http://finance.news.com.au/frameset.htm?/content/4263853.htm Vigilantes of global capital By New York correspondent STEPHEN ROMEI 23nov99 IT's election day and John Howard or Bill Clinton or Tony Blair for that matter faces the voters not with a tasty tax cut but rather a plan to attract more foreign capital. No, it's not a scene from the political version of Funniest Home Videos, it's a free market theorist's vision of the immediate future as the world enters a "golden age of capitalism". It goes to the heart of an incipient debate in the US: how will politics, which is fundamentally domestic, continue to manage an economy that is increasingly global? How should Western politicians react when their nations are hurt by the more rampant forces of global capitalism? When hedge funds attack their currency, or when a "megabank" goes bust? Will we witness a reactionary shift to re-regulation? That would be unwise, says Jerry Jordan, a former adviser to free markets Ubermensch Ronald Reagan, who heads the Federal Reserve Bank of Cleveland. "Most people are familiar with the idea that governments decide what markets may or may not do. Now what we are seeing is markets deciding what government may or may not do," he told The Australian. "In the early 80s, we heard references to bond market vigilantes. Today, most countries will, at some time, face capital market vigilantes, and their politicians will find their policies have to compete on an international basis. "Global market participants have become a class of stateless voters, roaming around the world economies seeking the best wealth-creating institutions. They represent an irresistible force." Mr Jordan will expand on his views in Sydney tomorrow, when he delivers the annual Bonython lecture at the Centre for Independent Studies. He says politicians are being "pulled in both directions" in an ongoing global plebiscite on wealth creation versus wealth-sharing. "There is a core tension between the interests of market participants and the incentives of local politicians to redistribute wealth, rather than create it," he says. "In the end, the forces of wealth creation will dominate those of wealth distribution. The adjustment process has not been, and will not be, a smooth one." He sees this process as one of no pain, no gain. He points to last year's Asian financial crisis as a good example of how adverse judgments of markets started a process that leads to stronger financial institutions. He argues the so-called "currency crises" in South-East Asia in reality exposed the serious deficiencies of the nations' domestic financial markets, particularly banking systems. As a result, another ideal long cherished by domestic politicians the government guarantee was shown to be unsustainable. It's interesting to note that in the analysis of the US's sweeping banking reforms allowing banks, insurers and stockbrokers to merge few suggest bank-like guarantees be extended to other financial institutions. "It is becoming apparent that governmental promises, whether in the form of pegged exchange rates or in the form of deposit, loan or investment guarantees, are on the endangered species list," Mr Jordan said. Warming to this theme, he argued that the existence of many national central banks and national currencies, maintained in the name of "monetary sovereignty" was also difficult to justify. "While there are a great many currencies, there are very few standards of value," he said. "The birth of the euro and talk of 'dollarisation' reflect a growing acceptance that most national currencies will not become successful, independent standards of value." Mr Jordan said the incredible wealth creation of the past decade in the US meant ordinary people, through mutual funds and retirement plans, understood the benefits of a golden age of capitalism. So what happens if it turns to dross? How will a generation of investors who know nothing but a bull market react if it all comes crashing down? That depends, Mr Jordan said, on two factors: the cause of the crash and the political policy response to it. Sounds like the politicians are on a hiding to nothing. Jerry Jordan will deliver the John Bonython lecture tomorrow night at the Centre for Independent Studies in Sydney. Inquiries to (02) 9438 4377 -- Leftlink - Australia's Broad Left Mailing List mailto:[EMAIL PROTECTED] http://www.alexia.net.au/~www/mhutton/index.html Sponsored by Melbourne's New International Bookshop Subscribe: mailto:[EMAIL PROTECTED]?Body=subscribe%20leftlink Unsubscribe: mailto:[EMAIL PROTECTED]?Body=unsubscribe%20leftlink
