The Hypocrisy of International Financial Market Regulation

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Money and financial instruments are increasingly being the most mobile aspects of the international economy with the unending breakthroughs in information technology. The transfer of capital from one country to another could be done seamlessly with a simple click of the mouse. Unlike that of international trade of goods which still largely face barriers of tariffs and quotas, the international financial market is marked by almost absolute immunity from domestic efforts of control. As savings of countries continue to outgrow their opportunities for investments, international financial markets will grow at the same pace. States, whether they like it or not, are integrated into one another through capital. While the transfer of capital from savings-rich developed economies into promising emerging markets provide mutual benefit, this is not without its consequences. In fact, critics point out that the benefits of the international financial system will not make up for the global pains it creates. These pains are in the form of speculative bubbles. When exogenous factors hype up an investment opportunity, capital is logically directed towards it in the hopes for big profits. Everyone eventually joins in on the mania. However, the sudden and dramatic upsurge in credit and value of that investment creates insecurity. The big investors then are the first to lock in profits and go, creating a downward frenzy, and thus the bursting of the bubble. Speculative bubbles have been the sources of financial crises that have a dire global reach. Countries, led by the United States, seek to check this tendency through using global functional institutions like the International Monetary Fund to inject capital into struggling economies in exchange for more sound domestic economic policies to prevent a global domino effect of the domestic crisis. However, the assurance given by the IMF to bail countries out in times of crisis create a moral hazard, and thus counter-productively encourage reckless behavior.

Some economists have argued to abolish the IMF to avoid moral hazard inducement while others have pushed for the strengthening of the institution. These solutions, while valid, are largely politically insensitive. Economists have the tendency to view institutions, more so global ones, merely in functional terms. But fact is, global institutions operate hardly on functional terms; they are largely politically motivated and instruments of the international regime dominant states have big stakes in. Economists, dominantly Western ones, insist that unregulated movement of capital is still what is best for everyone, even after a number of financial crises! Why? Simply because it is profitable for the states they represent. When states put up capital controls, this raises the costs of transactions and thus reduce profit. It is a crime for economists to even consider domestic capital controls as a solution! Instead, they seek to use the IMF to allow them to pursue their greed freely, and then save them when problems start to arise. It is easy to be mislead that because most of the countries that are bailed out are the developing ones, developed countries are but victims. However, the reason for these crises is the unregulated influx of foreign capital that overheats the domestic economy eventually leading it to burst. Rich states make problems in other states and bail them out so they could continue their greed! It may as well be that the solution to this global problem is not global regulation, but domestic regulation. States must be allowed to impose strategic capital controls without sanction so as to be able to direct investment away from speculative, short-term ones into more stable quality investments. Why should foreign capital determine how much and the direction of investments when domestic governments and economic managers know more about their economy? Much of global problems and crises, whether in the economy or in security, are caused by hegemonic states acting in their interests without regard for others. The problem, as it becomes apparent, is the constraining of smaller states to domestically determine and globally pursue their interests; and thus consequently check hegemonic powers. The world, in fact, may only be saved by the little guys.

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