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Financial markets: masters or servants?

First published in 2011 as Quiggin, John. ‘Financial Markets: Masters or Servants?’. Politics and Society 39: 331–45. doi.org/10.1177/0032329211415502.

Trade, and markets of one form or another, have always been part of human society. Borrowing and lending are similarly ancient and ubiquitous. On the other hand, markets for trade in financial obligations such as debts, and future sales and purchases, are specific to capitalism. The key financial institutions of capitalism, such as fractional reserve banking, joint stock companies and regular markets for trade in government bonds, date, in their modern form, from the 18th century. However, precursors can be found as early as the 15th century in Italy and the Netherlands.

Throughout the history of capitalism, there have been tensions between financial institutions and the state, and between financial capital on the one hand, and the firms and households engaged in the production and consumption of physical goods and services on the other. In some periods, most notably in the decades after World War II, financial markets were reduced to a subordinate role, channelling household savings into credit for business investment and (relatively constrained) consumer credit, under tight public regulation. In other periods, including the decades since the 1970s, financial markets became, or at least seemed to become, all-powerful Masters of the Universe.

Periods of financial sector dominance have regularly ended in spectacular panics and crashes, often resulting in the liquidation of large numbers of financial institutions and the reimposition of regulatory controls previously dismissed as outmoded and unnecessary. These panics have typically precipitated lengthy periods of recession or depression, with high unemployment, and slow or negative economic growth.

The financial crisis that engulfed the global economy in 2008 has been, so far, an archetypal example of this process. The power, and pretensions, of financial markets in the decades leading up to the crisis exceeded anything that had been seen in the past. The magnitude of the crisis was similarly impressive, with losses of billions or tens of billions of dollars becoming routine daily events and talk of trillions—commonplace. At several points, it appeared likely that the entire global financial system might collapse, and this danger has not passed at the time of writing (August 2010).

The aim of this paper is to consider measures to restore financial markets to their proper role as servants rather than masters of the market economy and the society within which it is embedded.

The paper is organised as follows. The first section provides a background to the crisis, showing how the Bretton Woods system restricted financial activity and the potential for financial panic. The breakdown of Bretton Woods was followed by a massive expansion in the scale, scope and speculative nature of financial activity. I next describe the Global Financial Crisis (GFC) that began in 2008 and show how it was driven by the complex, interlinked and uncontrolled nature of the financial system. The European sovereign debt crisis of 2010 is a continuation of the global crisis but has been used by financial markets to reassert their power. Section 3 deals with the reform of the international financial system. The central argument is that the idea of a ‘global financial architecture’ is misconceived. The necessary system is one of national (or EU-level) financial regulation, coordinated through international institutions. In Section 4, I argue that the central goal of national financial regulation should be to constrain the size and power of the financial system to levels appropriate to its role as a provider of services, ultimately dependent on the backing of the state. Finally, I offer some concluding comments.

Background

Periodic financial crises and panics have been a feature of capitalism ever since the South Sea Bubble, which brought an end to the first great experiment with joint-stock corporations. By the 19th century, financial crises replaced crop failures as the primary cause of economic distress. Some notable examples include the Long Depression following the Panic of 1873 in the USA and the 1890s depression in Australia. Kindleberger and Bernstein (2000) provide an extensive list of such crises.

None of these crises, however, were comparable in their effects to the Wall Street Crash of 1929 and the subsequent Great Depression. As well as producing a decade of misery and deprivation, the Depression helped bring Hitler to power in Germany and was therefore a major cause of the Second World War.

Meeting in Bretton Woods, New Hampshire in 1944 to plan a postwar economic order, the Allied governments were determined to avoid a repetition of the disasters of the interwar years. Although the most radical proposals for financial reform, those put forward by John Maynard Keynes, were rejected by the US government, the financial system that emerged from Bretton Woods was far more tightly restricted than any in the past.

The Bretton Woods system supported, and was supported by, Keynesian macro-economic policies, operated at the national level with the aim (largely achieved for several decades) of maintaining full employment, price stability and fiscal balance.

