Time to Rein in Global Finance
by William Greider
The Nation magazine, April 24, 2000
The financial crisis that collapsed Asian economies in mid-
1997 and then bounced around the world was a distant sideshow
to most Americans until it reached Wall Street. One year later,
when Russia defaulted and Brazil was engulfed by the investor
panic, US financial markets plunged too, and some major American
banks and brokerages were at risk (as a result of lending billions
to such magical schemes as Long-Term Capital Management, the wildly
over-leveraged hedge fund that went bust). The Federal Reserve
rushed to the fire, supervised a forgiving bailout for Long-Term
Capital and swiftly cut interest rates three times ~ restore confidence.
The giddy boom resumed, but the US establishment was rattled.
Led by the President, important voices from financial and academic
circles began to talk earnestly about the need to reform the global
financial system. "A new international financial architecture,"
they called it.
Nothing has been reformed. Three years after the turmoil and
destruction began, the world's unstable financial system remains
unchanged and, therefore, still vulnerable to all the excesses
of unregulated capitalism that nearly brought it down. Another
savage crisis is very likely to occur, somewhere or another, and
millions of innocent bystanders will, once again, find themselves
wiped out by the blind force of global finance, with its reckless,
manic appetite for greater returns. For instance, because global
flows of capital are now freed of any moderating controls by national
governments, they can surge into a promising "emerging market"
like Mexico or Indonesia, overwhelm it with easy money lent short-term
for quick profits, then rush out overnight, collapsing the currency
and economy. Major speculators, meanwhile, operating from unregulated
offshore banking centers, gang up to attack vulnerable currencies
from Britain to Malaysia and reap enormous windfalls by forcing
them into costly, often exaggerated devaluations. An embattled
country like Brazil is compelled to seek the protection of the
International Monetary Fund, which will demand an austerity policy
to restore the confidence of global investors (the very people
whose panicky flight triggered the crisis). These and other destabilizing
features of the free-market "architecture" are among
the problems that have not been fixed. When another crisis does
occur (perhaps closer to home), it will confirm the dereliction
of the "responsibles."
So the burden of reform devolves to others-those diverse voices
around the world who are uniting now in a-movement to challenge
the corporate-capitalist version of globalization. These active
citizens, of course, have very little power to change things themselves,
except their intelligence and spirit, plus an ability to arouse
the broader public. This new international movement understands
that the maladies of global finance go deeper than recurring crises
and the danger of a total breakdown. For decades, the poorer countries
have lived with harsh dictation from global capital about what
economic plans their governments may or may not pursue in behalf
of citizens, with brutal discipline if they stray. The cheerleaders
describe this as globalization's "golden straitjacket"-follow
our orders, and we will make you rich (someday, but people in
most societies are learning that the consequences for humanity
are often quite leaden. Some people do get rich, of course, or
gain wage incomes. But as millions learned in Southeast Asia,
their escape from poverty was a temporary thing, hostage to the
anxieties of distant investors who are oblivious to their individual
efforts and aspirations.
The financial realm constitutes the commanding citadel of
the global system-the benefactor that provides essential capital,
the enforcer that disciplines multinational corporations as well
as nations. Its imperious attitudes and amoral operating assumptions
are embedded in every aspect of globalization and implicated in
every complaint, from inhumane working conditions to environmental
wreckage, from the erosion of national sovereignty to the gross
and growing inequalities. Reforming global finance is, likewise,
the most formidable challenge, since many people who can grasp
the immorality of exploited labor or wanton destruction of nature
are intimidated by the dense abstractions of high finance.
An essential starting point is to remember that this out-of-control
global financial system is a man-made artifact, a political regime
devised over many years by interested parties to serve their ends.
