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Financial markets are widely understood to be global mechanisms. At the same time .... As vital as bank regulation is to the stability of the global financial system,.
International Finance 1:2, 1998: pp. 339–355

Confronting Asymmetry: Global Financial Markets and National Regulation* Brandon Becker and David A. Westbrook Partner, Wilmer, Cutler & Pickering and Associate Professor of Law, State University of New York at Buffalo.

Banner, Stuart, Anglo-American Securities Regulation: Cultural and Political Roots, 1690–1860, Cambridge, UK: Cambridge University Press, 1998, 336 pp. Basle Committee on Banking Supervision, Core Principles for Effective Banking Supervision, 1997, self published. Basle Committee on Banking Supervision, Framework for the Evaluation of Internal Control Systems, 1998, self published. Geisst, Charles R., Wall Street: A History, New York: USA, Oxford University Press, 1997, 416 pp. Group of Eight, The Birmingham Summit Communiqué, 1998, self published. Group of Eight, Denver Summit of the Eight Communiqué, 1997, self published. Group of Seven, Denver Summit Statement by Seven, Confronting Global Economic and Financial Challenges, 1997, self published. Group of Seven Finance Ministers, Final Report to the G-7 Heads of State and Government on Promoting Financial Stability, 1997, self published. *We thank Robert Podgursky for his editorial assistance in completing this article. It was substantially completed during the summer of 1998 before the developments at Long Term Capital Management and increasing dollar volatility. Nevertheless, we believe those developments only highlight the need for effective supervision and that ‘developed’ financial systems cannot rest assured that they are immune to significant financial disruptions.

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Group of Thirty, Global Institutions, National Supervision and Systemic Risk, 1997, self published. Henwood, Doug, Wall Street: How it Works and for Whom, London: Verso, 1997, 382 pp. Joint Forum on Financial Conglomerates, Supervision of Financial Conglomerates, Basle Committee on Banking Supervision, 1998, self published. Lee, Ruben, What is an Exchange? The Automation, Management and Regulation of Financial Markets, Oxford, UK: Oxford University Press, 1998, 392 pp.

I. Is Financial Policy Still Possible? Financial markets are widely understood to be global mechanisms. At the same time, and although supranational bodies exist, financial policy by and large continues to be realized through national institutions. There is thus a lack of fit, or ‘asymmetry’ (Kobrin 1997) between the tools available to financial policy-makers, and the job at hand, fostering healthy markets.1 This asymmetry problem can be schematized: markets----------::--------governments | | | | global----------//----------national Although the idea that the financial markets are global has become commonplace, both the extent to which financial markets are in fact globally interdependent and the extent to which current cross-border capital flows are unprecedented are disputed.2 While not unimportant, such disputes should not obscure the fact that the way in which markets are understood and discussed by financial policy professionals has undergone a shift within the last few years. With the benefit of hindsight, it is clear that such professionals were accustomed to thinking of the interplay between the market and government as the relation between two mechanisms of social ordering which were of roughly equivalent scale, and which operated on the same object, society. Markets and governments were understood ideally to be in dynamic balance,

1 We consciously use the ambiguous phrase ‘healthy markets’ to bridge, and avoid, the debate over the specifics of ‘the job’ of financial policy-makers. 2

See, for example, Rodrik (1997); Volcker (1997).

