Yesterday, Lori Wallach (of Public Citizen’s Global Trade Watch) and Simon Johnson (ex-IMF chief economist, now MIT prof and blogger at The Baseline Scenario) both testified before the House Foreign Affairs committee on "U.S. foreign economic policy in the global crisis."

Johnson for the most part conveniently neglected to mention the IMF’s contribution to the current crisis, and Wallach at times resorted to crass nationalism to get the Representative’s attention. But in the grand scheme of things, I thought both of them did well. Wallach in particular was, in my opinion, excellent. And it was fascinating to see the two of them, representing in my mind two diametrically opposed organizations – Public Citizen and the IMF, sitting at the same table and while not agreeing on everything, trying to get members of the committee to face some measure of reality.

Last week I transcribed some of Stiglitz’s remarks at the Nation Books event, "Meltdown: The Economic Collapse and a People’s Plan for Recovery," on loose monetary policies, one of what he described as the two main areas of discussion on the causes of the crisis, the other being lax regulation. And I’ve written a couple of diaries on the history of some of the domestic deregulation (Glass-Steagall and OTC derivatives), but the role of global financial deregulation is one I haven’t seen discussed much. Wallach’s remarks on this were so good, I thought I’d transcribe some of them (and quote from her written statement) to highlight the issue.

From Wallach’s opening statement (my transcription):

The devastation being caused by the global economic crisis to the lives and livelihoods of millions of people around the world is not merely the result of bad practices by a handful of mega financial service firms, but the foreseeable outcome of one particular system of global governance or perhaps more accurately, anti-governance.

Over the last decades the United States foreign economic policy has been systematically the implementation world-wide of a package of deregulation, liberalization, privatization and new limits on government policies space often dubbed the Washington consensus or the neoliberal agenda. "Trade" agreements, such as those enforced by the World Trade Organization and international agencies such as the IMF and the World Bank have been the delivery mechanism for this global experiment. I am no fan of tariffs, but I am a fan of policy space. The issue here is not trade rules, but rather the other rules to regulate finance and other elements of our economy.

The current regime of deregulation was put into place with intentionality and now the evidence is pretty clear that this system is a failure and it needs to be replaced. Thus, for instance, while the US has a responsibility to help those countries that are not responsible for the crisis get out of it, more funds for the IMF must be, for instance, conditions on changes in that agency’s rules: The rights for other countries to even stimulate their economies versus the IMF’s typical budget austerity. The ability to do currency controls to avoid raids on currency. The ability, for instance, to regulate foreign investors.

Congress in increasingly becoming aware of the overreach of so-call trade agreements when you are being told that auto industry rescues, buy american conditions in stimulus packages, the TARP system unless it’s made available to foreign banks are all violations of trade agreements. Some of this is true, some is exaggerated. In the body of my testimony, which I request be put into the record, I go into detail about one little known aspect of the current failed economic governance system. That is the radical financial service deregulation program of the WTO’s Financial Service Agreement. That aspect of the WTO which has gotten very little attention, but is at the core of the problem, exports worldwide the extreme financial service deregulation that triggered this crisis. And, more urgently, it imposes barriers on the re-regulation of financial services domestically and globally that many agree is key to remedy the crisis.

Agreeing to review and re-negotiate these WTO financial deregulation terms must be a key element of the G20 process aimed at addressing the crisis. Simply putting more stimulus money into operation under the current rules is not the solution. But even as Congress and the G20 and other international configurations are struggling to figure out to re-regulate finance, many of the same people in governments are currently pushing for expansion of the WTO financial service deregulation regime. For instance, the G20 summit in DC in November of last year was supposedly convened to lay out the coordinated response and re-regulation, instead the communique call for completion of the WTO’s Doha round. Yes, the Doha round has one of it’s three pillars further financial service deregulation. Let me repeat, the current Doha round agenda has as one of its three main elements, more financial service deregulation. Calling for completion of that agenda has no place in the G20 agenda. Again, I am not discussing passing tariffs, I am not discussing trade, but rather undoing a system that limits Congress’s and other legislators policy space to put into place the array of policies needed.

Some details from Wallach’s written statement:

… the WTO’s Financial Service Agreement explicitly limits domestic regulation of banks, securities and insurance firms by the United States and over 100 other nations. While many in Congress fume about foreign banks, such as UBS, obtaining U.S. tax-payer bailout funds while simultaneously refusing to reveal information about possible tax evasion by its depositors, few realize that the WTO’s FSA sets an array of limits on Congress’ regulatory authority over foreign banks operating here. [likewise, here and below, WTO's FSA limits regulations other country's governments can put on American banks operating within their jurisdiction - selise].

