Gaius Publius: Are We Having “Bank Deregulation” Crises or “Unrestricted Capital Flow” Crises?

Yves here. For the last four years, we’ve been highlighting research that has found that high levels of international capital flows are strongly associated with frequent and severe financial crises. Gaius describes how more economists are endorsing this idea, and how the proposed trade deals, the Trans-Pacific Partnership and the US-EU trade agreement, will only make matters worse.

By Gaius Pubius, a professional writer living on the West Coast. Follow him on Twitter @Gaius_Publius. Cross posted from AmericaBlog

The heart of the neoliberal agenda — the world of forced globalization that benefits only the rich — is the push for so-called “free trade.” I’ve written before that so-called “free trade” really means “free capital flow” — the right of owners of capital (Big Money men and women) to move that Big Money into and out of countries at will, without restriction.

For example, here (my emphasis and some reparagraphing throughout):

In its simplest terms, “free trade” means one thing only — the ability of people with capital to move that capital freely, anywhere in the world, seeking the highest profit. It’s been said of Bush II, for example, that “when Bush talks of ‘freedom’, he doesn’t mean human freedom, he means freedom to move money.” (Sorry, can’t find a link.)

At its heart, free trade doesn’t mean the ability to trade freely per se; that’s just a byproduct. It means the ability to invest freely without governmental constraint.

Free trade is why factories in China have American investors and partners — because you can’t bring down manufacturing wages in Michigan and Alabama if you can’t set up slave factories somewhere else and get your government to make that capital move cost-free, or even tax-incentivized, out of your supposed home country and into a place ripe for predation.

Can you see why both right-wing kings (Koch Bros, Walmart-heir dukes and earls, Reagan I, Bush I and II) and left-wing honchos (Bill Clinton, Robert Rubin, Barack Obama) make “free trade” the cornerstone of each of their economic policies? It’s the song of the rich, and they all sing it.

And from the same piece:

A direct consequence of a world in which capital flow is completely unrestricted is constant economic crisis. … There’s an opportunity in Spain, let’s say, to take advantage of cheap labor and prices. Money flows in, builds huge capacity, then flows out as soon as it finds better opportunity elsewhere.

What’s left behind? The Spanish in a crashed economy, and in a world in which the holders of their debt (German bankers et al) are using the EU (remember, capture of government) to make sure that creditors are made whole at the expense of whole populations.

Or, to put it more succinctly — Your “economic crisis” is just their “cost of doing business.” Nice to be them.

Now comes two more pieces of evidence that the above is true, all from the past month. One is by Joseph Stiglitz; the other by Paul Krugman. Not nobodies.

Stiglitz on Unrestricted Capital Flows and Bubbles

Noted economist Joseph Stiglitz wrote recently in the New York Times in support of Janet Yellen as the next Fed chair, and against Larry Summers. In fact, Stiglitz is strongly opposed to Summers for this post. In amongst the anti-Summers reasoning, I noted this:

At Treasury in the 1990s, Mr. Summers encouraged countries to quickly liberalize their capital markets, to allow capital to flow in and out without restrictions — indeed insisted that they do so — against the advice of the White House Council of Economic Advisers (which I led from 1995 to 1997), and this more than anything else led to the Asian financial crisis. Few policies or actions have greater culpability for that Asian crisis and the global financial crisis of 2008 than the deregulatory policies that Mr. Summers advocated.

Stiglitz couldn’t be more clear. Unrestricted capital flow — the free movement of capital into and out of countries at the sole whim of the owners of capital — causes bubbles and crisis.

Note, though, who wins in that scenario, and who loses. Capital flows in, chasing opportunity. Capital flows out when that opportunity disappears or is milked dry. Who wins? Owners of capital. Who loses? Everyone living in, or touched by, the economic devastation left behind.

Stiglitz uses the example of Asia in the 1990s. I used the example of Spain in the 2000s. Same thing.

Krugman on Unrestricted Capital Flows and Bubbles

From a recent column by Paul Krugman, this is even more direct:

This Age of Bubbles

[I]it’s hard to deny that India, Brazil, and a number of other countries are now experiencing similar problems [to each other]. And those shared problems define the economic crisis du jour.