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each correcting and complementing the operations of the other. But now that markets are viewed as far larger than even national governments, the balance has been disturbed, and the concern is how, if at all, government can address market developments. Talk of this asymmetry and, in particular, of the ‘power’ of markets vis-à-vis the putative helplessness of governments, can become dramatic. Former Deputy Secretary of the Treasury Roger Altman, after referring to the first tests of nuclear weapons, speaks of the global financial marketplace as ‘a very different but similarly awesome force, one capable of overthrowing governments and their policies almost overnight’ (Altman 1998). Although such metaphors may push the point, asymmetry is more or less consciously viewed as ‘the problem’ for financial policy professionals.3

II. The Policy Response Financial policy professionals have, in essence, three interrelated responses to the asymmetry problem: 1 regulation of markets should foster the flow of information within the markets, transparency in the broadest sense. Rather than regulate the market directly, regulation should help the market police itself. More precisely, transparency can help solve problems before they become systemic; 4 2 international networks among financial policy professionals should be built in both the private and public sectors. Obviously, this contributes to (1) and (3);5 3 supranational institutions, such as the International Monetary Fund (IMF) and the World Bank, should take an expanded role in developing and protecting a sound financial-services sector. Or, more narrowly stated, international organizations should assist in coordinating and

3 As the Group of Thirty put it: ‘the global operations of major financial institutions and markets have outgrown the national accounting, legal and supervisory systems on which the safety and soundness of individual institutions and financial system rely.’ Group of Thirty (1997). 4 Again, for purposes of this paper we assume, without defining it, that the avoidance of ‘systemic risk’, however defined, is a goal of financial regulators. 5

The construction of international networks among professionals has lately received considerable attention among international relations scholars. See, for example, Slaughter (1997); Helfer and Slaughter (1997) (describing and providing a bibliography regarding the emerging international perception of judging).

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Brandon Becker and David A. Westbrook integrating the actions of national authorities in order to reinforce market mechanisms.6

These responses enjoy considerable legitimacy. At the Denver Summit of the Group of Seven Industrialized Nations plus Russia last summer (Group of Seven Industrialized Nations Plus Russia 1997), the G-7 industrialized democracies and Russia noted the progress of globalization and new technologies were creating new challenges that spanned borders, and that therefore needed to be addressed by cooperation among governments. At the same summit, the Group of Seven, in conjunction with the European Union, reiterated positions taken at earlier Summits in Halifax and Lyon, that globalization presented increased possibilities of widespread systemic or contagion risks. In response, the G-7 urged financial regulators and international financial institutions to foster financial stability, of course ‘without stifling financial innovation or undermining the benefits of [globalization], liberalization and competition’. In lieu of specifics, the Heads of State and government and the representative of the European Union endorsed other reports. The G-7 endorsed the Core Principles of Effective Banking Supervision (discussed below), a policy paper promulgated by the Basle Committee on Banking Supervision that sets forth fundamental policies believed to form the basis of a sound banking system. The G-7 also endorsed a report by their respective ‘finance ministers on new measures to strengthen the international financial system through enhanced coordination of national regulators and by encouraging emerging economies to adopt a set of “core principles” for improved financial standards’. Thus representative government ratified the efforts of its bureaucracy. For their part, the finance ministers supported the consensus agreed by ‘international regulatory bodies’, that is, professional organizations composed largely or exclusively of national regulators, such as the Joint Forum on Financial Conglomerates, the Basle Committee, the International Organization of Securities Commissions (IOSCO) and the International Association of Insurance Supervisors (IAIS). The finance ministers also endorsed a strategy formulated by yet another entity, a working party established by the G-10 nations. Thus somewhat politically accountable bureaucracy ratified less accountable regulators and a supranational policy group. The G-10 working party, ‘which [sensibly] included representatives of emerging market economies, international regulatory bodies, and the international financial institutions’, was charged ‘to identify and analyze factors that promoted financial stability in emerging economies and to outline a 6

We recognize, of course, there is a substantial and ongoing debate regarding the scope and nature of such an ‘expanded role’. We believe, however, there is more or less a consensus regarding the need for some sort of transnational institutional framework to address global financial disruptions as well as oversight of global entities.

