In order to deter speculative behavior, without compromising the role this plays in financing economic activity, strict supervision of financial markets was introduced after the great Depression in 1929. This system came to an end during the 1980s, swept away by a vast liberal movement in favor of deregulation. The effect of this was an exponential growth of global finance, punctuated by ever more frequent crises with profound economic and social consequences. Despite vague talk of reestablishing stricter governance after the 2008 crisis, states remain powerless to tighten control, both for ideological reasons and because of their close relationship with financial actors.
The stock market crash of 1929 was unleashed when a speculative bubble burst on the New York stock exchange. Originating in the euphoria of the 1920s, the bubble was fueled by the possibility of investing in stocks using loans from deposit banks (where all savers kept their money) and by the increasingly widespread practice of fraudulent stock price manipulation. The crash plunged financial markets into a depression on an unprecedented scale and a succession of bank failures brought financial ruin to small savers. The United States economy swiftly entered recession, causing poverty and unemployment (the Great Depression). Protectionist measures introduced by the United States caused a contraction of global trade that accelerated the spread of the crisis across all Western economies. When President Franklin D. Roosevelt entered office in 1933, his response was to launch the New Deal, a vast package of economic and social reforms that laid the foundations of a welfare state in the United States (introducing social security measures to mitigate the social impacts of economic crises). He also attempted to oversee the financial markets more strictly, with measures including the Glass-Steagall Act (separating commercial and investment banking operations – until its repeal under Bill Clinton in 1999), the creation of the Securities and Exchange Commission (SEC, an agency supervising the financial markets), and so on. This attempt at regulation continued after the Second World War with the Bretton Woods agreements, which sought to regulate capital flows on a global scale.
Comment: The Dow Jones Index was created in the late 19th century and at that time mainly included rail companies. It presents a good illustration of how events can abruptly turn in global finance over the long term. The index indicates the value of the top thirty companies quoted on the New York Stock Exchange. The profile of the curve shows, on the one hand, an exponential increase around the 1980s-90s and after 2009 and, on the other, sudden collapses which indicate repeated crashes: in 1929, in 2000-2001 (the so-called dot-com bubble), and in 2008 (the subprime crisis) to cite the most hard-hitting. On each occasion, these speculative excesses have serious economic and social consequences for people.
Ideological financial deregulation
From the 1970s onward, however, the collapse of the Bretton Woods system after the United States decided to end gold-dollar convertibility, and then the economic crisis caused by the oil shocks, paved the way for liberal policies structured around the idea that markets self-regulate and are more efficient when they can operate freely.
Initiated by Ronald Reagan and Margaret Thatcher during the 1980s, then continued by their successors (on both the right and left of the political spectrum) and imitated virtually everywhere in the world, the deregulation of financial markets certainly did bring about a general reduction in financing costs which emerging countries were able to use to attract foreign direct investment (FDI) and grow. But it also increased the risk of speculation, fraud and systemic failure. In a world where any kind of acknowledgment of debt (bonds, student loans, life insurance, etc.) or deed of ownership (shares, patents, etc.) can be converted into a listed security, and a world of unlimited creativity (increasingly complex derivative products, cryptocurrencies, etc.), speculative behaviors became widespread. Preceded by a series of local financial crises in which the bursting of speculative bubbles caused massive, sudden capital flights followed by economic recession (Mexico in 1994, Asia in 1997–98, Russia in 1998, Argentina in 2001, etc.), the subprime crisis (2008) had major, global economic and social repercussions that (briefly) put the question of financial regulation back on the international agenda.
Timid post-2008 regulatory initiatives
Alongside plans for rescuing failing banks and reviving the economy, a series of legislative reforms were adopted with the aim of strengthening prudential regulations in banking and stock market transparency (the Dodd-Frank Act in the United States, passed under Obama in 2010 then partially repealed under Trump in 2018; the European System of Financial Supervision [ ESFS ], introduced in 2009; the Basel III accord adopted by the G20 in 2010). Yet even while fraudulent practices in the sector continued (the Libor scandal in 2011), these reforms were aimed primarily at making the financial markets more functional, without challenging the speculative nature of the way they worked and their disconnect from the real economy.
Despite some progress in tackling tax havens, key links in the global finance chain, states have backed down from implementing statutory constraints to curb markets’ speculative tendencies (high-frequency trading). Furthermore, they are ruling out the use of fiscal measures to discourage speculative behaviors. The financial transaction tax, repeatedly announced, is proving difficult to implement as states have failed to reach agreement (within the European Council in particular). As for the IMF, with its predisposition toward liberalism, its attention is focused on aid for countries in financial difficulty rather than the governance of financial activities.
