Leonard Seabrooke is a professor at the International Center for Business and Politics of the Copenhagen Business School and also professor of international political economy and director of the Centre for the Study of Globalisation and Regionalisation at the University of Warwick. His publications include The Social Sources of Financial Power and US Power in International Finance, and he has coedited Everyday Politics of the World Economy (with John M. Hobson), Global Standards of Market Civilization (with Brett Bowden), and The Politics of Housing Booms and Busts (with Herman M. Schwartz). Professor Seabrooke is coeditor of the international journal the Review of International Political Economy. He was also the director of studies of the Warwick Commission on International Financial Reform.
As director of the Warwick University Centre for the Study of Globalisation and Regionalisation (CSGR), you were closely involved with the Warwick Commission on International Financial Reform. Can you tell us what effect that report has had since it was published in November 2009, and then summarize the main findings of the Commission?
The Commission and its report reflect the University of Warwick’s commitment to being involved in important international policy debates. We have a particular interest in highlighting the impact that rigorous scholarly analysis can have on policy thinking. The Commission’s chair was Avinash Persaud, who brought a bag of ideas and a bundle of energy to the project. The Commission comprised world-class political scientists and economists, who met at Warwick, Berlin, and Ottawa over nine months to discuss the political economy of international financial reform. I certainly feel that the argument we ended up with was very different from our opening positions—which was a sign that there was some real learning going on. Avi, I, and the commissioners are all proud of the findings published in the report and think that they highlight not only how some key problems should be addressed, but also that we have to recognize that financial systems are political—they are linked to the welfare system and the economy as a whole and are, therefore, of great political interest.
There is plenty of anecdotal evidence that the main findings of the report have found their way into mainstream thinking by regulators, politicians, and financial market practitioners. Given the nature of the report and its far-reaching conclusions, I hope that it will inform thinking long after the most acute effects of the crisis have passed. It bears fundamentally on the key question: What is a financial system for? In other words, who does it serve, and what is its purpose?
Financial markets are highly complex, and it is all too easy for well-intentioned initiatives aimed at implementing macro-prudential regulation to have unintended consequences. To quote from Lord Adair Turner’s introduction to the Commission’s report:
“[The Report’s] focus on the credit cycle as the key driver of financial and macro-economic instability is correct and crucial, and the Report rightly identifies the danger that apparently sophisticated risk management and regulatory techniques, seeking to draw inference from observed market prices for assets and risks, can themselves generate instability of asset prices, of maturity transformation, and of credit extension.”
Lord Turner (chair of the UK Financial Services Authority) goes on to praise the way that the report draws a strong distinction between macro-prudential and micro-prudential regulation. Armed with this distinction, the Commission argues that if the regulatory focus is all at the macro level it will miss the point, and that micro-prudential regulation is an equally essential part of the mix. We also argue strongly that the current focus on global regulation—understandably inspired by the desire to avoid regulatory arbitrage by financial service players (where they simply move their operations to the regulatory environment with the lightest touch)—misses the importance of local regulatory responsibilities and initiatives at the national level. The subtitle of our report is “In praise of unlevel playing fields,” and this side of the argument has yet to be fully taken on board in present regulatory discussions in the European Union and the United States.
One of the big questions for regulators to decide is whether to focus on instruments or on behaviors. My view, and that of the Commission, is that the right target is behaviors.