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concrete strategy to strengthen financial systems in such economies’. The strategy consisted of: development of an international consensus on the key elements of sound financial systems; formulation of sound principles and practices by international regulatory bodies; use of market discipline and market access to provide incentives for their adoption; promotion by the IMF, World Bank and others of the adoption and implementation of such principles and practices. Thus financial policy professionals have endeavoured to be representative. The Denver Summit was held in June 1997, as the financial crisis in Asia was developing. At the G-8 Summit in Birmingham, in June 1998, the consensus wrought at previous summits was on display. The G-8 governments understood ‘a key lesson’ from the Asian crisis to be the position they had been taking for years: ‘the importance of sound economic policy, transparency, and good governance. These improve the functioning of financial markets, the quality of economic policy making and public understanding and support for sound policies, and thereby enhance confidence’. In addition, however, the Final Communiqué from the Birmingham Summit gave unequivocal support to the policies put forth by the international financial institutions, particularly the IMF, in response to the Asian crisis. Although the Final Communiqué was not explicit on the point, the IMF was serving as a lender-of-last-resort in Asia; that is, intervening much more directly in the economy than merely calling for enhanced transparency so that the market could function. The US Treasury in particular was strongly supportive of this role for the IMF, although sensitive to charges that intervention in financial markets might lead to moral hazard. Nonetheless, the Treasury has maintained that [w]e cannot prevent crises from happening entirely. When crises do occur, as most recently in Asia, the provision of temporary financial support by the IMF, conditioned on countries pursuing sound policies, is essential in providing countries the breathing room they need to stabilize their currencies, restore market confidence and resume growth. (Rubin 1998) While crises may not be entirely preventable, when possible they should be avoided. Obviously, a stable financial system requires sound banks, and to that end the Basle Committee has endeavoured to set forth fundamental principles for sound banking practices. Sound banks are felt to be particularly vital to the global financial markets due to the fact that the financial systems of many © Blackwell Publishers Ltd. 1998


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emerging economies are dominated, in some instances almost completely, by banks.7 In Core Principles for Effective Banking Supervision, the Basle Committee articulated the bank policy orthodoxy among developed countries; in particular, the need for independent bank supervisors who have the capability to oversee the various aspects of the bank’s business in order to ensure that bank practices are orderly. In Framework for the Evaluation of Internal Control Systems, the Committee turned to the problem of establishing a banking culture in which each aspect of the business is sensitive to the accumulation of risk. Taken together, the papers provide an overview of a properly regulated environment for banks, and how banks should, in effect, regulate their own affairs. As vital as bank regulation is to the stability of the global financial system, regulation of banks alone does not address all the risks posed by ‘corporate groups which provide a wide range of financial services, known as financial conglomerates and typically incorporating at least two of banking, securities and insurance’.8 In a series of papers published under the heading Supervision of Financial Conglomerates, the Joint Forum (comprised by the Basle Committee, IOSCO and the IAIS) has attempted to address the difficulties posed by the interaction of multiple businesses in multiple nations. In response, the Joint Forum stresses the need for information sharing among supervisors, and, where necessary, the need to appoint a coordinating supervisor to distribute information among relevant regulators. Turning from process to substance, the Joint Forum confronted the fact that risk from one business or jurisdiction may affect business in another. Similarly, multiple capital requirements, each imposed to address risks of a given business, may be met with the same capital (‘double’ or ‘triple gearing’). The extent of such risks, or such capital inadequacy, is difficult for either regulators or counterparties – both generally focused on a particular business in a particular jurisdiction – to determine. In response, the Joint Forum has proposed several techniques for the assessment of capital adequacy on a group-wide basis. Such assessment is difficult because communication among entities within a conglomerate may be imperfect, that is, the risk to one entity may affect another entity, but not on a dollar-for-dollar basis. Nonetheless, the Joint Forum’s prescriptions endeavour to ensure that relevant 7 The important role of commercial banks is not necessarily exclusive. Many of the materials discussed in this paper are, in effect, attempts not only to address the asymmetry between national governments and global markets, but also the differing oversight of commercial banks and other financial institutions. 8

Joint Forum on Financial Conglomerates (1998). The Joint Forum is composed of an equal number of senior bank, insurance and securities supervisors representing each supervisory constituency. Thirteen countries are represented: Australia, Belgium, Canada, France, Germany, Italy, Japan, Netherlands, Spain, Sweden, Switzerland, United Kingdom and United States.