To ward off any attempt at regulation, financial actors can rely on their many political supporters, giving them substantial lobbying power. In the United States and in Europe, the dividing line between regulators and regulated is a hazy one given the many links connecting the political world and that of private finance actors – like investment bank Goldman Sachs, which has produced numerous leaders of public institutions (including Mario Draghi, President of the European Central Bank [ECB]) and US treasury secretaries (under Bill Clinton, George W. Bush and Donald Trump), as well as recruiting former political leaders like the former President of the European Commission, José Manuel Barroso, who joined directly after his term of office expired.
- financial markets > Financial market
- Meeting place of investors (owners of capital) and economic actors (companies, households, states) seeking finance. The financial markets host the issuing (primary market) and trading (secondary market) of financial and other assets – debt securities, bonds, equities, commodities, currencies, derivative products, etc. – establishing their price in accordance with supply and demand (quotation). By extension the term refers to all the financial actors (commercial and investment banks, investment funds, etc.) operating in these markets.
- poverty > Poverty
- Initially referring to a lack of economic resources, the notion of poverty has broadened in recent decades to include its different components, such as appalling sanitary conditions, a low level of education, social and gender inequalities, human rights violations, environmental damage, and increased vulnerability to so-called “natural” disasters. The Human Development Index (HDI) developed by the United Nations Development Program in the mid-1990s (and its gendered variant, Gender Development Index or GDI) and the Global Multidimensional Poverty Index (MPI) devised by researchers at the University of Oxford in 2010, use Amartya Sen’s work on capabilities to identify the deprivation suffered by the poor in terms of health, education, and living standards.
- Protectionist > Protectionism
- Protectionism is the opposite of free trade. The term describes a political doctrine and state practice that implements measures to protect national industries and services from foreign competition (chiefly tariffs and non-tariff barriers). After World War II, protectionism was seen as an aggravating factor in political hostilities and commercial rivalries that could lead to war, and free trade was adopted as a common goal in response to business needs and growth objectives. As free trade is now increasingly challenged, primarily by countries of the South but also in some developed countries, protectionism has reappeared as a doctrine, a political program or brandished as a threat (e.g. in relations between the USA and China since the election of Donald Trump).
- New Deal
- Vast economic and political program implemented by United States President Franklin D. Roosevelt from 1933 to 1938, in order to address the economic and social consequences of the Great Depression that followed the 1929 financial crisis. Its primary aims were to support the poorest segments of the population (emergency welfare program, union protection law, agricultural subsidies, etc.), to regulate the financial markets (bank reform, creation of a regulatory authority for financial markets, etc.) and to revive the US economy. This program laid the foundation of the welfare state in the United States, an achievement that lasted until the liberal wave of the 1980s began to gradually dismantle its social and economic gains.
- welfare state > Welfare state
- The welfare state and its practices emerged in Europe in the late 19th century, breaking with the traditional concept of the liberal state. The crisis of the 1930s, followed by the Second World War, made its expansion a matter of necessity. The state became highly redistributive (modifying primary income distribution by redistributing funds levied via tax and social insurance contributions in the form of social benefits), especially during the “Trente Glorieuses” period, i.e. 1945 to 1975. Its role was radically challenged by the processes of globalization and the proponents of neoliberalism, just when economic crisis has made the existence of a social safety net increasingly necessary.
- regulation > Regulation
- The term regulation refers to all the processes and mechanisms that enable a system to function in a normal, regular fashion. At the international level, it refers to the set of processes, mechanisms and institutions that act to correct imbalances that might threaten the global order and to ensure that actors behave predictably, thereby ensuring stability. It is closely linked to the notions of governance and global public goods.
- flows > Flows
- Increasing flows of goods and assets, tangible and intangible, of capital and of people are characteristic of the globalization processes currently underway. This cross-border mobility constitutes a spatial phenomenon that geographers and cartographers, focused as they have been on territory, have been relatively slow to examine. These flows are organized in networks of varying degrees of density, not because territories and places are similar and interchangeable but because they are different and interdependent. They presuppose infrastructures (submarine cables, oil and gas pipelines, routes via land, sea, river and air) and logistics businesses (intermodal ports, freight airports, e-commerce warehouses, data hubs, etc.).
- scale > Scale
- Term with multiple meanings designating the size of a phenomenon or the level at which it is being analyzed. Spatial scale: a few kilometers at local scale, tens of thousands at global scale. Level of analysis: scale – defined in relation to a level of government – can be local (a specific area), regional (area within a country), national (the country itself) and supranational (from regional entities to world and universal scale). Multiscale analysis, an established practice among geographers, is also a useful tool for contemporary social scientists tackling the density and complexity of connections within and between societies. The adjective “glocal,” a contraction of “global” and “local, emphasizes the local embeddedness of productive systems and the interactions between different levels of scale, refuting the popular misconception of the “end of geography.”