Even during this postwar boom, the financial sector sought and found ways to undermine and avoid controls and regulations. The emergence of the ‘Eurodollar’ market in the 1960s, which facilitated trade in US dollar-denominated financial instruments outside the control of the US Federal Reserve, was a crucial step in this respect.

After Bretton Woods

The inflationary upsurge of the late 1960s rendered untenable key aspects of the Bretton Woods system, most notably the fixed US-dollar price for gold. Although a variety of responses might have been possible, the gradual erosion of financial controls in the 1960s paved the way for a complete breakdown in the 1970s. Fixed exchange rates were replaced by attempts at flexible management, then by freely floating rates. Controls on international financial flows were relaxed and ultimately abandoned. National financial systems were deregulated (Robinson and Quiggin 1985).

By the 1980s, almost nothing was left of the Bretton Woods system. Governments had little option but to obey the dictates of global financial markets, expressed most notably through the judgements of rating agencies such as Standard & Poor’s and Moody’s. The volume of international financial flows grew to levels that had previously been unimaginable, and then kept on growing even faster. By some measures, when the bubble burst in 2008, the total outstanding volume of financial assets was over a quadrillion US dollars.

By 2007, financial corporations accounted for 40 per cent of US corporate profits. The bulk of income growth in the USA over the period after the 1970s accrued to high-income earners, an increasing proportion of whom derived their income directly or indirectly from the financial sector. In particular, those in the top 1 per cent of the income distribution approximately doubled their share of income (Piketty and Saez 2003). Within that group, the top 0.1 per cent did disproportionately well. Similar, though less extreme, developments took place throughout the developed world (Atkinson and Leigh 2007; Piketty and Saez 2006).

Nevertheless, by the mid-1990s, the beneficence of financial-sector dominance seemed evident to all, particularly in the USA. Booming stock markets encouraged an atmosphere of triumphalism epitomised by such writers as Thomas Friedman (1999) and Edward Luttwak (1999).

But the first signs of failure were becoming apparent. The global financial system was threatened in 1998 by the failure of Long-Term Capital Management L.P., a hedge fund with leveraged borrowings in the trillions. The danger was averted by a bailout, hastily organised by the US Federal Reserve. The bubble-and-bust in dotcom stocks in the late 1990s repeated the pattern on a larger scale.

Bubble, bust and bailout

Although no one predicted the exact course of the GFC that began in 2008, a substantial minority of economists pointed to the unsustainability of the imbalances in the US economy and the global economy that developed from the late 1990s onwards. They predicted that the resolution of those imbalances would require a painful adjustment and, probably, a recession, followed by more restrictive regulation of the financial system (Bell and Quiggin 2006).

By contrast, the dominant market-liberal ideology encouraged the view that booming asset markets were benign. The massive growth in the volume of international financial transactions was seen as reflecting the (presumptively rational) voluntary choices of borrowers and lenders, and as a way of diversifying risk internationally.

Like other aspects of the financial system that developed during the bubble era, this reasoning was reminiscent of the deacon in Oliver Wendell Holmes’s poem of 1858 who tried to build a carriage (the ‘wonderful one-hoss shay’) that could never break down, on the theory that a system always fails at its weakest spot:

‘n’ the way t’ fix it, uz I maintain, is only jest

To make that place uz strong uz the rest.

(Holmes 1858)

As applied to the global financial system, the ‘one-hoss shay’ theory provided two systems of protection against failure. First, risks were widely dispersed throughout the global financial system, so that a localised failure in any one economy could not cause significant loss to investors with highly diversified portfolios. Second, central banks extended ‘too-big-to-fail’ protection to any institution large enough to be critical to the sustainability of the overall system.

The only way a system of this kind could fail was through a total global collapse. As Holmes, in his poem, described the end of the one-hoss shay:

[It] went to pieces all at once,—

All at once, and nothing first,—

Just as bubbles do when they burst.