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information – risks that might affect the entity as a whole, and hence perhaps the system – are presented to supervisors and to counterparties as an integrated whole. The prescriptions made by the Group of Thirty in Global Institutions, National Supervision and Systemic Risk are in many ways similar to those made by the Joint Forum. The Group of Thirty focuses, however, on what it calls core institutions: ‘[l]arge, internationally active commercial banks, the major participants in large-value payment systems, along with the largest investment banks, which are key participants in the clearing and settlement systems for globally-traded securities.’ (p. vi) Supervision of such institutions requires increased cooperation among the supervisors responsible for the various parts of the conglomerate. Moreover, in times of crisis, the international efforts of national supervisors ought to be coordinated. As the Group of Thirty (1997) phrased it: Current efforts to expand cooperation with their peers demonstrate that supervisors themselves recognize the need to improve oversight of global firms. These efforts would not be necessary if there were true global, hands-on supervision. No such global agency exists, nor is one to be desired. Given that in reality, the recommendations in this report are intended to create a system that works as effectively as if there were a global supervisor. This requires someone at the center of the process to coordinate contacts among supervisors and their sharing of information. (p. 20) Apart from the emphasis on global coordination, the Group of Thirty complements the efforts of the Joint Forum in at least two ways. The first is the emphasis on the regulated entities as the source of prudential standards: Core institutions should take the lead in developing an international framework for risk measurement and management. Not only do these institutions have an obvious stake in the success of such an effort, but no other institutions – private or official – are likely to bring comparable analytical resources or first-hand knowledge of global institutions and markets to the task. (1997, p. 9) Second, the Group of Thirty report relies heavily on the ability of outside auditors – presumably large accounting firms – to assess the situation of core financial institutions. While the impulse to have an independent judgment regarding the fitness of core financial institutions is commendable, it remains to be seen whether accounting firms have the capacity, are sufficiently © Blackwell Publishers Ltd. 1998


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independent and will be paid enough to render well-founded judgments of institutional soundness. As already suggested, the project of these international bodies may be summarized as the effort to establish supranational regulatory standards that will ensure the stability of the global financial markets, whenever possible by facilitating the market’s ability to discipline marketplace actors. Although intervention by a supranational body may be necessary, such intervention is understood to be extraordinary and temporary, justified only by crisis. Working internationally, financial policy professionals thus complement the polarity between national governance and international financial markets by maintaining that the proper national regulation can make governance less necessary, and by internationalizing the culture, if only rarely the institutions, of financial policy. Insofar as their efforts are successful (and as the very existence of the present journal evinces), we may speak of a global financial policy community. From the perspective of positivist jurisprudence, or of realist theories of international relations, this approach to the problem of asymmetry may appear nonsensical, or at best, soft. Statements made by the G-8 are largely hortatory, and neither the Basle Committee, the Joint Forum, nor the Group of Thirty has the authority to impose regulation. What such groups can do, how-ever, is establish a consensus on what comprises responsible financial regulation, and indeed, sound financial operations. This consensus may, or may not, be formally acknowledged by official regulators or even heads of state. For example, the Basle Committee encourages supervisory authorities throughout the world to make a formal endorsement of the final version of the Basle Core Principles (Basle Committee on Banking Supervision 1997). The authority of the Group of Thirty, in contrast, is derived largely from the status of its individual members. But regardless of the various ways in which authority within the nascent global financial policy community may be established or legitimated, the important point is that financial policy is increasingly a matter for global, as opposed to national, consensus. The tendency of financial policy professionals to globalize their culture in response to the globalization of the financial markets may be understood by analogy to other situations in which the span of concern exceeds the reach of institutions with positive authority. In the United States and in Europe, commercial relations span jurisdictions, but do not thereby take place outside of law. In the United States, the vast majority of commercial law is state, not federal law. Although the jurisdictions are smaller than the communicative space in which business occurs, local differences are not so substantial as to preclude shared understanding among businesspeople and their lawyers. Indeed, individual transactions commonly involve the laws of many states, such as Delaware corporate law, New York contract law and property rights defined by the laws of numerous other states. Similarly, under the principle of mutual © Blackwell Publishers Ltd. 1998

