How Far Has The Global Financial System Shifted From ‘liberal Order’ To ‘neoliberal Disorder’ Since The 1970s?

There has been much change in the global financial system since the so called "liberal order' during the years preceding the 1970s. Since then, the concept of founding international financial systems on a model of self-regulating markets has increasingly dominated the agendas of major financial powers, be they nation states, financial institutions or multinational corporations. As a consequence of such developments, the notion of neoliberal disorder has been brought into the limelight with much debate surrounding the topic. Without a doubt, there is much evidence to support the view that the global financial system has shifted from one characterised by liberal practices, to one distinguished by neoliberal practices. In this essay, I will argue that whilst indeed such evidence exists, this movement has not been so pronounced to justify describing the global financial system as moving from liberal order to neoliberal disorder. I will alternatively conclude that the global financial system has experienced a reduction in the strength of liberal order rather than witnessed its abolition, and as a result, it was this failure and lack of commitment to strong, consistent liberal systems that led to the "disorder` of the recent financial crisis.

First, I must untangle the question and separately examine the terms, "liberal', "neoliberal' and "order/disorder'. Liberal practices, which I will view under the term liberalism, are typically considered to represent the strong belief of personal liberties, the empowerment of the role of the individual and the concentration on the philosophy of rights more than economic prosperity. In contrast, neoliberal practices, or neoliberalism, is a specific school of economic thought which supports deregulation, privatisation and a complete lack of state interference, advocating the marketplace as the force to drive economic activity rather than governmental institutions, as was seen in Thatcherism and Reaganism in the UK and US respectively. Whilst defining these two terms may be relatively simple, that of order and disorder is less so. Order can be considered as a controlled system, or alternatively, the smooth coordination, organisation, direction and stability of a system to everyone's satisfaction. By extension then, disorder can be seen as an uncontrolled system, or an environment where economic instability, disruption and dissatisfaction are prevalent. There is consequently a risk, particularly when examining order in the context of political economy and the global financial system, that control could be as construed as equatable to order. As a result, the question could be interpreted as suggesting that, due to control, the outcome of liberalism is order. However, this would not be an accurate deduction. Whilst control can certainly create order, arguably, this is not "natural', rather "manufactured' and not comparable to order arising from neoliberal practices. Thus, as a central premise to "neoliberal disorder' is an absence of control, then for this essay, the terms order and disorder will be respectively used under the premise of economic stability and instability.

There are many signs that indicate a pronounced shift from liberal to neoliberal practices since the 1970s. The neoliberal revolution was an attempt to move away from the post-war welfare state and liberation movements in an effort to restore the dominance of business interests across the world. During the 1970s and 1980s, the rejection of strong financial regulation was central to Thatcherism and Reaganism in the UK and US, signalling a pronounced shift to free market ideology. This changing global financial system, often referred to as the New Financial Architecture (NFA) saw de-regulation where tightly regulated commercial-bank based financial systems were replaced with lightly regulated capital-market based, globally-integrated financial systems. The deregulation of markets and the scale and proposal of privatisation of public institutions such as British Steel, British Petroleum, and most recently the Royal Mail, further exemplified this significant shift to neoliberal practices. The cutback in regulation, particularly within financial institutions, saw the rapid growth and expansion of corporations. Contemporary global financial institutions became so large that, in many ways, they independently provided a sense of order, evaluating their own risk so that there was little need for regulation or "liberal order' imposed by external agents. Such conglomerates were seen by society and governmental organisations as "too big to fail' and created a degree of security and certainty unaided by state support. As a result, to a certain extent, governments and regulatory authorities no longer calculated risk, instead relying on those risk

management methods of financial institutions themselves. Additionally, the abandonment of the Gold Standard and the movement away from the United States dollar as a reserve currency, saw a reliance on cities, such as London, as world hubs and regulators of international financial trade, further signalling the extent to which the global financial system had shifted from "liberal' to "neoliberal' systems, and possibly by extension, "liberal order' to "neoliberal disorder'.

However, whilst this unquestionably demonstrates a shift towards neoliberalism, this cannot be said to demonstrate a shift to "neoliberal disorder'. To determine this, the successes and failures of the new global financial system, or NFA, must be examined, and the key causes of failure which culminated in the recent financial crisis established. The occurrence of the 2007-08 financial crisis suggests that changes from liberal to neoliberal practices does indeed represent a shift from economic order to disorder, with additional failures of supposedly self-regulating markets, such as wars, also suggestive of economic deficiency. In the case of the global financial system, the shift towards neoliberalism saw the creation of incentives which encouraged financial firms to take excessive risks in pursuit of financial return. As financial institutions grew larger, more complex and took higher risks, government oversight and regulation became increasingly incoherent and misguided (Levin et al 2011) and institutions became increasingly successful in evading regulatory constraints (suggestive in itself that any possible form of "liberal order' was fake and not present). This was seen in many financial institutions, such as the Lehman Brothers, Royal Bank of Scotland Group and Lloyds Banking group. These flaws in institutions and regulatory practices, the resulting increase in financial fragility, and ultimately, the lack of "order', are cited as key causes of the recent financial crisis. The U.S. Senate`s Levin–&Coburn Report concludes that the crisis was the result of "high risk, complex financial products [such as sub-prime mortgages]& undisclosed conflicts of interest& the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street.' Clearly then, it is thus inferred and argued by many that the recent financial crash was a result of 'neoliberal disorder'.

