12 of 13 people found the following review helpful:
5.0 out of 5 stars
You can never go wrong blaming the French, November 8, 2009
"For it is impossible for any one to begin to learn what he thinks he already knows." -- Epictetus
In a little-known book entitled Capital Rules: The Construction of Global Finance written in 2007 a year before the global financial meltdown, Harvard professor Rawi Abdelal tells how it was French socialists, not Wall Street or the U.S. Treasury or credit rating firms (S&P, Moody's, etc.), that liberalized global finance.
The only problem with this book is that it is not one of the many books on the financial meltdown that follows the successful pop journalistic formula of demonizing greedy financial or incompetent regulatory institutions and their executives as the cause of the meltdown. It doesn't tell people what they want to hear and, thus, has unfortunately received little attention.
Professor Abdelal's book is even more remarkable because he admits in the book that he started out with a hypothesis that the world finance system was globalized and liberalized by American capitalist greedy institutions but had to abandon this notion based on the evidence. As professor Abdelal puts it:
"I assumed that I would find ample evidence of American leadership, Wall Street's enthusiasm, the U.S. Treasury's guidance, Rightist politicians, and "neoliberal" economists and policy makers. I found nothing of the sort. Instead, I discovered European leadership in writing the liberal rules of global finance, Wall Street's caution and skepticism, the U.S. Treasury's ambivalence, disillusioned but reenergized Leftist politicians, and organization building bureaucrats."
According to Abdelal, the U.S. may have been the central beneficiary of liberalized global finance during the dot.com, telecom and real estate economic bubbles, but neither the U.S. government nor Wall Street preferred or promoted liberalizing the rules for global finance. Abdelal writes that the U.S. desired an "ad hoc" approach to international finance while Europe wanted a "rule based" system of equality.
Three French-dominated policy organizations, the European Union (EU) and European Commission run by Jacque Delors (Socialist Party), the Organization for Economic Cooperation and Development (OECD) headed by Henri Chavransky (a member of the Socialist Party), and the International Monetary Fund (IMF) run by Michel Camdessus (a Social Christian), played the crucial roles in liberalizing the world financial system. Even though these elites denied their effort to internationalize finance was a "conspiracy," the The Banker, a monthly international financial affairs publication, called it "a Machiavellian device" to wrest power away from the marketplace.
Part of the provisions of liberalization included the replacement of Moody's, S&P, and Fitch credit ratings of investments with the European Basel II Accords. This may partly explain why U.S. rating agencies were ineffective in signaling the eventual meltdown. Scholars Edward Altman and Anthony Saunders are quoted in the book as concerned that the Basel Accords rating system might "follow rather than lead the business cycle," rendering them feckless.
Abdelal makes it clear, however, that the U.S. was in favor of the globalization of finance but on an ad hoc and unilateral basis not a multi-lateral basis.
After the end of world-wide fixed money exchange rates in 1971, it was thought that capital controls would not work in an Internet connected world and would yield greater benefits.
To give an idea of the magnitude of globalization of finance Abdelal describes how the average daily turnover in foreign currency markets was $15 billion in 1973, rose to $1.5 trillion by 1998, and by 2004 rose to $1.9 trillion.
However, according to Andelal, the liberalization of the world financial system that evolved was driven by politics, not science. Contemporaneous with the formation of the European Union came a clamor by the French to open up world finance and monetary flows. French socialists wanted to end what they perceived to be the advantage of the rich and multi-national firms to elude controls designed to prevent the outflow of capital. French socialists felt that capital controls only constrained the middle class and voters, not financial elites.
An apt quote by historian Karl Polanyi in Abdelal's book reflects how Socialist and Capitalist finance came to be intertwined:
"The war between heaven and hell ignored the money issue, leaving capitalists and socialists miraculously united. Where (David) Ricardo (free trader) and (Karl) Marx (socialist) were as one, the nineteenth century knew not doubt."
Interestingly, former U.S. Treasury Secretaries Robert Rubin (formerly Goldman Sachs & later with Citi Group) and Larry Summers (now Obama economic advisor) were reportedly not interested in the European proposal to open up financial markets. The Managing Director of the Institute of International Finance (IIT), Charles Dallarma, is quoted in the book as saying: "The proposal was by no means a Treasury or Wall Street initiative."
The notion that globalization reflected the inevitable progress of history is not sustained. As Abdelal writes: "The invocation of an all-powerful, homogenizing globalization is itself dubious, but even if it were valid European finance was very much of their own making."
This book pops the mental preconceptions of both conservatives and liberals. Certainly, American liberal politicians exerted most, but not all, of the liberalization of domestic real estate finance which contributed to the meltdown of the U.S. financial system. But the overwhelming flow of foreign funds into the U.S. from 2003 to 2007 was not initially due to the receptivity of liberals running the U.S. Treasury or the Federal Reserve, or due to so-called greedy conservatives on Wall Street. Nor can Presidents Carter, Clinton, Bush I or Bush II necessarily be blamed for the liberalization of global finance.
Those that are only interested in finding books written mostly by journalists employing yellow journalism will find this book disappointing.
The moral of Professor Abdelal's book might be what Winston Churchill said about Capitalism and Socialism:
"The inherent vice of Capitalism is the unequal sharing of blessings; the inherent virtue of Socialism is the equal sharing of miseries."
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1 of 2 people found the following review helpful:
2.0 out of 5 stars
No, March 11, 2011
The author starts with what the author claims to be the received view; that the US was the driving force behind liberalisation of capital flows between countries. In contrast, the author finds that the driving force was EU, IMF, OECD, and in particular French technocrats. The US played only a passive role relating to economic liberalisation. The author documents how the international organisations played a role and this is probably the strongest part of the book. The author is less convincing when arguing that the US Treasury and Wall Street only played a passive role. The role of the US is not studied in detail, so I cannot understand how such a conclusion is warranted. The author seems a bit schizophrenic when it comes to academic affiliation, but it seems that he wants to be somewhat of a historian. Thus, he should take source material a bit more seriously when it comes to assessing the US situation.
I find it slightly off-putting that anyone can start with a silly straw man saying that everything was driven by US institutions. Obviously, Europe played a role as well. The key story to be told must be how Europe, US, and Japan interacted to liberalise capital flow. Equally off-putting is the smug tone when blaming the French. Reading between the lines I get the strong opinion that the author doesn't really like economic liberalisation at all. From this perspective the book is only worth two stars. The author devotes three chapters to the three international organisations mentioned above. Those chapter contains some interesting information. So the book is worth somewhere between two and three stars
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