Cabaret money

Money makes the world go around

What’s going on? It’s a variant on the same old story: investors loved these economies not wisely but too well, and have now turned on the objects of their former affection. A couple years back, Western investors — discouraged by low returns both in the United States and in the noncrisis nations of Europe — began pouring large sums into emerging markets. Now they’ve reversed course. As a result, India’s rupee and Brazil’s real are plunging, along with Indonesia’s rupiah, the South African rand, the Turkish lira, and more. …

It’s true that investor loss of confidence [i.e., rapid capital outflows] and the resulting currency plunges caused severe economic crises in much of Asia back in 1997-98. … And this latest financial turmoil raises a broader question: Why have we been having so many bubbles?

For it’s now clear that the flood of money into emerging markets — which briefly drove Brazil’s currency up by almost 40 percent, a rise that has now been completely reversed — was yet another in the long list of financial bubbles over the past generation. …

The thing is, it wasn’t always thus. The ’50s, the ’60s, even the troubled ’70s, weren’t nearly as bubble-prone.

He wonders what changed, and offers this answer:

[T]he other obvious culprit is financial deregulation — not just in the United States but around the world, and including the removal of most controls on the international movement of capital. …

Cross-border flows of hot money were at the heart of the Asian crisis of 1997-98 and the crisis now erupting in emerging markets — and were central to the ongoing crisis in Europe, too.

“Cross-border flows of hot money” is a nice phrase. It applies to Mexican cartel money (invested for them by the money center banks) as well as Spanish housing bubble loot, factories-to-China investments, and the mass purchase and sale of soaring and sinking currencies.

Are we in a Banking Crisis or a Capital-Flow Crisis?

Economists sometimes talk about this as a “banking deregulation” crisis, but that’s just because a lot of the “hot money” is held by banks for themselves and investors. It’s actually a global flow-of-funds crisis caused by all Big Money actors — investors, CEO masters of great corporate wealth, hedge funds, banks, billionaire soloists like Jeff Bezos and the god who owns Tesla; the lot of them.

Masters of money (capital) want to move their money wherever they want to in order to win more money, then leave whenever they feel like it. Just like Walmart wrecks a small town, both by coming in and ruining jobs, and then by leaving a ruined town behind — Big Money wrecks the world in just the same way.

The world we live in is organized so that only owners of capital can win, and they’re doing it by selling “free trade” to the rubes (see, the word “free” is right inside), and by capturing governments around the world and bending them to their will.

Those they can bribe, they bribe. Those they can overthrow and then bribe, they overthrow. Those whose laws they can amend so that only capital-backed candidates can win, they purchase those amended laws and back those candidates.

And those they cannot fully defeat, they get to sign sovereignty-killing “free capital” agreements like NAFTA and the coming TPP (“Trans-Pacific Partnership,” which Obama strongly supports).

TPP is the Next Big Move to Free Owners of Capital from Any Rules Whatever

I’ve written much about TPP. It’s a nightmare. And it’s coming to a capital-bought Senate near you. Watch for it soon, and its necessary opening act, Fast Track.

Stopping Fast Track is the key to stopping TPP. Stay tuned.

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  1. Michael G

    A good thought-provoking post. It made me remember how 50 years ago, Northern Ireland was a depressed area, and there were generous incentives to foreign companies to come and set up factories. But at the first chill wind, the company would retrench, the factory would close, the subsidy would be gone, and there had been zero benefit. (There were also the DeLoreans, of course.) The conclusion I drew was that it was throwing money away to subsidise foreign investment. The only subsidies that stood a chance were to local companies. The game may have changed a bit, but not that much.

  2. Moneta

    Well, here in Canada, Chinese firms have been buying up the oil patch. Under new regulation, they can bring in foreign labor under the pretext we have shortage of skilled labor when in reality it’s that there is a shortage of workers at the pay being offered. And, the final product gets exported to China.

    I’m trying to figure out how Canadians win and politicians can keep this business model going… I guess the Chinese moving in perpetuate the real estate bubble which the general population loves and the M&A keeps stocks buoyant which the top 10% also loves.

    1. cnchal

      Canadians lose with “guest worker” programs. For example, the business model of tomato growers in Leamington, and meat packing plants all over Canada requires cheap exploitable labor to work.

