National laws for global capital markets - A contradiction?

Through globalisation of capital markets the linkage between countries respectively governments has increased. But not only countries are affected. The rise of interchange of deposit money affects every participant of the globalised world. This phenomenon is no innovation of the 21st century. It was mentioned in literature before: ‘… the financial system has been changing rapidly in recent years and has now become a truly global market-place’ (Gowland (1990) p.80). The starting point may be considered in 1971/73 when foreign exchange rates were released (see below). (Group of Lisbon (1997) p.48).

For Alan Greenspan, former chairman of the FED, the development of globalisation of capital markets is a result of technization and availability of information at any time and place (cf. Greenspan p.243 ff.). Capital markets are the place where supply and demand coincide and match. But this commerce has to be controlled. Hereafter will be clarified why this is a difficult task.

In history were several attempts to regulate financial markets. After World War II was a conference in Bretton Woods were a new financial system of fixed foreign exchange rates was decided. John Maynard Keynes wanted to set more strict conditions for the financial market, in terms of an international clearing bank which should handle payment transactions. But finally he couldn’t prevail his beliefs. (cf. Flaschel (2009) p.34ff.). Some economists think the system of Keynes could have prevented a global financial crisis because of a better way of regulation. But this very sophisticated question will not be considered here.

Finally the Bretton Woods system broke down in 1973 when the US-Dollar was pressurized by a rising oil prize. In consequence of that the foreign exchange rates were released.

An interesting question is how capital markets are influenced. Especially companies and governments have an enormous influence on capital flows. They invest money and try to regulate the way markets work.

The influence of governments on capital markets can be described as donor of framework conditions. They govern economical conditions like corporate taxes, environmental regulations for companies, specific subsidies, minimum wages and economical restrictions. Briefly worded this can be pooled in the term commercial policy. (cf. Khan (2004) p.11ff.). Capital markets can also be regulated by monetary policy. Central banks fulfill this task e.g. by changing the interest rate. (cf. Howells (1990) p.174f.). Hereby the economy can be controlled in a macroeconomic way. The regularities within the economical system aren’t influenced by monetary policy. So in this case monetary policy is dispensable.

Framework conditions set by governments are crucial for specific decisions of companies like locating a new factory. A company will probably choose a location which delivers the best premises. This means in fact the countries are courting the companies by economical means, because they want to gain taxes as well as provide and maintain jobs. As a consequence governments are losing ground. The process is no longer controlled by politics. It’s steered by multicorporate enterprises targeting to maximize their earnings. This is a quite new factor in global economy.

Another result of globalisation on capital markets is the rising quantity of financial instruments. (cf. The Economist (2009) p.18). Besides classic instruments like shares and bonds or loans and receivables many different ways to invest money exist. Above all speculative instruments like swaps, forwards or commodity futures are gaining in importance. These instruments are often used by institutional investors as funds, especially hedge funds, to gain smallest spreads. The consequent earnings are very high because of the large sum of money invested. As long as the rate of the underlying assets develops as expected the system works. In periods of crisis a panic can paralyze markets. Enormous sums of money are deprived of the affected region and a chain reaction can lead to a collapse of whole economies. (cf. White (1988) p.75ff.). Particularly the capital markets of the developing countries are suffering of the ‘globalisation of currency’. In Southeast Asia sundry capital markets collapsed in the 1990s while those of Europe did not. (cf. Meltzer (1998). So regulation is even more difficult for developing countries. This may be by reason of lacking experience, infrastructure and the dependence of developed countries.

Conclusion:

It is still to be clarified whether globalised capital markets can be regulated: “Since the authority of states is territorially bound, global markets can escape effective political regulation.” (Held/McGrew (2006) Globalization). National laws are just restricted valid and suitable. This means if companies disagree with existing conditions of the market they leave country and open a new branch elsewhere. Multicorporate enterprises with different registered seats are not bound to national laws. And national governments have no option to compel them.

A supranational institution is required. Existing institutions like the IMF haven’t fulfilled this task because they aren’t provided with appropriate responsibilities. It’s a utopia to think capital markets are adjusting themselves. Financial crisis has shown this won’t happen. Designing globalisation is task of politics. Regulation of politics has tried to alleviate. But a functioning worldwide instrument or institution is needed. To solve these problems and to achieve stabile markets a reform of institutions is necessary. Europe could play a decisive role in reconfiguration of international financial order. It would be the next logical step after entrenching the EU and a new currency. For Europe it is very important to have steady markets because the EU eastward enlargement will bring along several states without equal financial regulations. So this will be necessary for a future intact structure of the EU. In the past the USA did not make any efforts of regulation. So the United States will probably not be interested in adjustment of financial markets because there are acting the most aggressive financial actors. A regulation would definitely encounter resistance. The grown business finance will not accept a massive regulation. But this must not stop politics from creating an institution.

The newly created institution has to observe trading on capital markets. Especially institutional investors which are seated in liberal states like Luxembourg have to be controlled more strictly. Innovative financial instruments that played a part in contributing to the recent financial crisis should have to pass a detailed examination before obtaining permission.

References:

Flaschel, P. (2009) The Macrodynamics of Capitalism – Elements for a Synthesis of Marx, Keynes and Schumpeter

Gowland, D. (1990) The Regulation of Financial Markets in the 1990s

Group of Lisbon (1997) Frontiers of Competition – Globalisation of Economics and the Future of Mankind

Held, D./McGrew, A. (2006) Globalization

Howells, P./Bain, K. (1990) Financial Markets and Institutions

Khan, H. (2004) Global Markets and Financial Crisis in Asia: Towards a Theory for the 21st Century

Meltzer, A. H. (1998) Asian Problems and the IMF, from: http://www.cato.org/pubs/journal/cj17n3-10.html

The Cato Journal, Vol. 17 No. 3 in 1998, Globalisation of Finance, from http://www.cato.org/pubs/journal/cj17n3/cj17n3-1.pdf

The Economist, Edition November 21st - 27th

White, E. N. (1988) Crashes and Panics