The virtues of financial repression

The virtues of financial repression

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By Eric Toussaint

In the United States, with the aim of getting out of the crisis born with the Wall Street crash of 1929, the total freedom enjoyed by the financial and banking media was curtailed. According to Rogoff and Reinhart, two economists who are not at all inclined to questioning capitalism, the reduced number of banking crises is explained mainly "by the repression of domestic financial markets (to varying degrees), and then by a massive resort to capital controls for many years after the Second World War. '

In the United States, during the thirties of the last century, the government of Frankin D. Roosevelt, with the aim of getting out of the crisis that arose with the Wall Street crash of 1929, curtailed the total freedom enjoyed by the financial and financial means. banking. Following this orientation and under the pressure of popular mobilizations in Europe during and after the Liberation, the governments of the old continent imposed a series of limits of maneuver on capital. Consequently, in the thirty years after the Second World War, the number of banking crises was minimal. This is what two American neoliberal economists Carmen M. Reinhart and Kemmeth S. Rogoff demonstrate in a book published in Spanish in 2011, entitled This time is different: eight centuries of financial folly.

Kenneth Rogoff was chief economist at the IMF and Carmen Reinhart, a university professor, is an advisor to the IMF and the World Bank. According to these two economists who are not at all prone to questioning capitalism, the reduced number of banking crises is explained mainly "by the repression of domestic financial markets (to varying degrees), and then by a massive resort to controls of capitals for many years after the Second World War. ' (one)

It is not trivial that these authors, who by principle oppose strict financial regulations, use the pejorative expression "financial repression" to designate a public policy that wants to limit the freedom of capital to do whatever it wants in the financial and financial spheres. banking. However, Reinhart and Rogoff are so disturbed by the effects of deregulation that, far from rejecting financial repression outright, they express a nuanced opinion: “Which does not necessarily mean that this repression and those controls constitute, in our opinion, the right way to face the risk of financial crisis ”. In their book of more than 400 pages they do not make any alternative proposal.

Indeed, during the "glorious thirties," the governments of most of the most industrialized countries applied policies that regulated the movements of capital into and out of the country. They also forced the banks to adopt a prudent behavior and transferred part of the financial sector to the public sector. According to Reinhart and Rogoff, in order to avoid the risk of bank failures, governments imposed “a high level of mandatory reserves on banks, not to mention other devices such as directed credit or obligation for pension funds or for commercial banks to maintain a certain level of state credits. "

For these authors, the situation changed "from the beginning of the seventies", since "the liberalization of financial and international capital accounts - the reduction or elimination of barriers to investment in the interior or abroad of a country - it spans the world. The banking crises have done the same. After a long interval, the proportion of countries affected by banking difficulties has started to increase in the 1970s. "

In contrast, the public control exercised in India and China over the banks allowed them to protect themselves from the contagion of the financial crisis that began in 2007. Reinhart and Rogoff consider that what the Chinese and Indian authorities are doing today is reminiscent of the situation that prevailed in the glorious thirty: "Such financial repression is not new: it was particularly widespread in advanced countries, as in emerging countries at the strongest moment of international capital control, from the Second World War to the 1980s"

In his time, Adam Smith recommended governments to drastically limit the freedom of bankers: “… but the exercise of what they call freedom in a small number of individuals, when it is harmful to the common security of society, is and must be restricted by the laws of every kind of government, not only of the freest, but even of those who want to call themselves despotic. " And he continued: «The obligation to build walls and walls that prevent the communication of a fire, would also be a violation of natural freedom, of the same kind as the restriction of which we have just spoken, and on the other hand, there will be no sensible man who stops approve it. " (2)

In contrast, periods marked by the abandonment of strict regulations concerning capital in general and financial companies in particular are characterized by the multiplication of banking crises that lead to general economic crises.

However, the experience of the period 2007-2008 did not lead governments to impose any kind of strict prudence rules. Some apostles of capitalism like Alan Greenspan, former director of the Federal Reserve of the United States, do not miss the opportunity to advocate against the slightest measure of prudence. In an opinion piece published in the Financial Times, he compares the earthquake in Japan in March 2011 with the financial "tsunamis" that have rocked the world of finance in recent years. He does not hesitate to affirm that, in the same way that we cannot ask the Japanese authorities to take all possible precautionary measures to protect the population from a natural phenomenon that only affects the country once every century, it cannot be required to the bankers who safeguard enough liquid reserves to deal with banking crises that occur only two or three times every hundred years. (3) Greenspan is, of course, opposed to the timid prudence measures proposed under the Basel III accords. (4) In general, if the agreements were to be applied, banks should have at their disposal the equivalent of 7% of their commitments, which is still totally insufficient. The International Finance Institute, which brings together the main European private banks affected by the management of the "Greek crisis", is putting pressure on public authorities to relax the rules under discussion. They want to maintain "laissez-faire, laissez-aller." (5)

But the point is to take action to prevent financial institutions, banks, insurers, pension funds and other hedge funds from continuing to do harm. It is necessary to bring to court the public authorities and the bosses of companies directly responsible or active accomplices of the stock market and banking disasters. In the interests of an overwhelming majority of the population, it is urgent to expropriate the banks and put them at the service of the common good, nationalizing them and placing them under the control of workers and citizens. Not only must any compensation for large shareholders be rejected, but it is also advisable to recover from their global equity the cost of cleaning up the financial system. It is also about repudiating the illegitimate claims that private banks claim from the public powers. Of course, it is necessary to adopt a series of complementary measures: control of capital movements, prohibition of speculation, prohibition of transactions with tax and judicial havens, implementation of a tax system that aims to establish social justice ... In the case of the European Union, some treaties such as Maastricht and Lisbon should be repealed. The statutes of the European Central Bank must also be radically modified. The crisis has not yet reached its climax, therefore it is the great moment to make a radical change in the direction followed, to achieve an anti-capitalist solution to the convulsions of the banks and the stock market.

October 15, 2011 - Eric Toussaint -Translated by Griselda Piñero -


(1) Carmen M. Rogoff, This time is different: eight centuries of financial stupidity, Fondo de Cultura Económica de España, S. L., 2011.

(2) Adam Smith, The Wealth of Nations, Book II On the Nature, Accumulation and Use of Funds or Capitals, Chapter 2, Section V, Ediciones Orbis, 1983. (original translation 1794, revised and adapted)

(3) Alan Greenspan, Financial Times, July 27, 2011.

(4) The Basel III Accords published on December 16, 2010 are proposals for banking regulations whose effects should definitely enter into force in 2019. These agreements ignore what is out of balance, one of the factors that is at the origin of the subprime crisis. The reassessment of the prudence threshold by the representatives of the 27 central banks should translate into the fact that private banks should be forced to increase their liquidity, which they must keep permanently to face the crisis. See the text of the Basel III agreements

(5) Financial Times, "Tougher supervision could be pernicious, IIF warns", 13 July 2011

Video: Are We Facing a Decade of Financial Repression? (May 2022).


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