(Holmes 1858)

And that, more or less, is what happened.

In scale and scope, the crisis was larger than any financial failure since the Great Depression. The estimated losses from financial failures amounted to US$4 trillion or about 10 per cent of the world’s annual income. Losses in output from the global recession have also amounted to trillions, and recovery has barely begun.

Unlike the Great Depression, this crisis was entirely the product of financial markets. All the checks and balances in the system failed comprehensively. The ratings agencies offered AAA ratings to assets that turned out to be worthless, on the basis of models that assumed that asset prices could never fall. The entire ratings agency model, in which issuers pay for ratings, proved to be fundamentally unsound, but these very ratings were embedded in official systems of regulation. Crucial public policy decisions were, in effect, outsourced to for-profit firms that had a strong incentive to get the answers wrong.

The bailouts undertaken by the US and European governments in late 2008 only reinforced the bad incentives in the system. Financial-sector participants kept most of the rich rewards they had reaped during the bubble years when their activities had massively distorted the allocation of investment capital and thereby reduced the sustainable growth rate of the economy. The terms on which public credit was extended for worthless assets were so generous that the financial sector has led the way in the recovery of corporate profits. Unsurprisingly, given these incentives, the behaviour of the financial sector has changed hardly at all as a result of the crisis.

The European debt crisis

The role of financial markets in the European ‘sovereign debt crisis’ provides a good illustration of the extent to which the financial sector has reasserted its claims to mastery over the economy. In nearly all respects, the crisis is the result of the financial excesses of the bubble era and the costly misallocation of resources it created.

Many of the European governments most severely affected by the crisis were in fiscal balance or surplus in 2007. The slide into deficit can be attributed to:

• the direct and indirect costs of financial sector bailouts (most notable in Ireland)
• the loss of revenue from the financial sector and from housing following the bursting of the bubble (most notable in Spain)
• the fiscal impact of the general economic downturn and the cost of stimulus and relief measures.

Even in Greece, where fiscal profligacy was a primary cause of the crisis, financial enterprises were both leading accomplices in the evasion of Eurozone fiscal targets and leading beneficiaries of the EU bailout. While ordinary Greeks have been forced to accept austerity measures, the US, German and French banks that made unsound loans can expect to be paid in full.

Yet the financial sector has presented itself as the guardian of fiscal probity, with rating agencies downgrading public debt and bond markets demanding cuts in public expenditure, invariably targeted at those who benefited least from the bubble.¹ The most striking examples include the UK, where the cost of the bank bailout is being used to justify ever-harsher treatment of the homeless and unemployed, and Ireland, where the government plans to sell most of the assets of the National Pension Reserve Fund (created to finance public service and social welfare pensions) to pay off creditors of failed private banks. Elsewhere in Europe, ‘austerity’ proposals have generally been more reasonable, with a primary focus on proposals to enhance tax revenue and measures to reduce the cost of retirement income policies, in most cases by increasing the age of retirement.

Budgets must balance in the long run, and policies of this kind are, to some extent, a necessary response to a real reduction in the net worth of governments as a result of the financial crisis. Nevertheless, the demands of the financial sector for austerity have produced an undesirable focus on measures to reduce budget deficits in the short term, at a time when the depressed state of the European economy implies the need for stimulus.

A striking example is that of the increases in Value Added Tax (VAT) rates adopted in Spain, Portugal and other European countries. A far more sensible policy would have been to announce an increase in the VAT rate, deferred for two to three years. The effect on long-term fiscal balance would be only marginally smaller than that of an immediate increase. On the other hand, a deferred increase would stimulate demand in the short-term, as consumers seek to beat the tax increase. Such a temporary stimulus is exactly what is needed.

Reforming the international financial system

The aftermath of the crisis has produced a range of efforts to improve upon the systems of financial regulation that failed so spectacularly in 2007 and 2008. The most important instance is that of the proposed Basel III Accords on banking supervision. The draft rules reverse many of the presumptions that informed the ‘light-handed’ approach of the Basel II system, which failed spectacularly in the global crisis. Basel III involves a substantial increase in bank capital requirements. More importantly, the risk-based framework of Basel II, in which banks were largely free to make their own judgements about the riskiness of their capital base, has been replaced by more prescriptive requirements to hold specific capital assets.

