On the Politics of the Financial Crisis

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The different ways governments try to face the current international financial crisis may cast light on several aspects of the political process. In the face of the United States Congress’ resistance to accept the White House initial diktat and the further delay, there may be the temptation to praise the alternative formula, that is, the concentration of power typical of the British-style political system in which the executive is formed by a single party with an absolute majority of seats in parliament. Indeed in the last few months the current British government has done a few things that it wanted to do immediately, including the nationalization of a couple of banks. However, most countries in Europe have complex institutions involving multiparty coalition cabinets, separate elections for president and the assembly, or bicameral, federal states. Actually, during the last twelve months, the United States government and the different state governments in Europe if counted together have executed bailouts and takeovers of financial services companies whose reported assets sum up to similar amounts –roughly around 5 trillion dollars on each side of the Atlantic (my own estimate from data in IHT, 1 Oct 08, although the numbers change every day).

At the European Union level, as at the United States level, decision-making also unavoidably requires multistate, multilevel and multiparty agreements through institutional structures of division of powers. Some relatively well-established opinion usually stresses the weaknesses of the European Union to act as effectively when sudden decisions are needed. But, as shown these days, the most usual situation in the United States --divided government with the president’s party not having a majority in Congress, the Senate vulnerable to ‘filibuster’ delays, and the congressional parties being highly individualistic--- implies that decisions can also be reached only through multi-sided negotiations and compromises. Generally, further reflection on initial proposals elaborated by one or two individuals, as the Paulson-type plan (which pretended to launch discretionary and non-reviewable decisions not submitted to accountability by any court of law or administrative agency), collective deliberation, integration of different interests, and second thoughts tend to produce better decisions than hasty pronouncements.

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Another relevant political aspect of the current financial crisis is that it contributes to setting the agenda of the electoral campaign for the U.S. presidential election. As evidence that not only structural variables, but also the candidates and the campaign issues matter for the election result, as discussed before in this Blog, let me quote the forecast of somebody active in the campaign. This was one month ago, at the beginning of September, just after the two party conventions which produced a close tie between the two candidates in the survey polls:

“‘If in October we’re talking about Russia and national defense and who can manage America in a difficult world, John McCain will be president’, predict[ed] Thomas Rath, the leading Republican strategist in the swing state of New Hampshire. ‘If we’re talking largely about domestic issues and health care, Barack Obama probably will be president’. Events can affect that conversation [added the reporter]. If Russia invades another country on Oct. 20 or Iran detonates a nuclear weapon, advantage McCain; if there’s another Bear Stearns meltdown, or a stock market crash, put a few points on the Obama side." (NYT, Sep. 7, 2008).

This was one month ago. Nowadays, survey polls seem to give strongly support to that forecast. But one long more month still lies ahead.

COMMENTS

Jan-Erik Lane said...

The biggest insights that the present global financial crisis offer is into political economy. What is happening with such a drastic or dramatic amplitude shows inter alia:
1) Financial institutions have Zero competence in principal-agent gaming.
2) Financial markets are determined by "animal spirits" rather than by rational choice.
3) The Chicago School Economics' teachings around the efficient market hypothesis in combination with  rational expectations are outdated and will need comprehensive revision to take into account the implications of both strategy and rumor. 
4) Government comes BEFORE markets, as markets do not automatically stabilize themselves.

jan 

Geneva

Guillem López-Casasnovas said...

The financial world is not what it was, nor will it be so ever again in the future. There are so many direct and structured, lateral and colateral products in the market place, so many intermediary agents and emerging nominees, so many players present in the new global market and such dominant interests at stake that the future of retail and investment banking is quite unknown.

Such a process of innovation has been developed thanks to significant financial engineering from a new way of understanding financial activities, favoured by extraordinary liquidity, essentially from emerging countries and sovereign funds. Recycling dollars derived from oil (currently volatising prices at a higher level than ever in the past) and revenues from the currencies of developing countries (economies that show two-digit growth and with rates of saving three times ours) has changed definitively the situation. To this new balance on international financial powers we must add the situation provoked by the current (and expected) future increases in the cost of food and some other raw basic materials. No turning back.

G. López-Casasnovas

Professor in Public Economics                                                                       

Pompeu Fabra University, Barcelona