- liberal > Liberalism
- Arising from Enlightenment philosophy, Liberalism refers to a corpus of political philosophy that places the preservation of individual rights at the center of its conception of society and the political order. Devolving from this, on the one hand, are mechanisms to safeguard the individual against the arbitrary use of state power, which mostly translate into a preference for a democratic political order; and, on the other, an emphasis on respecting private property, which leads in turn to a preference for minimal state involvement in the economy – restricting the state’s role to matters of sovereignty. Behind this consensus are many debates around the level of state involvement in the economy, or around protection of individuals vs. that of a political order and given social norms, which translate into different variants of liberalism (such as German-style ordoliberalism, libertarianism, or liberal conservatism).
- emerging countries > Emerging Country
- This term arose in the 1980s among economic and financial actors, who used the adjective “emerging” to describe markets where investment was risky but profitable. With its emphasis on growth and suggestion of rising movement, it reflects a linear, Western-centered understanding of development. As adopted and challenged by political actors, the label refers to the international, economic, political and/or diplomatic integration of some countries. It invites us to interrogate the way it is used both by actors who adopt it and those who reject it.
- FDI > Foreign direct investment
- Any investment motivated by a company’s aim of acquiring a lasting interest (shareholding exceeding 10% of voting rights) and significant influence in the management of a company based in another country. The transaction, implying a long-term relationship (unlike speculative investments), can involve the creation of a new company or, more usually, the takeover of all or part of an existing company via acquisition or merger. FDI, which mostly concerns flows between countries of the Global North, underpins multinational corporations’ globalization strategies.
- subprime > Subprime
- A financial crisis caused when a real estate bubble burst in the United States in the summer of 2008. Having obtained mortgages readily provided by the banks, which turned these debts into securities that could be traded in the markets (securitization), households found they were unable to pay them off, triggering a domino effect culminating in the financial collapse of several banks and financiers (Lehman Brothers, Bernard Madoff, etc.), an economic recession and fear in the financial markets that states such as Greece would default on their loans. Despite the economic and social damage caused by this crisis, it did not undermine the principles by which the financial system functions, since attempts at regulation made by the Obama administration were soon abolished by his successor.
- G20 > G20 (The financial G20)
- Club comprising the G8 members, 11 other developed states (South Korea, Australia) and emerging states (South Africa, Saudi Arabia, Argentina, Brazil, China, India, Indonesia, Mexico, Turkey) and the European Union. These countries’ finance ministers and central bank governors have been meeting since 1999, following a number of economic crises. Since 2008 it has become a summit meeting (heads of state and government), addressing financial, trade and development issues.
- tax havens > Tax Haven
- A territory that uses its sovereignty to establish fiscal and legal exemption regimes (banking secrecy, low or non-existent taxation, fast, flexible procedures, limited or non-existent administrative requirements, etc.) that are then used by multinational companies, hedge funds, wealthy individuals and organized crime networks to escape the tax and justice systems of their home country. Tax havens are key links in the financial globalization chain and are regarded as a threat to global economic stability. However, in practice they are treated with indulgence by large states more keen to benefit from the system than to change it, and almost all have tax havens under their control.
- states > State
- The state is a political system that is centralized (unlike the feudal system), differentiated (from civil society, public/private space), institutionalized (institutions are depersonalized), territorialized (a territory whose borders mark the absolute limit of its jurisdiction), that claims sovereignty (holding ultimate power) and that bears responsibility for ensuring its population’s security. In public international law, the state is defined as a population living on a territory defined by borders subject to a political authority (the national territorial state).
- governance > Governance
- Inspired by management and entrepreneurship, the expression global governance refers to the formal and informal institutions, mechanisms and processes through which international relations between states, citizens, markets and international and non-governmental organizations are established and structured. The global governance system aims to articulate collective interests, to establish rights and duties, to arbitrate disputes and to determine the appropriate regulatory mechanisms for the issues and actors in question. Governance takes various forms: global multilateral governance, club-based governance (restricted to members, e.g. G7/8/20), polycentric governance (juxtaposition of regulatory and management mechanisms operating at various levels), and so on.
- lobbying > Lobby
- Pressure or interest group whose aim is to influence political authorities so that they make decisions in the interest of that group’s members. Lobbies are recognized and accepted in varying degrees within the political cultures of different countries – and their methods and actions can involve varying degrees of transparency and legitimacy. Given the increasing technical complexity of trade negotiations and the intricacy of decision-making levels and processes, today lobbyists are amassing funding proportional to the interests they are defending and using high-level experts to prepare their dossiers. They play an important role in legislative development processes in the United States, in the institutions of the European Union and in the WTO.