These efforts have not, however, been informed by any rethinking of the role of the financial sector. As a result, they amount to an attempt to repair and recreate the pre-crisis system, fixing the obvious defects while maintaining the status of the financial sector as the core of economic activity. Ideally, in this view, the financial sector would retain its role of mastery over investment decisions and public policy while avoiding the excesses of the past.

Such an approach is doomed to failure. Even while the crisis was at its worst, there were regular examples of excess, such as massive payouts and lavish junkets for executives of bailed-out banks. Now that, for the financial sector at least, the crisis is effectively over, the return to pre-crisis attitudes and behaviour is gathering pace.

Starting from the view of the financial sector as a servant of the broader economy and society rather than as a master would produce a radically different approach to its regulation. A whole series of presumptions that have characterised the failed regulatory approaches of recent decades would be reversed. Most notably:

• The financial sector should be regarded as the biggest single source of economic risk rather than the pre-eminent social institution for risk management.
• Financial innovation should be regarded as harmful unless it can be shown to be beneficial, rather than vice versa.
• Growth in the financial sector share of the economy should be regarded with concern rather than celebration.
• Financial markets must be regulated as interlinked national markets rather than as a global market transcending national boundaries.

A successful approach to global financial regulation must rely primarily on co-operation between the US Federal Reserve and the European Central Bank (ECB), which between them account for more than 90 per cent of currency reserves and economies producing around a third of global output. Although the UK and Japan remain significant financial centres, the severe fiscal and regulatory problems they face suggest that they are unlikely to be in a position to play an independent role in the restructuring of the global financial system for some time to come. Other members of the G20 are similarly constrained.

Financial innovation

The process of financial innovation, involving either the creation of new financial instruments or the design of new financial strategies for firms (often termed ‘financial engineering’) was a central feature of the era of neoliberalism. The growth of finance has been almost unstoppable. Seemingly major financial crises like the stock market crash of 1987 or the Nasdaq² crash of 2000 stimulated the development of yet more innovative responses. Even the exposure of spectacular fraud at the Enron Corporation, which had been named by Fortune magazine as ‘America’s most innovative’ for six years in succession, did little to dent faith in the desirability of innovation.

It is now clear that unrestricted financial innovation played a major role in the advent of the financial crisis by facilitating the growth of unsound lending and undermining systems of regulation. There is an inherent inconsistency between unrestricted financial innovation and a regulatory system aimed at preventing the failure of financial systems or insuring market participants against such failures. Guarantees create ‘moral hazard’ by allowing financial institutions to capture the benefits of risky investments while shifting some or all the losses to government-backed insurance pools.

Moral hazard can only be offset by the design of regulatory mechanisms that discourage excessive risk-taking. However, as the literature on mechanism design has shown, the effectiveness of such mechanisms depends on the existence of stable relationships between the observable variables that are the subject of regulation and the risk allocation that generates these observables. Financial innovation changes the relationship. In the presence of moral hazard, therefore, there is an incentive to introduce innovations that increase the underlying level of risk while leaving regulatory measures of risk unchanged.

It follows that the only sustainable approach to financial innovation is one in which proposed innovations are introduced only after the implementation of necessary changes to regulatory requirements and risk measures. If reliable risk measures cannot be computed, the associated innovations should not be permitted.

Obviously, this approach is directly opposed to the Basel II system, which sought to control the total risk exposure of regulated banks while maximising the freedom of financial institutions to benefit from financial innovation. The failure of that system is reflected in the substantially more prescriptive approach of Basel III. However, despite the substantial tightening of restrictions in Basel III, the underlying presumption in favour of financial innovation remains. It is this presumption that needs to be reversed if financial regulation is to be effective.