      Several years ago a Chinese work crew in Alberta were killed when the storage tank they were building collapsed. I expected our governments to put a halt to this crap, instead the program was expanded.

      By destroying the manufacturing sector in North America, our corrupt governments have destroyed one of our best wealth creation methods. All to make sure that the Plutocrat’s wet dream goes on and on.

  3. Moneta

    I’ll keep on repeating the same thing… as long as we have an ageing population trying to fully fund its retirement, we are going to have huge pools of money that will keep on feeding the sharks.

    1. Dan Kervick

      We could avoid that problem by doing more to socialize retirement. Dramatically expand Social Security, and get rid of all of those 401Ks

      1. Moneta

        I believe our system should have stayed chosen pay-as-you-go a few decades ago and those wanting a little extra saving/investing on their own.

        I am convinced that the most problematic players in our system are the big underfunded DBs. As long as they stay in the game, the investment bankers can keep on skimming the pools.

        Now we are stuck in a rut… imagine the popular reaction if we seize private savings and nationalize them to go pay-as-you-go.

        Pay-as-you-go is not appetizing when there is a bulge in the population and that bulge happens to be the retiring cohort. 3 decades ago, we knew we would have a stranglehold in the system and we thought we could solve it by forcing individuals to fund their own retirements. Now we are seeing that all roads lead to Rome… or Athens.

        At the end of the day, what we get to consume depends on what we produce. Our system is promoting speculation, not production.

        Most of these pensions will be worth peanuts as we keep on promoting speculation.

          1. JEHR

            “Defined Benefit” ( ) as opposed to “Defined Contribution” ( ) plans.

            Companies are now in the process of Not guaranteeing the return on pensions and opting for shared “risk” plans where the pensioner is not assured of anything; yeah, “shared risks” like what we got from the CDOs and CDSs after the financial crisis when banks were “sharing” the risks!!!!

  4. David Lentini

    I think it’s worth emphasizing that in the “Age of Bubbles”, actually improving anything is beside the point: The “opportunities” are for (usually paper) profits; so we can look forward to a future of “pump-n-dump” as the oligarichs destroy society while trying to flim-flam each other. It all kind of reminds me of the Maltese Faclon, the idle rich blithely chasing after some legend and leaving death and destruction in their wake.

  5. The Dork of Cork.

    You perhaps mean tooo many protestant (savers)
    Not enough feckless Catholics(spenders)

    Don’t old people run down their savings ?
    If they were rational agnostics I guess.

    Meanwhile in the real physical world of Irelandistan
    Entopy entropy they all have got it in for me.

    The facts.
    Meanwhile the stock of Irish peripheral cars is aging rapidly.

    Age of Irish stock of cars & commercial vehicles.

    31 Dec Y2007 :

    Private cars 4 years + : 65%

    Private cars 6 years + : 50%

    Goods Vehicles 4 years + : 57%

    Goods vehicles 6 years + : 40%

    31 dec Y2012

    Private cars 4 years+ : 82.56 %

    Private cars 6 years+ : 63.8 %

    Goods vehicles 4 years + : 87.19 %

    Goods vehicles 6 years + : 65.7 %

    The vast bulk of the cars were registered between 2000 and 2008….
    Soon they will begin to retires and the fiscal investment at that time will be seen for what it is.
    That fiscal investment in roads was used to carry the products of private loans……so it was not really fiscal investment at all , it was a mirror of the consumer credit hyperinflation both in its origin and execution.

    1. Moneta

      The quality of an investment depends on the future income it will generate and its depreciation.

      Most people have trouble differentiating an investment from a money pit.

      And it does not matter whether they are Protestant or Catholic… here in Canada the big difference between the two used to be who owned the capital.

      1. The Dork of Cork.

        “here in Canada the big difference between the two used to be who owned the capital.”

        exactly ………..
        I was using the historical memory of such a relationship.

        The Catholics did the consuming and the Protestants did the capital accumulation, it was sort of a symbiotic thingy ,kind of anyhow.

        Now everybody “owns” capital (via debt) but nothing remained to be consumed.
        The capital we own is not really capital in the scientific meaning of the term.
        Its junk.