Yet, even as the evidence of systemic failure has become overwhelming with the current crisis thoroughly indicting the so-called neoliberal model that wrought these outcomes, a version of global cognitive dissonance seems to have taken hold. That is to say that, while the cries for re-regulation are now issuing forth from many previously unimaginable quarters, many policymakers and scholars have not come to terms with the systemic nature of the needed changes. Thus, many very smart people are clinging to totally inconsistent views: for instance, we must dramatically re-regulate finance to save the world, but we must also finish the WTO Doha Round (which would impose further financial deregulation) to save the world because “free trade” is good.

The WTO, and regional pacts such as NAFTA, the Central America Free Trade Agreement (CAFTA) and various other FTAs based on the NAFTA-CAFTA model exploded the past boundaries of trade agreements. Rather than focusing on traditional matters such as tariff cuts and opening quotas, these pacts require signatory countries to adopt an array of non-trade policies. These include limiting service-sector regulation including financial services, providing new foreign investor rights and privileges that incentivize and protect the relocation of production to low-wage venues, constraining domestic import safety and the inspection standards that may be applied, and even limiting how domestic tax dollars may be spent in procurement. Rather than trade agreements, these pacts were a global governance system that dramatically shifted the balance of power away from government oversight of the economy for the public interest.

One cannot overstate the limiting implications of the GATS market-access rules for vital domestic regulatory space. For example, these obligations limit the ability of countries to require “firewalls” between different aspects of financial service businesses, for instance by forbidding consumer banks to gamble with our savings by simultaneously operating investment banking or securities businesses. By making market-access commitments in various banking services, the Clinton administration created a conflict between U.S. WTO obligations and existing U.S. law – namely the Glass-Steagall Act of 1933, which forbid bank-holding companies from operating other financial services. The law had been created so that trouble in one sector would not contaminate the entire system and trigger the sort of financial collapse that occurred during the Great Depression. This firewall policy, which applied to both domestic and foreign banks, had the effect of preventing foreign banks that combined commercial and investment banking services from entering the U.S. market. The administration recognized this conflict and indeed made a formal commitment listed in the U.S. GATS schedule to support changes to Glass-Steagall.

The United States and other rich countries also committed to even greater deregulation and liberalization by signing an additional WTO agreement, called the “Understanding on Commitments in Financial Services.” When all was said and done, the United States and the OECD countries were largely bound to extremely broad WTO obligations to stay out of the regulation of “banking,” “insurance,” and “other financial services.” The United States and OECD countries also agreed to a “standstill provision” which requires that “[a]ny conditions, limitations and qualifications to the commitments [made]… shall be limited to existing non-conforming measures.” That is to say that these countries have agreed not to create new regulations (or reverse liberalization) for the list of financial services each signatory bound to comply with WTO rules. Translated out of GATSese, this means that, in the countries responsible for regulating many of the world’s largest economies, legislators and regulators face specific limits on what they and scholars deem necessary: the creation of new financial service regulations.

The GATS’ philosophy runs directly counter to the prevailing call for regulation. For instance, one provision calls for signatories to agree to eliminate domestic financial service regulatory policies that meet GATS rules, but that may still “adversely affect the ability of financial service suppliers of any other (WTO) Member to operate, compete, or enter” the market. Further, these countries agreed to ensure that foreign financial service suppliers are permitted “to offer in its territory any new financial service,” a direct conflict with the various proposals to limit various risky investment instruments, such as certain types of derivatives.

GATS and the FSA provide powerful incentives for global harmonization of banking, insurance, securities and accounting standards. Harmonization is not as benign as the term implies. International standard-setting moves decision-making out of the hands of state and federal government and into international arenas that are less accessible, accountable, or responsive to the citizens of various nations who will live with the results. Rather than raising standards, international harmonization can precipitate a “rush to the bottom,” resulting in lower oversight standards and weaker prudential and investor safeguards. Rather than creating a minimum threshold that all countries must meet, the WTO deems its international standards to be a ceiling that countries may not exceed. GATS also empowers private-sector international banking, insurance, securities, and accounting standards to be the yardstick that WTO dispute-resolution panels will use to judge whether a nation’s domestic standards are more trade restrictive than necessary.13 Since it is difficult to defend domestic standards that exceed international standards, the GATS and FSA policy-harmonization requirements often serve as a downward ratchet.

