Reversing the nationalisation of global finance

The G7 summit in Taormina in May 2017 represented a turning point in global governance: the G7 leaders clearly confirmed their shift to nationalism with respect to relevant global issues, in particular climate change and also financial regulation and coordination.

A few days before the leaders gathered, G7 finance ministers and central bank governors met in Bari, where they focused on issues mainly in the domain of international economic coordination, particularly how to reduce the evanescence of taxation for information technology companies and how to safeguard stability and enhance growth through coordinated public and fiscal policies. Neither the finance ministers nor their leaders have felt the need to improve coordination in the global financial regulatory system, and positions are still too far apart. In particular, the weakening of financial regulation and coordination in G7 countries, led by the United States and the United Kingdom, does not facilitate the mission of globalisation to benefit all.

The 2018 Charlevoix Summit hosted by Canada will unlikely reverse the nationalistic path of financial globalisation, since G7 leaders and their policies have mostly not changed since 2017, except (maybe) in Italy.

However, nationalism cannot win on a playing field dominated by technological innovation that is radically changing the inner structure of the economies and banking systems in the G7. The evolution of financial technology – fintech – and cryptocurrencies (which are neither money nor means of payments) is attracting increasing quantities of capital because of the need to get rid of the banking system and its stringent rules that aim at safeguarding stability but inevitably reduce freedom and anonymity. Cash and deposits are rapidly moving out of the regulated banking system and into wallets filled with bitcoin (see figure) and the cryptocurrency Ethereum, increasing banks’ need for capital and then further diminishing their stability. The Chinese government, worried by fraud and capital flight, intervened in February 2018 to block any trading of cryptocurrencies. But in the absence of any coordinated intervention on innovative financial infrastructure, the Chinese decision will probably be ineffective.

History repeats itself. The phenomenon of deregulated financial products, such as derivatives, was considered to be at the root of the financial meltdown of the 2008 global crisis, and a few players in the market have been found guilty and paid for their errors (such as Lehman Brothers, Fannie Mae and Freddie Mac, Northern Rock, and Greece).

The introduction of a centralised counterparty system in the over-the-counter derivative markets after 2010 reduced the risk but increased concentration, because 90% of contracts are cleared in one clearing house in the United States. The goal of stability collides with the America First policies of the US and Brexit in the UK. The deregulation of the financial system promoted by the American and British leaders for different reasons, and the easing of monetary policies in Japan and in Europe, will further sustain inflated asset prices in G7 members in 2018.

In 1996, Alan Greenspan described the behaviour of investors in the US stock market as irrational exuberance; similarly, after many years of cheap money, today’s market expectations are still very high. In this complex framework, only G7 and G20 central banks and the Financial Stability Board can try to smooth these explosive forces, by persuading the markets that inflation can finally hit, interest rates should normalise to positive values, and asset prices should reverse to sustainable levels.