Nothing in nature or, for that matter, in economics requires the
rest of us to accept a system that is so unjust and mindlessly
destructive. What follows is intended to help people think more
clearly about the possibilities for reform. Some plausible, immediate
steps will be described that could impose more order and equity
on global finance, also a grander vision of how the world's divergent
economic interests might someday come together in a new institutional
relationship that disarms the overbearing power of capital while
it also reconciles tensions between rich and poor countries. We
begin, however, on the narrow ground where the elite debate is
located because some of its "solutions" may actually
make things worse, especially for poorer countries.
The public dialogue among establishment figures started on
a hopeful note, with sober pleas for "a new architecture"
from Bill Clinton, Treasury Secretary Robert Rubin, Tony Blair
of Britain and many other influentials. Since then, the discussion
has steadily narrowed and is now reduced to a single question:
how to reform the International Monetary Fund and the World Bank,
as if those international financial institutions (the so-called
IFIs) are the only problems to fix. What's left aside is the private,
deregulated marketplace of global investing, lending and speculation
that actually generates the instabilities and gross injustices.
There are a couple of significant exceptions I will mention, but
the general drift of respectable opinion is toward doing as little
as possible and doing nothing that might upset the bankers and
In Washington, the reform debate has been hijacked by the
free-market right-wingers in Congress and elsewhere, who propose
to eviscerate the IMF and the World Bank, severely reducing the
scope of their lending and their authority to intervene in crises.
The loan windows would be effectively closed to most poor nations,
and discretionary decision-making would be replaced with fixed
and very conservative rules. The right portrays the fund and the
bank as out-of-control bureaucracies that have stealthily accumulated
functions far beyond the original purposes of the Bretton Woods
agreement that created them a half-century ago. In the reconstruction
following World War II, the IMF's initial role was to be the mediating
agency that insured stable, fixed currencies. The World Bank did
investment lending to rebuild war-devastated economies and to
help poor countries begin development. It is certainly true that
in recent decades, both institutions have been transformed and
both often make things worse for countries they are supposedly
helping, imposing on them the conservative economic dogma known
as the "Washington consensus."
But the right-wingers make an additional complaint: The IMF
actually causes financial crises-by encouraging investors to take
imprudent risks in the belief that the IMF will come to their
rescue with a bailout-and its functions must be sharply limited.
Among their fanciful claims, the right-wingers promise that if
another major financial collapse does occur, the IMF will be prohibited
from executing the kind of big-package bailouts employed for Mexico
in 1995 and Southeast Asia in 1997.
The right-wingers' anti-IFI message appeals to many social
activists on the left, and some have signed on to the conservative
agenda on the assumption that anything that weakens the IMF and
the World Bank is a big step in the right direction. I share their
critique of the IFIs, but their logic seems to me quite naive
about the actual power relationships in the global system. I suspect
they may come to regret making common cause with the likes of
Senator Phil Grarnm, who, as conservative chairman of the Senate
banking committee, can do great damage under the banner of reform.
The right wing's prescriptions are contained in the recent report
from the International Financial Institution Advisory Commission,
created by Congress in 1998 to critique the IFIs and recommend
changes (the chairman is Professor Allan Meltzer of Carnegie Mellon,
a hard-money disciple of Milton Friedman who regularly scolds
the Federal Reserve for being too lax). Treasury Secretary Lawrence
Summers, perhaps anticipating the right's line of attack, has
called for a moderate scaling back, but Harvard economist Jeffrey
Sachs is providing liberal cover for the right-wingers. A leading
IMF critic and Democratic appointee to the IFI commission, Sachs
enthusiastically endorsed the conservative recommendations (while
privately assuring friends that he disagrees with the more odious
At the risk of sounding soft on the IFIs, I observe that the
right has grossly rewritten recent history in order to blame them
and absolve private capital. The IMF and the World Bank have indeed
expanded and contorted their purpose enormously over the past
two decades, but in every important instance they've done so at
the behest of the US Treasury, responding to urgent demands from
private banking and finance, mainly the major US banks and brokerages.