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recognition, European Union member states recognize the validity of the laws of other member states, each of which meets a certain European minimum standard.9 The fact that politics is possible, however, does not mean that politics will be successful. Although globalizing the regulatory culture of advanced financial markets would be a substantial diplomatic achievement, the substantive success of that achievement depends on the ability of the global financial policy community to prevent systemic shocks and national failures such as the Indonesian crisis. Getting the policy right is no small task. As suggested above, in order to create consensus, financial policy statements have tended to be doctrinally consistent and generally unobjectionable. The question becomes whether diplomacy is purchased at the price of effectiveness (that is, whether the supranational articulation of financial policy suffers from the most-common denominator problem). Even in advanced financial markets, substantial problems, such as the savings and loan crisis, have arisen and can be expected to arise again.10 Even insofar as the asymmetry problem may be solved, whether the global financial policy community will have the wherewithal to set sound policy for financial markets remains to be seen. In this regard, the current policy framework may obscure the possibility of considering mandatory, substantive rules applied to market participants. Such mandatory rules (for example restrictions on short-selling, restrictions on capital movements or leverage restrictions) are currently out of favour. Such rules are variously viewed as either counterproductive or unworkable or both. Instead, with a few exceptions,11 the generally preferred course is to increase the flow of information, thereby relying on market incentives to promote prudent risk management. Our concern, however, is that the focus on information flow, derived perhaps from the very difficulty of establishing globally operative mandatory rules, may constrict even the discussion of whether in certain, limited circumstances mandatory rules are appropriate. In other words, and to put the matter more bluntly, at what point does the government decide – after the consumer education programme, after the subsidized development programme, after the driver’s licence revocation proceedings – to require people to wear seat belts, even if the mandatory rule is not perfect.


See generally Steil (1998). Nevertheless, even this is at best an imperfect example due to the continuing difficulties in actually implementing a Euro-passport. 10

Although we wrote this before the developments at Long Term Capital Management became public, and the emergence of increased dollar volatility, we view those developments as simply confirming that despite the progress in quantitative risk ‘management’, significant financial disruption still can – and will – occur in advanced financial markets. 11

See, for example, Kuttner (1998), Weiss (1998), and Cooperman (1998).

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Of course, even this analogy example only highlights the difficulty of acting nationally in global markets. Even so, we think it important that at times policy-makers consider not only process but substance.

III. The Renationalization of Finance? It is worth noting that there is very little argument that financial markets should not be international; the policy debate is couched in terms of how to manage the inevitable. Although the conclusion seems to require no explanation, it is hardly a self-evident position for national policy-makers to adopt. Perhaps the global financial markets are felt to be in large part the result of communications technology, and therefore to partake of the historical irreversibility associated with technological advance. In addition, the financial markets may seem to be the ultimate expressions of market forces, which since the wanings of planned economies are widely believed to propel history. Yet even while globalization of the financial markets is seen as inevitable, there is a growing sense (if nothing like a consensus) that capital flows are too volatile. The crises in Asia and, especially with hindsight, Mexico are understood to be crises of confidence as well as market corrections based on flawed fundamentals. In response, there is talk of favouring long-term over shortterm foreign investment, and perhaps curtailing the foreign-exchange markets.12 Yet such talk of restraining markets is inherently problematic in the financial policy community, a world premised on the efficacy of the financial markets in making allocative decisions (Muehring 1998). Though widely held, this troubled perspective is not quite universal. In Wall Street, Doug Henwood (1997) argues that contemporary financial markets are socially wasteful institutional arrangements which ought to be radically reformed. Henwood goes further – to our minds weakening the argument – and characterizes the markets in doctrinaire fashion as complicated mechanisms for channelling wealth to, and realizing the political will of, the privileged class. Therefore, current practices within the marketplace are not entitled to the deference usual in the financial policy community. For Henwood, globalization of the financial markets is not only not inevitable, it must be subordinated – like the rest of marketplace activity – to a just politics. Henwood is not particularly concerned about globalization per se, arguing that the relationships within a given market are much more important than whether the market crosses a political boundary. Nonetheless, Henwood is not convinced that capital should flow effortlessly among