        Irish alcohol consumption peaked in 2002….get it ? the euros introduction.
        Consumption is put off in these countries beginning in lets say the mid 1970s so that more junk could be built… the junk hinterland which is just full of capital like stuff cannot be serviced.

      2. ChrisPacific

        Most people have trouble differentiating an investment from a money pit.

        Which creates an opportunity for the financial sector to sell them a money pit dressed up as an investment.

  6. The Dork of Cork.

    The “Irish” or the bank behind them ( with a broken bottle of Paddy pressed into some young fellows stomach – to be more accurate) made a decision to maintain the road network in 2011.
    Why ?
    Who really knows but at a guess because Ireland still remains absurdly integrated with other systems and strives to have no national monetary or physical redundancy for obvious rentier reasons.
    The mid level bastards in local control of its systems hope for another wave of pointless globalization to wash over their balance sheets.

  7. Mickey Marzick in Akron, Ohio

    From natural resource extraction to human resource extraction – the externalities are always borne by the locals. The “boom town” is nothing new. The cure for unrestricted capital flows is to eliminate the externalities. So long as the environment and/or human beings are treated as such, capital will always flow downhill to the lowest cesspool available. Eliminate the latter, and I suspect the flow of capital will become more circumspect.

    What baffles me is that neoliberalism is treated as something different than liberalism – as if it’s a discovery! Does the fruit fall far from the tree?

    Once one realizes that the period from 1932-1976 was an anomaly in the long history of capitalist development due to specific historical circumstances, the push for unrestricted capital flows across borders is nothing more than an extension of unrestricted capital flows within borders. Witness the migration of manufacturing from the North to the South in the United States. – textiles from New England to the “lintheads” of North Carolina and from there to Bangladesh. North to South, center to periphery – Wallerstein, Braudel… and a host of economic historians have documented this pattern of investment-disinvestment.

    Underlying such movements of capital is the belief that private property rights are absolute and that “cheaper is better” – more efficient in econospeak. The owners of capital subscribe to the former whereas the “rubes” have been duped into believing the latter in a virtuous cycle of creative destruction. Until the latter changes CAPITAL will remain a rolling stone. But it always has been. Marx pointed this out in both the Grundrisse and Das Kapital, Vol 1. Even Joseph Schumpeter acknowledged Marx in this respect. But who reads either anymore?

    Le plus ca change, le plus c’est la meme chose.

    1. skippy

      You need a hug…

      Toni Negri: “Building coalitions of the multitude in Europe”
      Against the rule of financial capitalism, let’s build democratic governance of the common

      3 / 9 / 2013

      (Draft translation by Ed Emery)

      Forgive me if I take a long run-up to the question. First and foremost I want to ask myself what it actually means to ‘do politics today’, and then I shall return to the theme of Europe. Doing politics on the terrain of autonomy, in other words taking the point of view of the subversive subject and therefore analyzing the figures and the way of acting of the precarious-cognitive proletariat. In fact I find the needs and desires of this subject to be a central mechanism, virtually hegemonic, in the analysis of the movements of the multitude that is dominated and exploited in its struggle against the capitalist order.