In the Third World debt crisis of the eighties, IFI lending assisted
the massive, silent bailout of leading banks like Chase and Citicorp
(now Citigroup), which allowed private banks to back out of huge
portfolios of failed loans yet left the indebted countries of
Latin America in even worse shape (a negative wealth transfer,
from poor to rich, totaling $116 billion). In the nineties the
$50 billion bailout of Mexico was engineered by Rubin and Summers,
not the IMF, which as always followed Treasury's orders (a rescue
for the customers at Merrill Lynch and Goldman Sachs, among other
firms). The Asia and Russia bailouts were likewise driven by US
policy-makers and financiers. The IFIs are agents of global capital,
not the masters.
If the two Bretton Woods institutions were abolished tomorrow,
the punishing chaos and inequities in global finance would continue
and might be amplified by panicky investors, since these disorders
originate in financial markets, driven by powerful private interests
and their self-serving doctrine of lawless free markets. The right-wingers,
along with Jeffrey Sachs, are being cute when they pretend to
recommend no more bailouts. As they well know, if the next crisis
is large and threatening enough, the IMF, World Bank, Fed and
other major central banks will again intervene as lenders of last
resort-regardless of anybody's promises- since "letting nature
take its course" might risk a total meltdown.
Developing countries, meanwhile, will find themselves in a
new straitjacket, probably harsher than the present one, if the
right's agenda prevails. The Meltzer-Sachs commission's majority
insists, for instance, that the IMF lend only to "prequalified"
nations that pass certain tests of soundness-that is, adopt conservative
economic policies and deregulate domestic financial systems so
that foreign banks and brokerages are free to enter and dominate
them. Thus the US financial industry might accomplish through
this back door what it has long sought in formal trade negotiations,
like the controversial Multilateral Agreement on Investment, which
was stymied only by vigorous grassroots opposition from many nations.
The Meltzer-Sachs proposals contain other neocolonial features
that are most unfriendly to the poor.
The political plans of the right may also threaten-even derail-the
energetic global campaign under way to win debt relief for the
very poorest nations. Senator Gramm and allies intend to attach
the Meltzer-Sachs prescriptions to upcoming legislation needed
to approve debt relief. If they succeed, Jubilee 2000 could be
held hostage, even stalemated, by Congressional right-wingers
insisting on their version of reform.
The global financial marketplace resembles a Wild West territory
where bankers and big ranchers try to establish law and order
among the populace while exempting themselves (since they write
the laws in the first place). In this metaphor, the IMF plays
sheriff and hanging judge, dispensing commandments and punishment
on behalf of wealthy patrons while absorbing the wrath of angry
citizens. Reforming the IFIs, including attempts to insert labor
and environmental rights into their lending conditions, may be
a noble project, but it will almost surely fail unless this underlying
contradiction is confronted and altered. What this territory needs
is new laws that regulate the behavior of the powerful, that extend
due process and equal protection to the weak as well as the mighty.
The great fiction promoted by the free-market gurus-that national
governments are powerless to assert themselves in this new world-has
always been nonsense but widely believed. The myth is now being
refuted, concretely, by legislation introduced by a respected
establishment Republican. Representative Jim Leach, the moderately
conservative chairman of the House banking committee, has proposed
a measure to assert the influence of US banking regulation over
the galaxy of offshore banking centers- the secretive, unregulated
outposts where "dirty money" from drugs and crime mingles
with respectable capital from hedge funds, major banks and wealthy
investors. Leach's proposal is the most meaningful step toward
genuine reform that I've observed (actually the only one) and
ought to inspire reform activists to explore the broader implications.