There is, however, evidence to suggest that the recent problems of the global financial system cannot be described as such. Whilst neoliberal opponents argue that the recent financial crisis was a case of "neoliberal disorder', many natural market advocates disagree, arguing that neoliberalism only sees a "natural order' arise if markets are left alone, and that only through the distortion of financial decisions by government regulation will so called "neoliberal disorder' occur. Crotty, for example, contends that 'The most important deduction from modern financial markets theory is that markets always price risk correctly as long as governments do not distort financial decision making through regulation' (Crotty 2008). Whilst the global financial system did indeed experience a shift from a tightly regulated commercial-bank based system to a lightly regulated capital-market based system, regulation of the financial sector was still evident. This light regulation not only failed to prevent the excesses of the boom, but served to assure investors that the high yields and low risk spreads of the period were permanent, and that the risk of crisis was thus minimal (Crotty 2008). The certainty and security provided by such forms of regulation, typically seen in liberal systems, saw the global financial system grow disproportionately to the rest of the economy and arguably encouraged financial institutions to take unnecessary risks under the knowledge that such gambles were safe with the support of the state to fall back on. The current UK Conservative government, for example, who are supporters of neoliberal economic theory, portray, in many ways, the recent financial crisis of global capitalism as a crisis of such regulation and public sector spending, and thus an argument to move from policies grounded in liberal theory to policies advocated by neoliberal economic theory. It is thus hard to justify describing the recent financial crisis as "neoliberal disorder' when a cited cause of this crisis, public sector spending and the failure of regulation, is not representative of perfect neoliberal economic theory. In fact, it would be a sensible conclusion to consider the problems of the financial crisis not as neoliberal disorder but "liberal disorder', as state involvement, or state failure, represented a significant contributing factor to economic disorder. As a result, the global financial system has, arguably, not shifted far as it was liberal practices and the integration of financial systems and markets with associated regimes of light government regulation that led to the global financial crisis and the "disorder' being referred to.

If we examine the regulatory regime put in place in the aftermath of the Great Depression of the 1930s, experienced across America, Europe and other continents, it is clear that regulators succeeded in closely monitoring and controlling financial activity and placing tight government restrictions on the risks that banks could take. However, rising inflation, Third World debt and the Savings and Loan crisis, along with the increasing success of institutions to evade regulation and the gradual weakening in political commitment for a strong regulatory system undermined the success of this regime (Crotty 2008). This change was significant enough to see the radical deregulation of the global financial system and the emergence of the NFA, which, as demonstrated, grew into a system prevalent with disorder. As Alan Blinder, former vice chairman of the Federal Reserve described: 'It's a failure at a lot of levels. It's hard to find a piece of the system that actually worked well...' (Blinder 2008 cited Crotty 2008). However, whilst this "failure' is evident, whether it can be called 'neoliberal disorder' is contestable. Many saw the post-1970 changes to the financial system as a shift from liberal to neoliberal economic theory, which indeed it partly was, yet there remained, albeit light, forms of regulation and government interference with the financial system. This continued role of state intervention and regulatory bodies thus suggests that, despite a shift from liberal to neoliberal theory, this shift was not complete and elements of liberal economic theory, though diminished, remained. This partial shift created a false sense of security and certainty, whilst regulatory failure allowed the financial system to take unnecessary risks and chase large, high risk rewards through perverse incentives, ultimately facilitating the growth of a fragile global financial system. As a result, and as argued in this paper, such changes cannot be considered as a shift to perfect neoliberal economic theory, and by extension, a shift from "liberal order' to "neoliberal disorder'. Rather, the global financial system has shifted from "liberal order' to "liberal disorder', with regulatory failure representing a significant cause of the 2007-08 financial crisis. This argument is key as it represents a central justification used for the movement towards further contemporary neoliberalism - the privatisation of the Royal Mail and attempts to privatise NHS services exemplifies this. Whether this is the best scheme is open to interpretation, with some authors alternatively suggesting a serious program of regulatory reform designed to eliminate precisely those structural flaws that created the crisis (Crotty and Epstein 2008 cited Crotty 2008). Yet, right or not, this further shift towards neoliberalism, requires us, as Davison and Harris (2012) do, to examine the potential risks and dangers of 'The Neoliberal Crisis', considering what is at stake in present and future events and exploring and calling into question the foundational assumptions of neoliberal hegemony. Doing so, will allow an understanding of how to intervene and formulate effective and successful alternatives to true neoliberal disorder should it materialise.

References

•& Crotty, J. (2008) Structural Causes of the Global Financial Crisis: A Critical Assessment of the "New Financial Architecture', Economics Department Working Paper Series. Paper 16. University of Massachusetts - Amherst

•& Davison, S., Harris, K. (2012) The Neoliberal Crisis: A Soundings Collection, Lawrence Wishart Ltd.

•& Sheridan, E. (2015). http://news.forexlive.com/!/china-currency-intervention-drains-fx-reserves-in- july-20150809

•& Levin et al (2011) WALL STREET AND THE FINANCIAL CRISIS: Anatomy of a Financial Collapse. MAJORITY AND MINORITY STAFF REPORT PERMANENT

SUBCOMMITTEE ON INVESTIGATIONS UNITED STATES SENATE. http://

majeures.it-sudparis.eu/sif/docs/r37/2011_United_States_Senate-Anatomy-of- a-financial-collapse.pdf