The era of financial globalization may be coming to an end.
Virtually universal revulsion at the errors and excesses of the financial giants, and the global recession that resulted, has not led to any real consensus what to do about it, at either national or international levels.
Instead, countries are looking out for themselves, or simply quarreling. Recriminations are in fashion, whether against regulators who allowed bailed-out bankers to get big pay packages or against financial institutions that were unpopular in some countries long before the financial crisis.
Samuel Johnson once said, “When a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully.” He might have added that a reprieve from the death penalty can cause the mind to wander.
That wandering can be seen in Britain, where the Labour government has put together a package of regulatory reforms that the Conservative opposition vows to repeal if it wins the next election, as is widely expected.
It can be seen in Washington, where the Federal Reserve and the Treasury are being pilloried in Congress for actions that were necessary to avert a collapse of the global economy last fall.
The Institute of International Finance, a group of the world’s largest financial institutions — the ones that would be most affected by a sharp retreat in financial globalization — put out a report recently pleading for international cooperation and voicing fears in particular about national efforts to apply differing standards for local affiliates of international banks.
“We are operating in a globally interconnected world where we need to strengthen the system’s capacity to minimize the risks and to maximize the benefits of the interconnected global marketplace,” said Josef Ackermann, the chief executive of Deutsche Bank and chairman of the institute.
The big banks are particularly concerned about a proposal by Britain’s Financial Services Authority to “ring fence” the assets of British subsidiaries of foreign financial firms. Other countries have indicated they may follow suit, noting the way Lehman Brothers brought assets home before it failed.
For any one country, the group said, that might appear prudent. “But this can only put the brakes on global recovery, global finance capacity and ability to respond to global liquidity problems.”
But what was global before the crisis quickly turned local. The countries that suffered the most were those that had no locally owned banking system — think of Eastern Europe — and those that had banking systems far larger than the nation could afford to rescue — think of Iceland.
To many, the crisis showed the dangers to so-called host countries of relying on foreign banks that are supervised by home country regulators. When bailouts were necessary, the home countries were reluctant to let the money be used overseas.
Charles Dallara, the managing director of the institute, quoted a central banker as saying, privately and sadly, “We are going back to a world of national banking.” Dallara thinks that would be disastrous for global efficiency and global growth.
Among the leaders of the major countries, there is universal agreement that a coordinated global regulatory system is needed — and little will to get such a system in place. They talk globally when the Group of 20 meets, and act locally when they return home. The banks admit they messed up, but plead for a new regulatory system that is consistent across borders and flexible enough to allow innovation.
In Europe, there is much more hostility to both credit rating agencies and to hedge funds than there is in the United States, albeit for reasons that have little to do with the crisis. So tougher rules may be applied there.
In the United States, the Obama administration proposals may be faltering in Congress. It is not clear there are enough votes to create a consumer protection agency to review financial products. That is turf the Federal Reserve wants to occupy.
Bankers, having survived because of bailouts, have recouped enough to be raising their own pay again, to the fury of many, and to be able to lobby politicians in both Europe and the United States to force a relaxation of accounting rules. That is now letting the banks report better profits, but at the cost of freezing some assets. If there were an active market in troubled assets, the banks might have to recognize losses they now can pretend will vanish if they are ignored.
That lobbying battle, in which the banks have had at least the quiet support of some regulators, shows the risks of depending on bank regulators to perform other duties, like protecting consumers or regulating systemic risk.
The first duty of banking regulators is to protect the banking system. That usually means keeping the banks healthy, which is in everyone’s interest. But if the banks are weak, it can seem like a good idea to hide that weakness from the public, to buy time for the banks to regain health. That tendency to secrecy needs to be resisted, particularly since secrecy can also help to obscure the original regulatory failures that created the problem. Can we be sure that the Federal Reserve would put consumer protection over bank profits at a time of stress?
It is amazing that these days the Fed is being raked over the coals not for its pre-crisis failures — of inadequate regulation of the banks, no regulation of mortgage brokers and too-easy monetary policy as the housing bubble grew — but for the steps it took to successfully contain the crisis last fall and winter.
Even after several congressional hearings, I’m still not sure if the Fed and the Treasury really forced Bank of America to complete its purchase of Merrill Lynch at the end of last year, or whether such an action would have been improper. But having lived through the aftermath of the Lehman collapse, I am glad I did not get to see how the markets and the economy would have responded to a New Year’s Eve crisis at Merrill.
One measure of the post-Lehman panic is that the government ended up offering to guarantee all kinds of things that in any other environment would have seemed safe. When Neil Barofsky, the inspector general for the Troubled Asset Relief Program, totaled up all possible federal guarantees at $23.7 trillion recently, he included assets like Treasury bills in money market funds and mortgages guaranteed by Fannie Mae and Freddie Mac.
That is now being used to accuse those who fashioned the bailouts of having been overly generous to undeserving bankers. It should be used to remind everyone of just how close to disaster the financial world came — and of the need to get the financial system working again, without public guarantees for everything in sight and with enough safeguards and regulation to avoid a new crisis.