Last year Leach was powerfully offended by the scandalous
money traffic through the Cayman Islands and other offshore havens
that allowed Russian oligarchs to spirit away many billions and
deposit the loot in the Bank of New York (possibly the same billions
the IMF had lent to the Russian government, though that's not
yet proved). Leach discovered that in one year some $70 billion
was transferred from Russian accounts through a tiny island in
the Pacific Ocean called Nauru, population 11,000. Last fall Leach
drafted regulatory legislation that could put a stop to these
financial games, or at least force them into the daylight. The
so-called brass-plate banks, typically existing only as computers
set up in obscure locations, are more than an arcane gimmick,
because they channel huge volumes of global capital, especially
from the major speculators, outside official scrutiny from any
Banks in the United States, Leach asserted, should be prohibited
from accepting any of these blind transfers from money shops if
they cannot establish that the money originated from a truly regulated
institution that is, in fact, a real bank (the Clinton Administration
introduced a competing version after the financial industry complained
about Leach's). The issue exposes a central hypocrisy of international
finance-a system that demands "transparency" and "due
diligence" from banks in developing nations while all the
best names in international finance use these irregular outposts.
The offshore money, whether clean or dirty, enjoys the same benefits:
avoidance of national laws and regulation as well as avoidance
of taxes (global tax-avoidance schemes may cost hundreds of billions
in lost revenues; no one really knows).
Despite the complexities of global finance, the operating
cortex is relatively small and easily accessible to government
regulators-five dozen or so international banks that handle the
foreign-exchange transfers for everyone else. Nearly all are based
in the wealthiest economies, supervised and regulated by their
national governments. The politics is straightforward: Write tough
new rules for these leading banks and everyone else must observe
them (unless they choose not to do any banking with the world's
principal centers of financial wealth).
New rules are needed to create more financial stability and
equity, but, ultimately, banking regulation can also be a discreet
instrument for upholding social values-public needs for housing,
healthcare, education-since the regulation implicitly influences
access to credit (which borrowers are preferred, which shut out).
Not all of the issues can be reached by national legislation alone,
but much of the disorder will be swiftly remedied if the wealthiest
nations, especially the United States, abandon the crumbling dogma
of laissez-faire and accept the obligation to restore fairness.
Here is a brief sampling of some possibilities proposed by various
* Shut off or shut down the offshore banking centers, both
to curb speculation and recapture lost revenues for national governments.
Leach's proposal is a modest first step toward establishing the
standard of law. Tax-dodging and money-laundering are financial
issues that every citizen can understand.
* Allow nations to impose their own controls on short-term
capital flows in order to disarm the "hot money," those
frantic capital surges in and out of countries that have triggered
so many crises. The Council on Foreign Relations, an old establishment
outpost, recommended as much in a study group co-chaired by two
other Republican notables, Peter Peterson, Richard Nixon's Commerce
Secretary, and Carla Hills, George Bush's US Trade Representative.
Their recommendation departs from orthodoxy but is not as radical
as it sounds. Chile, after all, has been allowed to do this. It
successfully discourages short-term lending from abroad with a
stiff holding-period tax that severely penalizes early withdrawals
(shorter than a year's duration). The United States and other
powers simply have to tell the IMF to back off and let emerging
economies use such insulating devices, perhaps even incentives
like Chile's that direct longer-term capital to the nation's own
priorities. One wonders, in passing, why the Clinton Administration
is so shy about the issue of capital controls when the Council
on Foreign Relations has provided establishment cover. j
* Create a quasi-public international investment fund that
directs major volumes of long-term capital to developing countries
and thus allows them to escape the dictates of investors and economic
doctrines imposed by the IMF. A broadly diversified fund, including
private and public investors, professionally managed to produce
healthy returns, would bring patience to the process of globalization-stable
capital that is not beholden to the quarterly earnings of multinational
corporations or the feverish mood swings of financial markets.
Governments might set forth the broad principles, but the fund
would have to establish that patient capital can compete profitably
(precisely why private capital loathes the idea). Jane D'Arista
of the Financial
Markets Center (her work is available at www.fmcenter. org)
has proposed a closed-end international fund that would function
like a giant mutual fund, but with a sense of history. An alternative
version would raise its capital from a modest tax on global financial
transactions and might gradually displace the World Bank as the
leading development lender. Either way, the goal is to give aspiring
nations more freedom from the fickle financial markets, while
assuring the capital inflows they need to develop.
