The virtues of financial repression

During the 1930s in the United States, to get out of the crisis resulting from the 1929 Wall Street crash the Roosevelt government decided to reduce the freedom previously enjoyed by the financial and banking sector. In the wake of this decision and under pressure from popular mobilizations in Europe during and after ‘Libération,’ governments of the Old Continent set a limit on what capital could do. As a consequence, during the thirty years following World War II, the number of banking crises was minimal. This is demonstrated by two neoliberal US economists, Carmen M. Reinhart and Kenneth S. Rogoff, in their book, This Time Is Different: Eight Centuries of Financial Folly, published in 2009. Kenneth Rogoff is a former chief economist with the IMF and Carmen Reinhart, a university professor, is Senior Policy Advisor at the IMF and the World Bank. While they are obvious supporters of the capitalist system, these two economists acknowledge that the limited number of banking crises can be mainly explained ‘by the repression of the domestic financial markets (to varying degrees) and the heavy-handed use of capital controls that followed for many years after World War II.’ |1| It is significant that authors who on principle are opposed to strong public regulation should use the negative phrase financial repression to refer to public policies aiming at restraining the freedom of capital. Nevertheless, Reinhart and Rogoff find the consequences of deregulation so embarassing that instead of rejecting financial repression outright they formulate a fairly equivocal comment: ‘We are not necessarily implying that such repression and controls are the right approach to dealing with financial crises.’ |2| In a book of over 400 pages they fail to make any alternative proposal.

Indeed, for three decades after World War II governments in most industrialized countries implemented policies that regulated capital flow. They also forced the banks to behave prudently and nationalized part of the financial sector. As Reinhart and Rogoff acknowledge, in order to avoid bank defaulting, governments set ‘high requirements for bank reserves, among other devices, such as directed credit and minimum requirement for holding government debt in pension and commercial bank portfolios.’ |3|

They observe that ‘since the early 1970s financial and international capital account liberalization – reduction and removal of barriers to investment inside or outside the country – have taken root worldwide. So too have banking crises. After a long hiatus the share of countries with banking difficulties first began to expand in the 1970s.’ |4|

On the other hand, public control over banks as practised in India and China saved them from bearing the brunt of the 2007 financial crisis. Reinhart and Rogoff consider the measures taken by Chinese and Indian governments today reminiscent of the years after World War II: ‘This kind of financial repression is far from new and was particularly prevalent in advanced and emerging market economies during the height of international capital controls from World War II through to the 1980s.’ |5|

In his time Adam Smith recommended that governments drastically limit the freedom of bankers: ‘those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments, of the most free as well as of the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty exactly of the same kind with the regulations of the banking trade which are here proposed.’ |6|

By contrast when governments remove strict financial regulation on capital and on financial companies banking crises multiply and result in widespread economic crisis.

What happened in 2007-2008 did not lead governments to impose strict prudential rules. Some partisans of capitalism such as Alan Greenspan, former director of the US Federal Reserve, repeatedly argue the case against prudential measures. In a Financial Times op-ed Greenspan compares the earthquake that hit Japan in March 2011 to the financial “tsunamis” that have hit the world of finance over past years. He claims that just as it would be unreasonable to demand that the Japanese government take precautionary measures to protect its population from a natural disaster that occurs once in a century, it cannot be expected that bankers keep sufficient liquidity to face banking crises that occur only two or three times in a century. |7| He is thus opposed to the limited prudential measures put forward in the Basel III accords. |8| Generally speaking, if these accords were implemented, the liquidity coverage of banks should amount to 7% of their commitments, which is grossly inadequate. The International Finance Institute, which groups together the main European private banks concerned by the management of the ‘Greek crisis’, is putting pressure on governments to soften those rules. These banks want to maintain a laisser faire, laisser aller stance. |9|

However, we must take measures to prevent financial institutions (banks, insurance companies, pension funds, hedge funds, etc.) from further undermining our economy. We must sue governments and CEOs that are directly or indirectly responsible for banking and stock exchange collapses. In the interest of the vast majority of the population, it is urgent to expropriate banks and make sure they serve the common good, by nationalizing them and putting them under workers’ and citizens’ control. Not only should we refuse any compensation to major shareholders, but we should demand that these same shareholders pay for the cost of sanitizing the financial system. We must also repudiate the illegitimate debts that private banks claim from governments. And of course implement a number of complementary measures such as controlling capital flow, prohibiting speculation and transactions with tax and judiciary havens, and setting up a tax system geared towards social justice. In the context of the European Union, treaties such as those of Maastricht and Lisbon must be abrogated. The statutes of the European Central Bank must be radically changed. While the crisis has not yet reached its peak, it is high time to take a U-turn and enforce an anticapitalist outcome to the banking and stock exchange turmoil.

Translated by Christine Pagnoulle and Judith Harris