      There are two arguments, rather, two topoi that should be addressed in dealing with this question. The first is objective, in other words we have to ask what it means to pose ourselves within capitalist development in the critical phase of neoliberal hegemony. We could also probably begin to ask questions about ‘the limits of capitalism’ but first we would have to remove all catastrophist predictions, in whatever form they present themselves, and all the nostalgias of a tradition which for too long has rested on this illusion. The capitalist context is today characterized by the domination of finance capital which is consolidating its action after a long transition going back at least to the second half of the 1970s. We have analysed this evolution in broad detail, and have often anticipated it in our collective work, so let us go straight to the conclusions. Finance capital is hegemonic; it can no longer be defined as it was defined by Marx and Hilferding, because it has become a capital that is directly productive. Today it is seeking ways of stabilizing itself, engaging in extractive activities both as regards nature and its riches, and as regards the biopolitical-social (i.e. welfare). When we talk of the consolidation of the power of financial capital, we hypothesise (and this is a hypothesis which is coming increasingly close to a conclusive verification ) that the transformation of capitalism has led to (among other things – but the observation is limitative of the analysis, but also important for concentrating our analysis on the things that interest us)… has led to a very deep transformation of the territorial forms and the institutional structures within the overall make-up of states and nations in the ‘short century’. This transformation begins within the individual national markets where, in each of them, the capitalist production structure is reorganized after the first Great War (in response to the triumph of the Bolshevik Revolution ), according to Keynesian contractual modalities. After World War II, and after the ‘reconstructions’, this form of social organisation and capitalist command begins to become fragile and sometimes it explodes under the pressure of the working class: it is then that the neoliberal revolution begins, starting from the end of the 1970s and then with an extraordinary acceleration at the start of the twenty-first century. First it reorganises the state, using fiscal procedures in management of the crisis and the governance of public debt. The march of globalisation which intervenes during that period and the global affirmation of the ‘financial markets’ shift the public authorities’ control of the debt possibilities of the state to structures that organize the private, a shift from equilibrium of the administration internal to the internal state to an equilibrium built under the dominion of the global ‘markets’.
 – snip

        1. anon y'mouse

          context suggests that it might mean:

          money that makes money just by virtue of being money.

          not by productive investment in actual goods and services, land and stuff.


          1. Lambert Strether

            That is Marx’s M -> M’ notation (money that makes money from money, as in usury, as opposed to M -> C -> M’ (money that makes money by passing through commodities, as e.g. Boeing makes money by passing money through the plant in Everett, WA + wage labor). (Caveat that I’m not endorsing Das Kapital in its entirety, just ripping the notation off…)

            However, we typically do not think of M->M’ as being “directly productive,” because where, after all, is the airplane, so it looks like the comment isn’t talking about M->M’ so I’d like to know what is meant more precisely since the whole idea sounds like it bears on our current predicament…

            1. skippy

              @Lambert Strether…

              Here is the reply I got via an Academic down under.

              Yeah its to do with finance capital that value can valorise itself without having to pass through the commodity form/ production. For current theorists of this see Marazzi ( who Negri uses) or Lapavitsas

              Its under theorised in Capital (Vol III) Hilferding’s book ‘Finance Capital’ has been seen as the go to tome by serious Marxians.

              skippy… hope it helps clarify.

  8. The Dork of Cork.

    Meanwhile a person who has constantly advocated full and free banking within the Irish non system perversely talks about Ireland as a independent entity who only wishes to please external capital holders…

    This is projectile vomit stuff.

    One constantly asks what is this place ?
    I am beginning to connect the dots but the anti matter nature of this world is striking.
    The entire nature of rational (& non politically correct) human discourse has been in a sort of 5th dimension bind bend as a result of the intense & now infinite gravity field of financial claims on capital which does not exist.

  9. washunate

    “Free trade is why factories in China have American investors and partners — because you can’t bring down manufacturing wages in Michigan and Alabama if you can’t set up slave factories somewhere else…”

    The problem with this line of thinking is that it is not accurate. Median wages are not under pressure in the US because of FDI in China. The vast majority of the American workforce doesn’t even do what workers in China do.

    Rather, wages are under pressure in the US because that is what the agenda is – the concentration of wealth and power within US society. The US has an economy that is almost entirely domestically oriented. We make and consume most of what we make and consume right here in the US.

    How we distribute our wealth is a question of domestic political economy. It has nothing to do with competition from low wage workers across the Pacific (or high wage workers across the Atlantic, for that matter).

  10. Paul

    Your “economic crisis” is just their “cost of doing business.”

    No – my crisis is what is left of their bingeing at our expense.
    Empty bottles, broken glasses, custard splotched all over the carpet, cigarette burns in the sofa, the smell of urine in the corner, behind the curtains, organic liquids on the children’s bedspread, and maybe some missing pieces of silverware.
    Hey – was a nice party while it lasted, man!
    Hope we didn’t leave too much of a mess…!

    1. Expat

      Great metaphor, one I’ve used to describe our generation’s legacy to the next. Even though most of us were not invited to the party, the rising generation is stuck with cleaning up. It’s what, 5 am? No who is still awake has seen the first sickly rays of sun, either. And, to change metaphors, it’s going to be pretty hard to clean up, inasmuch as every life support system on the planet is collapsing and all the institutions humans developed to handle crises have been destroyed.

