance has an enormous dynamic potential, yet its economic

power and global scope raise fundamental challenges to national sovereignty, democratic politics, and international co-operation. These challenges are magniﬁed by the problems of risk and severe economic instability to which the sector is prone, posing further challenges for global as well as national public policy as to how global ﬁnance is best regulated. Many discussions of global ﬁnance are written by economists and

management specialists, and others by ﬁnancial regulators or journalists. The distinctiveness of the present study, written by a sociologist and

economic historian, is that it takes a rather diﬀerent and far broader approach. This has two main features. First, it places global ﬁnance within society and subject to political and cultural as well as economic processes. Second, it is historical and as such not limited to the present or to immediate ﬁnancial concerns. Economics does not provide all the answers to an understanding of

how global ﬁnance works, while a focus exclusively on the present does not engage with the historical fact that global ﬁnance and globalization itself has a long history. Financial crises are not new but endemic to market-based economic systems. Much of the rhythm of global ﬁnance over the last 300 years has been cyclical in nature, as Charles Kindleberger famously pointed out in Manias, Panics and Crashes (1978). Such cycles followed a pattern of credit expansion-speculation-bubble-distress-bust. Many look to economists for answers to these questions, but there is equally a strong sense that economics failed to predict crisis and may only have limited purchase on its causes. The alternative sociological approach outlined in this book includes greater emphasis both on historical trends and instabilities in global ﬁnance, and gives close attention to the cultural worlds of ﬁnance, to the traders and bankers at the heart of the system. The idea that markets work simply through the rational pursuit of selfinterest is too simplistic and needs to be replaced by a broader sense of the culture, social psychology, emotions, and discursive contours of ﬁnancial market players. These shed light on how markets work, and why participants fundamentally underestimated risks and uncertainties, leading eventually to crisis. Markets and ﬁnancial institutions, together with investors, borrowers

and savers, are then part of wider social arrangements, rather than operating in an entirely separate economic domain. This does not mean economic thought is not helpful or productive. Indeed, economic theory acts not simply as a commentary on economic life, but also helps to shape the way economic activity is organized. The problem is rather that economics, as we shall see, is not enough if we want to understand how markets work. There is, after all, a two-way ﬂow of inﬂuences between the economy, on the one hand, and political, legal, and cultural processes on the other. Such processes include public regulation of markets, legislation and legal norms concerning economic property rights, and acceptable forms of economic transaction, as well as cultural expectations and conventions concerning

the purposes, functioning, and limits to the scope of economic activity. Markets have, in other words, social, political, and cultural preconditions as well as consequences. They are acted out or performed by individuals and groups according to ways of understanding economic life, that arise within the broader social infrastructures that markets inhabit. This is true both within nations and in cross-border activities where diﬀerences in political arrangements, legal requirements, and cultural practices aﬀect how business is done. Research in areas such as management styles, modes of negotiation, and preferred forms of legal regulation show this to be the case. So while the ideal of ‘free’ markets is widespread, it would be misleading

to assume that this amounts to a complete description of how markets actually work. Finance markets may appear impersonal, a characteristic enhanced both by the extensive use of computer-based transactions and by the secretive nature of conﬁdential business practice. Yet they are performed by individuals operating within organizations and networks. Market participants must make judgements not simply about price signals and what they mean for investment, saving, employment, and consumption, but also about who they trust, what operating methods are legitimate, how they interpret risk, what legal and political obligations are required of them, and whether ethical considerations should enter into market behaviour. This does not mean that market participants necessarily comply with external norms and obligations – tax evasion and insider share dealing being two obvious areas where they do not. But it does mean that there is a wider social setting to be reckoned with. Even if self-interest or greed are the norm, there are circumstances – such as repeated ﬁnancial crises over the last 300 years – where they are inadequate as guides to behaviour, and where the location of markets within society can no longer be ignored. This is evident in the emergence of criticism over the legitimacy of

high salaries and bonuses paid to ﬁnanciers who have presided over banking failure. It is also connected with arguments that businesses that receive massive public bail-outs in order to survive ﬁnancial collapse should not simply carry on as before, but should have a greater public responsibility for their actions. The wider social and political context is also reﬂected in adverse commentary on the widespread tendency of banks to raise their own interest rates in excess of central bank interest

rate rises. Legislators and regulators, as well as citizens, take these matters seriously and often seek redress. Whereas conventional economic thought brackets out much of this wider array of concerns and inﬂuences, in this book they are brought back in to the analysis. The development of global ﬁnance is part and parcel of wider social

arrangements, but it is equally connected with that much-hyped and omnipresent phenomenon of globalization. This involves a growth and intensiﬁcation in cross-border transactions and relationships, such that the world becomes increasingly interdependent. This interdependence is seen within an international division of labour which sees raw materials, manufactured goods, and ﬁnancial services exported and imported. But it also applies to ﬁnance, where money markets for investment capital, foreign exchange, government debt, real estate, and household consumption depend on global linkages between borrowers and investors, conducted through ﬁnancial intermediaries. Nations may have particular proﬁles in terms of the types and scale of ﬁnancial institutions located within them, levels of domestic savings, and levels of public expenditure and debt. Yet their room for manoeuvre in ﬁnancial matters is circumscribed by the integration of national ﬁnance within global arrangements. Such limits apply even to the world’s largest and most powerful nation, the USA, whose deﬁcits both in international trade and in government expenditure depend on huge inﬂows of global capital, including massive purchase by China of US government bonds. Without these global inﬂows, US consumers would have to curtail their consumption, corporations would have to limit capital expenditure, and governments would have to slash public spending. Global interdependence also means that events or crises in one region

spill over to many others. This happened in the Wall Street crash of 1929 and subsequent Great Depression. It has also happened in the recent ﬁnancial crisis. The reverberations of this renewed episode of global ﬁnancial dislocation have been felt not only in the USA where banking collapse and the sub-prime mortgage crisis bit deepest, or in Europe where banking crisis has been combined with sovereign debt crises and political instability in smaller countries such as Greece and Ireland. The crisis also has ramiﬁcations for Latin America, Africa, and Asia, as the upward trajectory in the growth in world trade faltered, while global capital markets reduced the supply of credit and largely abandoned poorer indebted nations.