Chapter One: Economic Globalization

XII. Disintermediation: The Growth Of International Financial Markets

The mere fact of the existence of the Bretton Woods institutions testifies to the mid-20th century view of the financial sector as being a department of government. This statist political doctrine was most clearly evidenced in the Soviet Union, but also underlay the behaviour of western nation states. When countries didn't actually nationalize banks, insurance companies and other types of financial institution, they nonetheless wrapped them up in a cocoon of regulation, almost entirely behind national boundaries.

Who now remembers capital controls in Europe? But in the 1960s, if you wanted to take money from, say, France, to England, you had to put it in your shoes. Would any young student of economics in 2010 believe without evidence that in 1960 it was against the law to own gold in most of the countries of Europe? One of the really good things the European Union has done, with the help of the World Trade Organization, is to open capital markets. The explosion of world trade in the last 60 years (see Chapter 6) is due in no small measure to capital markets liberalization.

An incidental consequence of the financial and fiscal straitjacket imposed by countries on their citizens and their companies in the first half of the 20th century was the creation of 'offshore'. Switzerland grew fat on the savings of French and Germans which they hastened to transport across their national borders to the care of a regime that wasn't going to steal it from them. Jersey, Bermuda and other jurisdictions performed a similar service for the UK. The phenomenon of 'offshore' is explored in greater depth in Chapter 4 (Fiscal Globalization), but it needs to be mentioned here as one of the instruments of financial liberalization. While it's true that economic liberals came into ascendancy in the 1970s, and influenced the behaviour of many governments in the 1980s, leading finally to the death of the Soviet Union and other obnoxious regimes, their task was made much easier by the existence of an alternative financial system that was already feared by rich country governments. Feared indeed to such an extent that in the 1990s the left-leaning finance ministers of the OECD launched an all-out attack on 'offshore' – still unsuccessful as of the time of writing – in defence of their ability to tax the living daylights out of citizens and companies alike.

The amazing growth of global (meaning, not national) financial markets is a key aspect of the march away from national economies towards one global economy, but is not always seen in those terms.

Markers on the road include:

By the end of the 20th century, public (ie, international) markets had become more powerful than all but the very largest nation states, financially speaking, and even the United States is effectively powerless to control the value of its own currency.

The internationalization of financial markets has been accompanied by a process of disintermediation and the growth of asset securitization. This is a sentence of rather big, ugly words, but all it means is the imposition of market (trading) disciplines, including transparency and rule-based governance on financial transactions. Whereas for most of the last 100 years, an investor needed to use a financial intermediary (often called a broker, and usually with a nationally-protected monopoly) to make investments into a usually opaque asset-owning fraternity (a recipe for fraud and profiteering), increasingly an investor now has direct access (often through the Internet) to disinterested third-party information about proposed investment targets, and can use transparent market processes actually to purchase assets. Perhaps this sounds ordinary in 2015, but 50 years ago it was anything but ordinary.

It can be difficult to discern the process of financial globalization at work amid the torrents of advertising, mountains of regulation and bewildering variety of financial products that nowadays assail us. But the end results can be confidently predicted: all providers of publicly-offered financial assets (banks, insurers, listed companies etc) will be regulated under global codes (even if these are delivered through national agencies); the assets themselves will be offered to buyers (investors) through transparent trading exchanges, most or all of which will eventually be electronic; any asset for sale will be described in detail and subject to rating by third party assesors; and of course the assets themselves will be held by independent custodians in de-materialized form.

This structure minimizes the chances of fraud or disinformation, and gives both the widest possible access to assets for investors and by the same token the widest possible distribution to offerors. Most assets will likely be offered in securitized form by investment funds, with direct access to underlying assets available only to 'insiders', who are presumed not to need protection from themselves.

This is not far from being the case already for 'widows and orphans' products such as mutual funds (unit trusts) and shares offered on bigger stock exchanges. The result is to reduce transaction risk and cost to the absolute minimum (in an ideal market both would be zero), leaving asset risk isolated and as highly visible as possible so that the investor can make a fully informed judgement.

The regulatory separation between 'ordinary' (public) and 'insider' (qualified investor) transactions already exists in respect of many types of financial asset. It may be that as regulatory demands proliferate on providers of public assets, many asset-owners will choose to offer their wares only through securitized channels or direct to insiders. The overhead involved in making public offers will simply be too great for all but the largest providers. On the other hand, the Internet makes direct communication with investors easier, so it is not completely clear what balance will emerge.