In the meantime, governments should prohibit the World Bank
from financing any more oil, gas or mining projects- 40 percent
of the World Bank Group's loan portfolio last year, according
to Friends of the Earth and other environmental groups. These
generate environmental destruction and social upheaval in developing
countries while often propping up corrupt regimes. Private capital
should take these risks, not taxpayers.
* Create a new international bankruptcy court to arbitrate
claims between creditors and defaulting nations and provide protective
workouts so indebted countries aren't destroyed in the process.
The present system, loosely supervised by the IMF, central banks
and various clubs of private bankers, is utterly one-sided. The
fallen nations are steadily bled, their remaining assets picked
over by scavenging investors, while foreign creditors walk away
with no responsibility for their own mistakes. A global bankruptcy
system for nations would develop equitable principles for settlements
and terms of lending that could be incorporated in every debt
instrument of global finance, the legal language that establishes
the obligations of bankers and bondholders as well as their borrowers.
This reform is a more reliable response to the problem of "moral
hazard"-investors who take irresponsible gambles because
they believe governments will bail them out- than anything the
free-marketeers have suggested. Professor Kunibert Raff of the
University of Vienna has proposed that nongovernmental organizations,
trade unions and civic groups participate to speak for the affected
citizens in bankrupt nations.
* Confront and engage the long, difficult task of constructing
a new international system that assures stable relationships among
national currencies. The present system of floating exchange rates,
with its exaggerated swings in currency values, is a central source
of global instability as well as a movable feast for speculators.
With everyone linked to the continuing gyrations of major currencies,
the damage is randomly transmitted: US interest rates rise and
trigger a collapse of the peso in Mexico or the baht in Thailand.
Unpredictable exchange rates lead multinationals to disperse factories
so they can hedge currency shifts by bumping their output from
one count - , to another. This rudderless free market-$1.5 trillion
a day in foreign-exchange transactions-wastes enormous amounts
of capital in unproductive games, while the intimidating instability
also retards growth rates in the advanced industrial nations.
These are not radical complaints, but points that conservative
authorities like Paul Volcker have made in calling for reforms
to stabilize the world's currency relationships. Unlike previous
examples, this problem cannot be easily fixed, and certainly not
by a single nation. Managing the international stability of currencies
was the original purpose of the IMF, but that function was wiped
out three decades ago when Nixon unilaterally discarded the Bretton
Woods system and accepted Milton Friedman's idea of floating exchange
rates-money values determined, every day, in the marketplace.
The triumph of laissez-faire produced the present turmoil. The
IMF ought to be phased out, but that's unlikely until a new, more
democratic institution is created to replace it. Big players can
hedge against unpredictable losses, but people can't hedge their
lives, the* societies. Global finance needs a supervisory governor
that everyone can trust.
Set aside current realities and imagine a different future:
Every nation, rich or poor, conducts foreign trade in its own
currency and, therefore, gains greater ability to steer its own
national economic policies. The dollar and the euro, perhaps joined
by the yen, serve as the most reliable anchors but no longer swing
wildly in value against one another, damaging producers and workers
on one end or the other. Poorer nations, exporting and importing
in their own currencies, are no longer compelled to raise "hard
currency" reserves to pay back foreign loans; thus they are
free to move away from the model of export-led growth and concentrate
more on domestic development. Exchange rates among the currencies
still fluctuate in value, actively influenced by market forces,
but the speculators have lost their best game. The extraordinary
volumes of currency trading subside; the "hot money"
finds less opportunity to panic. The rhythms of globalization
become less volatile and randomly destructive, as investors discover
that the best returns require investing with a longer perspective.
Finance capital no longer acts like an imperious master, but only
as one important agent in capitalism's processes of wealth creation.
All this is entirely plausible, but to reach this future one
has to accept the need to create some kind of new governing authority
for global finance. The most ambitious and persuasive plan I have
encountered was designed by financial economist Jane D'Arista.
The improvements described above are what D'Arista foresees as
possible if the world undertakes a fundamental reordering. Someday,
I predict, political leaders will be compelled to consider something
like this, though I fear it may require a bloody catastrophe to
get their attention.