  11. Susan the other

    This is the system we have. And we are at the crossroads. This system will not survive a world economy based on sustainability. It is going to be the battle of the titans. Financialization cannot make a “profit” in a no-growth world. The banksters will try every trick in the book to try to stay alive at the expense of the rest of humanity. They are already doing a big PR blitz about how they want to change finance. And how they really want us to love and respect them. Right.

  12. RBHoughton

    Free Trade first appeared nearly two centuries ago when the British government was unable to collect sufficient revenue from the men of commerce (after 20 years of smuggling into French-controlled Europe, British businessmen rather liked tax-free trade).

    Robert Peel agreed to cancel excise and customs taxes on trade and substitute an income tax on workers – packaged as Free Trade to make it sound nice.

    Its true today that the moneymen naturally prefer workers to pay tax than themselves but it seems to go a bit further now.

    I suspect that destabilizing foreign countries by inward / outward currency flows will tend to cause capitalists in those countries to put their money in USA. That seems to be the name of the game – an attempt to remove national preferences of trade partners and choice of currencies and substitute the USD as the sole unit of credit.

  13. tiebie66

    Someone help me here please:
    – how are the increasing and increasingly destructive money fluxes distinguished from the effects of ending the gold standard in the early 1970’s?
    – how would a gold standard affect said fluxes if it were implemented today?
    – would a gold standard promote sustainable economics?
    – a transaction tax seems an obvious way to combat said fluxes, no?
    As these fluxes seem to dwarf trade-related fluxes, and are controlled by the “1%”, they seem to be a major cause of money scarcity. Hence the JG and government spending a la MMT would only make matters worse in the long term, no? Governments taking up the output gap slack seems simply a short-term fix that would do nothing to curb the accumulation of money in few hands in the long run – in fact, it seems to me it would simply benefit the rich in the long run. These symmetrical graphs that purport to show that governments accrue more money as the private sector goes into debt ring hollow to me. I feel that something is left out/the picture is incomplete and misleading, but cannot put my finger on it. What is missing?

    It seems to me that a transaction tax would much reduce destructive money flows and that money accumulating in few hands should be ‘recycled’ via taxation. Thus, a lack of aggregate demand can also be a symptom of regressive taxation, instead of a symptom of simple excessive taxation, no? In high Gini countries, a lack of aggregate demand must be addressed via taxation, not via spending! I see too much discourse on government spending, but not enough on taxation – when/where have I missed that debate?

    1. Moneta

      The argument is that with a gold standard, you can better control printing.

      The reality is that gold can be constraining… if you are born with nothing, how will you get to participate in the economy? The gold standard is nice to the incumbents of wealth. If you get some gold, you are taking it away from someone else… no growing pie unless you dig up more gold… but if you dig up more gold, you are expending energy that could be used to produce more useful stuff!

      Also, historically, many countries did not respect the peg and printed more than they should have (i.e. England). That’s one of the reasons why we got off the peg… it was too hard to maintain. Therefore, the gold standard does not guaranteed control of money printing.

      1. Bapoy

        I seriously doubt you thought that one through. I bet you were likely born with nothing, yet I bet you now own something including dollars.

        You seem to think currency has to expand for people to get some, not correct. If I owned all the gold in the world how would I get you to work for me if I dont pay you in gold.

        Any amount of currency is enough, look at stocks. In some cases they split them in others they reverse split. Same difference.

        Also, gold doesnt prevent printing, it makes it more transparent (prices go WAY up). Fractional reserve hides the price increases while making people debt slaves. Oh, and the best thing about gold is that it forces settlement between nations, protecting jobs and the skills of its society.

      2. Bapoy

        As for England printing, that will harm the countries doing it, not the others as others will ask for payment in gold. Thats actually a major plus.

  14. Bapoy

    Last one. We did not drop the peg because of England, we dropped because too many dollar holders were asking for gold and the gold was not there. Look it up, the US defaulted in 1971.

    Fractional reserve was the cause of that, not gold. Same with the great depression, it was fractional reserve that caused it, not gold.

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