See also Tobin (1997) (arguing that currency transactions ought to be taxed); Malpass (1998).

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jurisdictions, and seems to believe that the financial markets should be essentially national so that they can be held accountable. In response to the argument that communications capability makes international transfers of capital inevitable, Henwood maintains that technology can be used to control capital flows as easily as to facilitate them. So much for the asymmetry problem. Henwood’s polemic is an alternative voice to the consensus view of financial policy discourse. But although engaging and well-written, Wall Street ranges among types of dissatisfaction with the status quo: external critique of the activity of finance per se; internal critique of the contention that finance creates real wealth, and so benefits society as a whole; and rather technical critique of a number of ideas influential in financial circles, for example the MillerModigliani theorem. It thus remains unclear whether Henwood believes that the superstructure of finance should be dismantled to the extent possible; or merely that the benefits of financial markets should be distributed more equitably; or that more sensible financial markets would result in an increased GDP. We would have preferred Henwood to make such choices, and arguments on behalf of, and perhaps even against, his choices. But Henwood too frequently succumbs to the temptations of polemic, at least in this book. On the plus side of the ledger, Henwood’s writing is good, his explanations concise and his reach ambitious.

IV. Is the Tension Between ‘Markets’ and ‘Government’ So Real? The very problem of asymmetry presumes an equivalence between markets on the one hand, and government on the other, as modes of social ordering. The problem of asymmetry also presumes that society is increasingly dominated by markets at the expense of governments. We strongly suspect that both the assumption of equivalence and the assumption of increasing dominance by markets are misleading oversimplifications of contemporary social arrangements. What is an Exchange?, Ruben Lee’s (1998) extended discussion of the nature of securities exchanges exemplifies the sort of nuanced institutional analysis which can be only clumsily articulated by the bifurcation between the market and the government. For example, Lee demonstrates that it is impossible to understand an entity called an ‘exchange’ apart from an analysis of the exchange’s governance of its patrons. Resolution of many conflicts within the exchanges are governed by internal law-like rules distinct from whatever laws and regulations may be imposed by the national government on the one hand, and distinct from the pricing mechanism on the other. At the same time, © Blackwell Publishers Ltd. 1998