Many reformers will object that this subject is wildly premature,
too abstract for citizens to grasp, too distant from present politics
to engage their scarce energies. Besides, they will say, does
anyone really want a new, more powerful IMF? I disagree. Thinking
ahead in larger terms can give self-confidence to this new movement.
Asking hard questions about the future forces people to clarify
their vision. Besides, governing elites are much too timid to
think big for us.
D'Arista's concept borrows from John Maynard Keynes and Harry
Dexter White, co-architects of the original Bretton Woods arrangement,
but the operating principles are adapted to the greater, faster
complexities of today. She calls this new institution an "International
Clearing Agency" because it would act as the currency clearinghouse
for payments in international trade (the place where exporters
and importers exchange one nation's currency for another's). Banks
would. do the exchanges for them, much the way they use the Federal
Reserve as a clearinghouse for all US banking transactions. The
ICA would not be a true central bank, since it wouldn't have the
power to create money, but many features and functions would be
similar. Like a central bank, it would hold the world's reserves,
backed by marketable financial assets deposited by the participating
nations. This financial base would give it the power to act as
lender of last resort in major emergencies and provide temporary
liquidity loans to countries *n difficulty (just as the Fed routinely
lends to commercial banks).
The ICA's central function, however, would be a balancing
act among nations and their currencies-keeping the exchange values
of currencies within agreed-upon ratios. If a nation tried to
capture artificial advantage by letting its currency stray, it
would be nudged back in line by its shrinking reserves at the
ICA and eventually compelled, more or less automatically, to correct
its economic imbalances or face a formal devaluation. Thus the
ICA would adjust and stabilize the flows much as the original
IMF did. Other times, it would help a country deal with unexpected
shocks like commodity-price gyrations or natural disasters. Overall,
the agency could discreetly counter the runaway surges in financial
activity, just as the Fed is supposed to do. Defending the safety
and soundness of the system is in everyone's interest, not just
private investors. It's an alternative to the Wild West.
Such an institution would have awesome power, no question
about it, but less awesome and arbitrary, I think, than the unaccountable
powers that private capital randomly asserts, for self-interested
profit, over the affairs of nations. Smaller countries, ironically,
might find D'Arista's scheme more attractive because it promises
them more sovereign space to pursue their own ideas of economic
development. The centers of financial wealth-especially the United
States-would likely be the skeptics, since it requires them to
surrender much of their ability to manipulate and dominate others.
When the United States developed into a truly national economy
in the late nineteenth century, it suffered repeated, disastrous
financial upheavals that eventually persuaded politicians, albeit
reluctantly, to accept the need for a central bank. The question
now is whether the world has yet had enough of the chaos and profiteering
to accept something similar.
The toughest challenge concerns democratic governance, not
financial design. Who would run and control this institution?
Wouldn't the same old crowd take over and use it to bully others,
as with the IMF? D'Arista has some tentative answers. She proposes
a rotating executive committee whose members must insure representation
on two levels-population and economic output-so that at least
half the world's population would be represented at the table,
as would nations that, combined, account for at least half the
world's economic output. I suggest two additional levels of representation-the
world's regions and he people at large themselves. It's not practical,
obviously, to have a popular assembly supervising the global financial
system, but here's a radical thought: Why not elections? I can
imagine a regular worldwide referendum in which people everywhere
vote directly to express themselves-thumbs-up or thumbs-down-
on the ICA's performance. A negative vote would force a change
in the leadership, much as in parliamentary systems. The same
principles might be useful for restructuring control of the IMF
and the World Bank (while they exist) or, for that matter, the
United Nations and other international forums that lack credibility
and power because they do not truly reflect world realities.
These are just ideas, of course. But if nations are serious
about the notion that globalization can lead to worldwide democracy,
we ought to look at distant horizons and begin asking ourselves
how this new democracy might work. The vision is simple: putting
people first, instead of behind capital.
William Greider page