which is the restriction of the free flow of capital across borders. In Hot Money Blues, his New York Times column this morning, he says
one thing seems certain: for the time being, and probably for years to come, the island nation will have to maintain fairly draconian controls on the movement of capital in and out of the country.
He further suggests that if shaped properly such a move might well have the support of the IMF. It would not only mark the end of an era for Cyprus, which had heavily marketed itself as a place people could move their money with no questions asked (as a way to avoid taxes),
But it may also mark at least the beginning of the end for something much bigger: the era when unrestricted movement of capital was taken as a desirable norm around the world.
Krugman implies this will be somewhat positive. I ponder whether it may indicate something that implies even more economic hardship for the vast majority.
Krugman provides context by reminding us that in the first few decades after the 2nd World War cross-border restrictions on the flow of capital was considered good policy, nearly universal in poorer countries, and even known on occasion in both the UK and the US: we "briefly limited capital outflows during the 1960s." He acknowledges that there are costs to the control of capital flow, and that traditional economic analysis (although as he notes it is hard to find support in the numbers) argues such controls will negatively affect growth.
It is the next sentence I view as key:
Bu it also reflected the rise of free-market ideology, the assumption that if financial markets want to move money across borders, there must be a good reason, and bureaucrats shouldn’t stand in their way.
It is ideology that has created the international financial crises - plural - that have put so many in the world in financial jeopardy. We have seen in this country, even before the process accelerated in the Reagan administration, a driving of economic policy by an extreme free-market ideology: remember that it was the Carter administration that began the deregulation of the airline industry under Alfred Kahn, and Bert Lance was hardly an advocate of strict government oversight of economic activity.
In fact, one could argue that the primary role of government in the eyes of free market ideologues was to facilitate the accumulation of wealth and power by certain financial interests and to protect them and their corporate partners against any liabilities, civil or corporate. The excesses that resulted took many forms, whether in the collapse of Enron or the bailouts of Wall Street. It allowed the creation of institutions with far too much control in too many sectors of the economy, whether it was the narrowing of ownership of print and broadcast media, the concentration of airlines into what will soon be four major carriers, or the growth of financial institutions and elimination of restrictions such as Glass-Steagal designed to prevent serious crises such as those which had helped create and exacerbate the Great Depression to the point that a handful of giant institutions now control well over 50% of the banking in this country. When the government's solution to the ensuing crisis was to further concentrate economic power in fewer hands, as took place under the leadership of Hank Paulson at Treasury, we only made a very bad situation ever more intolerable. The lack of regulation of derivatives, for which while at Goldman Sachs Paulsen had argued strenuously, when combined with the ability to move immense amounts of financial "assets" almost any place in the world with no government oversight or restrictions has created a nightmare scenario, where no one truly knows the total liability of this economic house of cards, which may well exceed the entire global GDP.
Returning to Krugman. He notes that when Malaysia institute capital flows they were treated as a pariah, but now?
But the truth, hard as it may be for ideologues to accept, is that unrestricted movement of capital is looking more and more like a failed experiment.
It’s hard to imagine now, but for more than three decades after World War II financial crises of the kind we’ve lately become so familiar with hardly ever happened. Since 1980, however, the roster has been impressive: Mexico, Brazil, Argentina and Chile in 1982. Sweden and Finland in 1991. Mexico again in 1995. Thailand, Malaysia, Indonesia and Korea in 1998. Argentina again in 2002. And, of course, the more recent run of disasters: Iceland, Ireland, Greece, Portugal, Spain, Italy, Cyprus.
Of the nations listed, only Greece is an anomaly, caused by financial profligacy. Krugman argues that
best predictor of crisis is large inflows of foreign money: in all but a couple of the cases I just mentioned, the foundation for crisis was laid by a rush of foreign investors into a country, followed by a sudden rush out.
Krugman credits Harvard's
Dani Rodrik with having raising this issue since the 1990s. He then notes it is no longer possible, as Europe clearly demonstrates, to argue that this is simply a problem of poorer nations to which the wealthier nations are immune. We have been partially protected by controlling our own currency, whereas the Euro zone is impacted by what happens with any of their members suddenly cratering and thus jeopardizing the finances of the entire zone. Even so, we were only PARTIALLY protected, given the worst economic crisis since the 1930s is where we now found ourselves.
It is not that Krugman suggests there will be a complete shut-down of cross-border money flow. But he thinks things may well change:
There may well, however, be a process of erosion, as governments intervene to limit both the pace at which money comes in and the rate at which it goes out. Global capitalism is, arguably, on track to become substantially less global.
And that’s O.K. Right now, the bad old days when it wasn’t that easy to move lots of money across borders are looking pretty good.
Stop and think for a moment. American corporations have moved profits overseas to low or no- tax jurisdictions while cleverly keeping losses on paper here, thus claiming huge profits which drive up their stock prices and result in excessive bonuses for top management while not only not paying taxes to the US and state governments, but actually receiving payments on the losses from the American taxpayers.
Our free trade policy has also lead to a large amount of overseas money, sometimes from government entities, flowing into US financial institutions or into investments in US assets. In one sense, were the US to attempt to restrict the flow of capital into or out of the country, this could start to dry up these additional sources of capital that have helped to cushion us from some of the impact of other parts of our economic policy.
What is clear is that no country can completely control its own economic destiny so long as it cannot control the flow of capital across its borders. What is also clear is that simply attempting to restrict it will not work.
What Krugman's column indicates, yet again, is how little control individual governments have over the economic activities of major financial and corporate institutions.
Unless and until countries, including our own, will address this honestly, economic life for the vast majority of people will only continue to spiral in a downward direction, while the wealthy and powerful continue to accumulate ever more wealth and power in the hopes that they can protect themselves from the inevitable.
Not a pretty picture, is it?