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exchanges are commonly and not incorrectly thought of as the purest of markets. From yet another angle, exchanges also must be understood as entities in the market for exchanges, that is, as entities that compete against and cooperate among each other for business. Exchanges are thus constituted by a combination of market and non-market mechanisms akin to that found by Coase (1937) in non-financial firms. Going forward, Lee (1998, pp. 316–17) argues that the best way of regulating trading systems is composed of two prongs: the separation of the regulation of market structure from the regulation of other areas of public concern, and the employment of competition policy to regulate market structure. Although Lee is persuaded that such separation is the best way, he acknowledges the practical constraints on such an approach. Nevertheless, he believes such separation will create a more stable framework for both ensuring investor protection and furthering marketplace innovation. We need not resolve whether Lee has chosen the right answers because he has clearly chosen the right questions. Too often the debate about how various trading systems should be classified for regulatory purposes takes on aspects of a nominalist discussion in which the underlying policy reasons about what objectives are to be achieved by such classifications are lost. Instead, Lee begins by asking what are the purposes for which certain entities are classified and then discusses whether those purposes are furthered by various types of government oversight. His book is thus both refreshing in its treatment of this topic and at the same time comprehensive. In this connection, because non-market mechanisms exist in the heart of the market, it is impossible to be satisfied with the statement that even securities trading is an example of the increasing dominance of markets over governments as a mode of social organization. The converse, that the market thrives in the heart of government, is also true. As every publicchoice theorist would be quick to point out, even the most public-spirited of institutions must be understood – if perhaps only partially – in terms of the incentives afforded its actors. The mutually permeable character of the concepts of the market and of the government is borne out in different ways by Charles Geist and Stuart Banner, who each provide historical accounts of the securities markets. Fittingly enough for an account of that garrulous culture, Charles Geist’s Wall Street: A History has some of the character of oral history. A wealth of stories is not an unmitigated advantage for a history: although many of the accounts are interesting, larger patterns are somewhat obscured by the sheer number of events recounted. Nonetheless, a few general themes emerge. First, government has been involved with the securities markets since the beginning; the first securities markets dealt in government debt. Second, transnational capital flows, particularly but not exclusively British investment, have been an © Blackwell Publishers Ltd. 1998

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important part of American finance since its inception. Third, Wall Streeters always have argued that they could govern their own affairs, and that external regulation was unnecessary. Despite these efforts at self-regulation, Geist argues that throughout its history Wall Street tended to excess, and government responded by regulation. Stuart Banner’s Anglo-American Securities Regulation: Cultural and Political Roots, 1690–1860 makes many of the same points, albeit in a far more academic fashion than Geist’s book. The books also use these points to tell quite different tales. Geist sees market excess leading to the collapse of laissez-faire and the imposition of Depression-era legislation and subsequent regulation. First there was the market, and then came the government. In contrast, Banner maintains that, from their beginnings, the securities exchanges were selfregulatory, juris-generative institutions. Banner draws an interesting connection between the early exchanges and mercantile courts through which merchants had long settled disputes. The text is a bit overstated: the merchant courts were found throughout Europe since the twelfth century, as opposed to being an exclusively English institution of the seventeenth century. The tradition is thus somewhat broader and deeper than Banner suggests. Banner’s important point, however, is that many institutions, including exchanges, merchant courts, churches, sports leagues and so forth govern themselves in legalistic ways, even if they receive no authority from the state. For Banner, much ‘government’ is internal to the securities exchanges. Banner also argues that government (in the ordinary sense) participated in the earliest securities exchanges in two ways: first, by offering debt, and second, by regulating the environment in which the exchanges were born. Traditional attitudes toward speculation and usury ensured that the earliest exchanges were the object of political debate. Banner thus takes issue with the popular history, held widely by US lawyers and reflected in Geist’s book, in which securities law begins with the passage of the Securities Act in 1933, and all that passed before was formless and void. Anglo-American Securities Regulation convincingly demonstrates that, from the beginning, government was both internal and external to the securities exchanges. There never was an era of true laissez-faire markets. The fact that laissez-faire was from the beginning a political prescription rather than a description of actual practice does not mean that markets did not spin out of control. But ineffective supervision of the markets should not be confused with realization of the laissez-faire ideology that market supervision was impossible or unwise. Drawing on a wealth of sources, including newspapers, political pamphlets and even popular songs, Banner attempts to demonstrate the ebb and flow of cultural hostility against and approval of the securities markets, and to draw some connection – causality may be too strong a word – between this ebb and flow and the governance of the markets. © Blackwell Publishers Ltd. 1998