Controlling risk in the financial sector

Given an unlimited public guarantee for the liabilities of these institutions, a permissive attitude to innovation is a guaranteed, and proven, recipe for disaster, offering huge rewards to any innovation that increases both risks (ultimately borne by the public) and returns (captured by the innovators).

Post-crisis financial regulation must begin with a clearly defined set of institutions (such as banks and insurance companies) offering a set of well-tested financial instruments with explicit public guarantees for clients and a public guarantee of solvency, with nationalisation as a last-resort option. Financial innovations must be treated with caution and allowed only when there is a clear understanding of their effects on systemic risk.

In this context, it is crucial to maintain sharp boundaries between publicly guaranteed institutions and unprotected financial institutions such as hedge funds, finance companies, stockbroking firms and mutual funds. Institutions in the latter category must not be allowed to present a threat of systemic failure that might precipitate a public sector rescue, whether direct (as in the recent crisis) or indirect (as in the 1998 bailout of Long-Term Capital Management). A number of measures are required to ensure this.

First, ownership links between protected and unprotected financial institutions must be absolutely prohibited, to avoid the risk that the failure of an unregulated subsidiary will necessitate a rescue of the parent, or that an unregulated parent could seek to expose a bank subsidiary to excessive risk. Long before the current crisis, these dangers were illustrated by Australian experience with bank-owned finance companies, most notably the rescue, by the Reserve Bank of Australia, of the Bank of Adelaide in the 1970s.

Second, banks should not deal in unregulated financial products such as share investments and hedge funds.

Third, the provision of bank credit to unregulated financial enterprises should be limited to levels that ensure that even large-scale failure in this sector cannot threaten the solvency of the regulated system.

In the resulting system of ‘narrow banking’, the financial sector would become, in effect, an infrastructure service, like electricity or telecommunications. While the provision of financial services might be undertaken by either public or private enterprises, governments would accept a clear responsibility for the stability of the financial infrastructure.

Another important regulatory adjustment will be the end of the system by which prudential regulation has been, in effect, outsourced to ratings agencies such as Standard & Poor’s and Moody’s. Agency ratings have been enshrined in regulation: for example, official investment guidelines require regulated entities to invest in assets with a high rating (AAA in some cases, investment grade in others) or provide those responsible for making bad investment decisions with a safe harbour against claims of negligence if the assets in question carried a high rating. For these purposes at least, an international, publicly backed non-profit system of assessing and rating investments is required.

Constraining the size of the financial sector

The first objective must be to ensure that exchange rate movements reflect the economic fundamentals of trade and long-term capital flows rather than the vicissitudes of financial markets. The most promising strategy for achieving this goal is the idea, long-advocated and long-resisted, of a small tax on financial transactions, commonly called a Tobin tax, after its proposer (Tobin 1988; see also ul Haq, Grunberg, and Kaul 1996).

A tax at a rate of 0.1 per cent would be insignificant in relation to the transaction costs associated with international trade or long-term investments. On the other hand, daily transactions of US$3 trillion would yield revenue of US$30 billion per day, or nearly US$1 trillion per year. Since this amount exceeds the total profits of the financial sector, an effective Tobin tax would imply a drastic reduction in the volume of short-term financial flows. It follows that the revenue from a Tobin tax, while significant, would not be sufficient to replace the main existing sources of taxation, such as income tax.

The large volume of literature on the Tobin tax has identified some problems with the simple proposal for a tax on international financial transactions. First, it is possible to replicate spot transactions on foreign exchange markets with combinations of forward transactions and futures, and swap transactions. To make a Tobin tax effective, it would have to be applied to all financial transactions, including domestic transactions. During the bubble era, when the few remaining taxes on domestic financial transactions were being scrapped to facilitate the growth of the financial sector, this was seen as a fatal objection. It has become apparent, however, that the destabilising effects of explosive growth in the volume of financial transactions are much the same whether the transactions are domestic or international.

