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