Glass-Steagall like firewalls between banks and other financial institutions, regulation of some types of derivatives, accounting standards — that’s right, while the Clinton administration was busy, with the help of Congress, deregulating our financial industry – they were doing the same thing, on steroids, globally.

…………………………………………………………………

Notes:

1) Public Citizen’s Blog on Globalization and Trade: Eyes on TRADE. I’m not that familiar with Lori Wallach, but she has also written on the WTO’s involvement constraining regulation on on food safety, product safety, public health, environmental standards, anti-monopoly and anti-competitive business practices generally and enforcement of harmful IP law.

2) For background on NAFTA’s chapter 11, see Bill Moyer’s documentary, Trading Democracy (more from the National Security Archives.)

3) A little background from Frontline’s 2002 program, Commanding Heights, interview with Lori Wallach (my bold):

INTERVIEWER: Where did the anti-globalization protest movement begin? It seems that it exploded in Seattle in the popular consciousness.

LORI WALLACH: For many people in the U.S. and perhaps Europe the real wakeup call about the WTO was Seattle. But the protest in Seattle was the representation, maybe the coming-out party of a movement that had been building for almost 10 years, a movement that was much more visible in many of the poor countries around the world, [where there were] massive million-people rallies against these same policies imposed by the other legs of the globalization juggernaut, the IMF and World Bank. So for many rich-country television watchers, suddenly it was "Oh my gosh, I was wondering what happened to our Endangered Species Act thing on turtles." That thing called WTO got it, according to all those people walking in the street in their turtle costumes.

That’s how it happened in the U.S. and Europe. But in the poor countries, people were really turned on to it already.

4) For the "no one could have predicted" files, more from Frontline’s 2002 program, Commanding Heights, interview with Lori Wallach:

INTERVIEWER: Do you think the current rules and current system, not just for trade but global finance, are stable?

LORI WALLACH: Ha! A lot of people are very surprised at the fact that in so many countries, there are these very deep grassroots-based coalitions criticizing the status quo of corporate globalization. I think a lot of what that is about is that people, as well as having one or two experiences of something directly that the system did that they hated, they also in their gut sense the instability of it. They get indicators of it, [and] they sense it. They get indicators like big meltdowns, like the financial crisis in Asia. But they also get indicators of things like the local bank which just keeps getting merged and renamed, and your [credit] card does work and then it doesn’t work and the name keeps changing every three weeks. And then the grocery store is [owned by] the guy you’ve known forever, but all of a sudden this Dutch company is that company, and now your cereal isn’t there anymore. Some of it is just change, but a lot of it is also literally the instability where at any given moment everything you expect to be reliable is ripped up and it’s gone.

Combine that with the real financial cataclysms like the Asian meltdown. A lot of people in their everyday life are seeing this sort of out-of-control scenario very personally; it’s out of their personal control. To some degree, … in the way that some of these instances of particular WTO attacks on laws or policies people really intimately enjoyed or knew about, I think that the financial crisis in Asia was also the bursting of the second balloon. The first balloon was the no downsides: Trade is good; it’s inevitable; it’s going to happen. The other balloon was something like: "Oh, how wonderful! Technology has just created this seamless thing where some guy in a boat in the middle of Bombay can click his blah-blah and ta-da!" All of sudden people realized, "Holy beans! No one’s in charge." I mean, we have technology like airplanes, but with this as a technology there’re no air-traffic controllers. You wouldn’t ever just have planes, two trillion of them a day, which is how many hard investment dollars float around in currency exchanges, you wouldn’t have two trillion planes floating with no direction.

We have $2 trillion in currency exchanges going around every single day at the click of a computer, with no speed bumps, no traffic controls, and no lanes or rules of the road. So suddenly boom! — things hit each other. Well, of course they hit each other. It’s like a plane crash. The technology’s there, [but] it’s totally unregulated. Now suddenly someone’s stock for their teeny little pension from whatever it was they did, because it was based in some lunatic fund that someone decided to speculate on in Indonesia which was related to some guy who traded the currency over here, and some other guy sneezed and accidentally hit his computer button, and wiped out that currency. I’m only being partially sarcastic, but just suddenly you come home and your pension got cut in half. That was the second warning, when that happened to people. First GATTzilla ate Flipper, and then some computer ate your pension.

5) Only a very little off-topic: For those who’ve wondered why I’ve been saying for years how much I despise Bill Clinton, here is another bit from Lori Wallach’s Frontline interview that does a good job of summarizing one of the reasons: Clinton and the Shift in the Democratic Agenda.