The fact that a Tobin tax on international financial transactions would be integrated with taxes on domestic transactions suggests that, in all probability, revenue would be collected and retained by national governments. However, suggestions that at least some of the revenue could be used to fund global projects such as the international development goals of the United Nations Conference on Trade and Development (UNCTAD) remain worthy of consideration.

The second problem is that the tax would require global cooperation to prevent financial market activity from migrating to jurisdictions that did not apply the tax. Although this will remain a problem in the post-crisis world, it is likely to be much less severe than indicated by earlier discussions. The number of separate jurisdictions that would need to agree has been substantially diminished by the emergence of the euro.

As part of the resolution of the crisis, it seems inevitable that most remaining European currencies, with the possible exception of the British pound, will disappear, and that a Europe-wide regulatory system will emerge. The number of separate jurisdictions with well-developed financial systems is, therefore, likely to be very small, with the European Union (EU) and the USA being overwhelmingly dominant. Furthermore, successful resolution of the sovereign debt crisis will involve a substantial and growing role for fiscal transfers within the Eurozone. Thus, the EU will become more and more comparable to the USA in economic terms.

As in the case of tax evasion, the problem of ‘offshore’ financial centres such as Caribbean island states is unlikely to be a serious stumbling block. The free-market dogmas that prevented action to preserve the effectiveness of financial regulation in the late 20th century have lost much of their force. A Tobin tax on transactions among complying jurisdictions may have to be supplemented by a punitive tax at a rate of, say, 10 per cent on transactions with non-compliant jurisdictions. This would ensure that non-compliant jurisdictions were excluded from global financial markets, though the penalty would be modest as regards trade and long-term investment flows.

The new financial architecture: global or international?

The first step towards a sustainable financial architecture is the recognition that the idea of a global financial architecture is both misleading and unattainable. The starting point for any financial architecture must be the institution that acts as lender of last resort for others. This function is, and is likely to remain, one undertaken by national governments and their central banks.³ It follows that there can be no global financial architecture. Rather, national systems of financial regulation must be linked and integrated to produce a sustainable international financial architecture.

The first requirement for such an architecture is that there should be no ‘offshore’ financial system that is outside the agreements governing the international financial architecture but nevertheless allowed to transact with institutions inside the system.

This issue has already arisen in relation to international tax avoidance and evasion, and it will arise in an even more acute form in relation to the Tobin tax, discussed below. Fortunately, the Organisation for Economic Co-operation and Development (OECD) has already made substantial progress on tax avoidance, and the approach here will serve as a model for financial regulation.

The OECD prepared an internationally agreed tax standard allowing countries to choose their own tax rates but requiring the exchange of information to prevent avoidance and evasion. Jurisdictions that implemented the standard were placed on a white list, while those that refused were placed on a black list. Countries that promised to implement the standard but had not yet done so were placed on a grey list. Blacklisted jurisdictions were threatened with sanctions, largely unspecified but sufficiently effective that, by October 2009, no jurisdictions surveyed by the OECD global forum remained on the blacklist.

The tax standard is inadequate in many respects, and open to the evasive tactics for which tax havens are famous. Nevertheless, it seems clear that standards will be tightened progressively, and that no jurisdiction will be willing to risk the consequences of refusal to implement them.

The Financial Stability Board, established after the 2009 G20 London summit to strengthen prudential oversight of capital, liquidity and risk management, provides the potential to apply the tax haven model to ‘regulatory havens’ offering lax financial regulation. As with taxation, the process will undoubtedly be slow. Nevertheless, the powers of the G20 financial regulators are sufficient to ensure that evasion of financial regulation through the use of offshore transactions can be prevented. It remains to be seen whether, in the absence of immediate crisis, governments will find the political will required to resist the demands of financial institutions for light-handed regulation.