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V. Conclusion Financial policy professionals have responded to the asymmetry problem by attempting to globalize their own culture. If this effort is successful, the asymmetry between global markets and national institutions will be irrelevant. Even though financial markets will exist across a number of jurisdictions, the substantive legal understanding within each jurisdiction will be substantially the same. Moreover, the current orthodoxy is that proper regulation of the market functions largely by requiring the provision of information to the market. Properly informed, the global financial market should be selfcorrecting. Thus the nascent global financial policy community answers the problem of asymmetry with two symmetries: that between the global financial market and a global regulatory culture, and that between the global market and itself. Talk about the power of markets and globalization does a great deal of work in this community’s accounts of the contemporary situation, work akin to that once done in accounts of the nineteenth and early twentieth century by words like ‘history’ and ‘progress’. Such language attempts to rationalize, and hence gain purchase upon, current events that are felt to be both unprecedented and profoundly problematic. Turning from position papers to books, and examining the financial markets in the greater institutional and historical detail books afford, reveals two problems with the formulation of the asymmetry problem. First, institutions penetrate one another. While markets and governments may be understood in the abstract to represent distinct institutions, in practice they represent aspects, characteristics, of institutions. Sometimes one predominates, sometimes the other, but there is invariably a mix. As Paul Volcker put it in the preface to the Group of Thirty Report (1997): Major financial institutions must be willing to accept the need for a certain consistency of approach – a common framework – in assessing, managing and reporting risks, and to work with official supervisors in developing standards. Supervisors in turn will need to work with each other and to understand competitive and technological realities in order to ensure the effectiveness and the necessary degree of commonality of their approaches. (p. iii) At this level of analysis, the financial markets should not be understood in terms of a simple bipolar opposition between the market and government as modes of social ordering. Second, in the long view, the assumption built into the asymmetry problem that financial markets and national governments have been coterminous is © Blackwell Publishers Ltd. 1998

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historically wrong, or at least overstated. Certainly in the medieval and in the Mediterranean world, polities tended to be smaller than the webs of commerce, and even capital, on which they drew. As both Geist and Banner show, the US financial markets have always depended on foreign capital. Moreover, for much of US history, a gold or silver standard provided some international base, context, for US monetary policy; that is, the supply of capital in the United States has never been determined solely by federal fiat. Thus it could be argued that the contention that the financial markets traditionally have been national, and have become just recently international, is historically untenable. Once markets and government are understood to entail one another, and once the international history of capital is acknowledged, it becomes far less clear that the concept of asymmetry can be anything more than a shorthand for the need to develop an international understanding of financial market regulation. But these scholarly truths should not obscure a different and opposing truth of politics: through much of modern history, national governments have been concerned with the supply of capital, and have assumed that they could govern the financial markets. These assumptions have been put under considerable stress by the transnational volume, and perhaps more importantly, by the velocity, of the contemporary financial markets. Billions upon billions of dollars changing hands overnight, every night, may well be different in kind from relatively long-term foreign investment in concrete US assets. Moreover, although significant informational and also legal impediments to transnational capital transfer continue to exist in many if not all countries, it seems undeniable that capital is increasingly mobile. As a result, national governments increasingly are not considered, and do not consider themselves, responsible for the governance of the markets. The asymmetry problem is thus not only about the growth of markets, but also about the reduction of governments’ aspirations, and quite possibly, abdication of responsibility. Especially insofar as little is hoped from politics, the financial policy community is to be commended for taking some responsibility for recent financial shocks, notably in Asia. But although a sense of responsibility is politically indispensable, it is not enough. The acrimonious debate over the handling of the Asian crisis, and of Indonesia in particular, has just begun. Learning the right substantive lessons, and translating those lessons into policy, remains the real task for the global financial policy community. Brandon Becker Wilmer, Cutler & Pickering 2445 Main Street, NW Washington DC 20037-1420 USA © Blackwell Publishers Ltd. 1998


Brandon Becker and David A. Westbrook

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© Blackwell Publishers Ltd. 1998