Volume 43, Number 168,
January-March 2012
The New Financial Power
Kostas Vergopoulos*

Our age has also been marked by an increased oversight of the different Sovereign States in the markets via private assessment and rating agencies. Public debts advance or retreat according to the opinions of the "private gendarmes of public securities" according to Krugman's formula (2010a). We are also dealing with a new situation whose origins also go back to the last few decades' monetarist "reforms." From his very first mandate, President Ronald Reagan had already set the example (1981-1984): the printing of money was moderated or even halted, yet the usa's public deficit doubled, financed by foreign debt. The state renounces its sovereign privilege of printing money and financing its expenses in order to act solely as an issuer of securities in international financial markets. This exact model was also adopted in the uk by Margaret Thatcher. For the European Union the turning point was the Maastricht Treaty (1992) and its companion the Stability and Growth Pact (1998). In accordance with both of these treaties, the member states of the Euro's currency zone also renounced all financing by their central banks. Notwithstanding, the European Central Bank (ecb) took over financing the aforementioned states. It is understandable that the ecb would also turn to treasury advances in order to ease the situation of member states in difficulty or hit by hard times. The only authorized means for financing the member states of the Eurozone is none other than the debt of financial markets not exceeding 3% of gdp. It should be clear that all monetarist "reforms" since the 1980s in English-speaking countries and the fundamental treaties in the Eurozone in the 1990s have done nothing but subdued the states to the financial markets, out-of-control private rating agencies and hedge funds (both domestic and foreign). These markets, which demand from the states guarantees of balanced budgets and solvency, have actually ended up working with reserve ratios of their own capital equal to less than 1% when compared to the risk they cover (Nadal, 2010). Under the international accords of Basel I and II, this is tolerated despite the famous Cooke Ratio dictating a prudent 8% of all financial commitments undertaken. This upper limit has very recently (September, 2010) increased due to the new Basel III accord, reaching 4.5% plus a reserve capital of 2.5% for a total of 7%, the same as found in the new version of the Tier 1 Capital ratio, though it does not reach that set forth by the Cooke Ratio. Notwithstanding, we should keep in mind that the new international accord will not go into effect until 2019. Martin Wolf, editor for the Financial Times, has shown that in order to stabilize the banking system with respect to the systematic risks which it itself has created, one needs one's own funds to equal at least 20% to 30% of the financial commitments undertaken. The British editorialist indicates that the bank's performance would thereby be more protected and subsidized at the same time by taxpayers. Now a bank's risks are insured by taxpayers and the rates of return go up as if this insurance did not exist. Speculation is not an avatar but rather a phenomenon closely guarded and buoyed by the authorities.

The world financial markets have acquired and kept a high speculative status, setting themselves up as the sole authority capable of assessing the solvency of a state's public finances based on a set of private financial profitability criteria. This phenomenon could have been called "the financialization of states," in which a state must also take on a virtual quality like its financing sources. The recent international accords of Basel III have of course dictated greater reserves of one's own funds, yet this does not change the fundamental effect and influence that financial capital has over the states, over the real and productive economy: they do not change the tendency towards contraction, deflation, and the stagnation of the real economy as dictated by the logic of stabilizing the global system of virtual finance. Furthermore, the new Basel III accords also recognize that the current weakness of monetary interest rates lower than 1% of the initiative, primarily the American one with the ecb coming in a close second, is incapable of stimulating a financing of the economy by the financial system and banks. Financial institutions are still hesitant to approve loans and assume risks, especially high ones, with a cost-effectiveness lower than the current one. The Bank for International Settlements admits that for financial institutions to fully take on financial risks, interests rates will need to reach higher levels. In other words, economies must make sacrifices to save their financial sectors, yet these same sectors are reluctant to carry out their financial duties: before they "join the party," they are waiting to confirm for themselves a recovery and for the reestablishment of financial profitability. Real uncertainty feeds financial reluctance and financial reluctance feeds real uncertainty.

Financial sector regulations are more advanced in the United States than in Europe. Let us look at the recent financial sector reform enacted by President Obama. First of all, in his speech on May 20th, 2010, the American President denounced the hordes of financial lobbyists that dictate the nation's laws. Stephen Roach, Non-Executive Chairman of Morgan Stanley Asia, states that financial rents, which reached 8% of American gdp twenty years ago, now represent around 50% of said gdp (Berner and Greenlaw, 2010). Then the recent Dodd-Frank act that barely made it past the American Congress, comes back to the separation of activities between a bank's deposits and spec funds. It is true that this law does not take up anew the radical separation of the institutions, but it does at least allow two things: on the one hand banks can speculate with their own funds but cannot do so with virtual funds. On the other hand, if their funds come from their clients' deposits, then it is mandatory that they get their explicit consent. Just like in the 1930s, the United States is once again more advanced than Europe when it comes to rules and oversight of financial markets. As the German newspaper Der Spiegel pointed out, "a veritable ocean separates the United States and the European Union when it comes to managing the current crisis, especially in the areas of budgetary and financial policy" (Spiegel International, 2010). Now we must draw attention to the fact that even if Wall Street submits to effective oversight, it will not change the fact that in the conditions afforded by the international financial markets, said oversight will be of limited value if other financial centers around the world do not submit to the same regulations. It is here that Europe, much more than the US, insists on the deregulation of financial markets. Speaking of which, Asian authorities are not losing their distrust of American reforms as they see in them thinly-veiled protectionist policies.

Published in Mexico, 2012-2017 © D.R. Universidad Nacional Autónoma de México (UNAM).
PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 48, Number 191, October-December 2017 is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
CP 04510, México, D.F. Tel (52 55) 56 23 01 05 and (52 55) 56 24 23 39, fax (52 55) 56 23 00 97, www.probdes.iiec.unam.mx, revprode@unam.mx. Journal Editor: Alicia Girón González. Reservation of rights to exclusive use of the title: 04-2012-070613560300-203, ISSN: pending. Person responsible for the latest update of this issue: Minerva García, Circuito Maestro Mario de la Cueva s/n, Ciudad Universitaria, Coyoacán, CP 04510, México D.F., latest update: Nov 13th, 2017.
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