These new developments raise fundamental questions about the role of existing international organisations, most importantly the International Monetary Fund (IMF). The IMF has historically acted to preserve the interests and power of the global financial sector. IMF interventions, presented as ‘bailouts’ of indebted countries, have typically imposed terms only marginally more favourable to the country concerned than the outcomes they would incur through default. The real beneficiaries have been lenders. After a brief conversion to policies of Keynesian stimulus in the deepest phase of the GFC, the IMF is again acting as an advocate of ‘austerity’ in the interests of bondholders.

The World Bank and the regional development banks also have an important role to play in countercyclical responses to financial crises. The experience of the recent crisis showed the need for more rapid and flexible responses.

The outcomes of the 1990s bubble economy

Like previous episodes of finance-dominated capitalism, the bubble economy that emerged in the 1990s has ended in disaster and depression. Despite the support of sophisticated economic theories, best practice national and international regulation, and the almost unbounded information flows made possible by technological advances in computing and telecommunications, the global financial sector has proved to be just as vulnerable to fraud and failure today as in the days of the South Sea Bubble.Economically and socially sustainable growth will be possible only if the financial sector is forced back into the role of servant rather than master. This will not be easy to achieve. Despite their spectacular collective failure and evident dependence on government handouts for survival, the leaders of the financial sector remain both wealthy and powerful. So far, they have successfully resisted all but the most limited encroachments on their power and freedom.

They have, however, lost their most important asset: the aura of infallibility that surrounded ‘the markets’. While ordinary citizens may find it difficult to conceive an alternative to financial market dominance, they no longer believe that a finance-dominated economy ultimately works for the benefit of all. Given a properly articulated program of reform, it should be possible to mobilise sufficient public support and anger to overwhelm the defences raised by these 21st-century ‘malefactors of great wealth’.⁴

Bibliography

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Bell, Stephen, and John Quiggin. 2006. ‘Asset Price Instability and Policy Responses: The Legacy of Liberalization’. Journal of Economic Issues 40, no. 3: 629–49. doi.org/10.1080/00213624.2006.11506938.

Friedman, Thomas. 1999. The Lexus and the Olive Tree: Understanding Globalization. New York: Farrar, Strauss and Giroux.

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Piketty, Thomas and Emanuel Saez. 2003. ‘Income Inequality in the United States, 1913–1998*’. Quarterly Journal of Economics 118, no. 1: 1–39. doi.org/10.1162/00335530360535135.

Piketty, Thomas, and Emanuel Saez. 2006. ‘The Evolution of Top Incomes: A Historical and International Perspective’. American Economic Review 96, no. 2: 200–05. doi.org/10.1257/000282806777212116.

Robinson, Marc, and John Quiggin. 1985. ‘Retreat from Social Control: Financial Deregulation Since World War II’. Journal of Australian Political Economy 18: 9–16.

Quiggin, John. 2011. ‘Financial Markets: Masters or Servants?’. Politics and Society 39: 331–45. doi.org/10.1177/0032329211415502.

Tobin, James. 1988. ‘International Monetary Reform: Sand in the Wheels’. For Neue Zürcher Zeitung, July 1988.

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1. 1 A particularly striking example of the financial sector’s unwillingness to learn from experience was that of Timothy Ash of the Royal Bank of Scotland. Speaking about the IMF rescue package for Ukraine, Ash observed ‘We hope the fund is maintaining its push for a more flexible exchange rate, far-reaching reforms in the banking sector, and more privatization’ (quoted in Krasnolutska and Martens 2008). A few weeks before this comment was made, RBS had been nationalised as a result of failed speculation and catastrophic mismanagement.

2. 2 National Association of Securities Dealers Automated Quotations Stock Market.

3. 3 The Eurozone, where national governments run their own prudential policies but share a common central bank, raises some interesting questions but is unlikely to serve as a model for the rest of the world.

4. 4 The phrase was coined by US President Theodore Roosevelt in an address on the occasion of the laying of the cornerstone of the Pilgrim Monument, Provincetown, Massachusetts, 20 August 1907. Theodore Roosevelt Digital Library. Dickinson State University. www.theodorerooseveltcenter.org/Research/Digital-Library/Record.aspx?libID=o286435.