Financial deregulation and the Dollar-Wall Street regime PDF Print E-mail
Wednesday, 24 February 2010 22:44

Surely, in an open democracy, government should be solely responsible to the citizenry that elects them. So why was it, then, that the Key government formulated a budget with an overarching deference to international finance?

In the weeks leading up to the Key National government’s first Budget, the interests of international credit ratings agencies were a prominent feature of the media discussion. Senior public officials and politicians met with international ratings agency Standard and Poors to convince it the proposed budget met the company’s preferences.  Why is this? 
Fundamentally, it was because ever since the 1984 Lange Labour government adopted a radical program of financial deregulation and neoliberal structural adjustment (so-called “free market” policies), New Zealand has been extensively integrated into the US-dominated global financial system. This system, which has been extensively analysed by critical political economists around the world, has come to be referred to as the “Dollar-Wall Street Regime” (DWSR).
In the early 1970s, the oil shocks, global recession, and an enduring economic crisis led to the breakdown of the “Bretton Woods” system, which had governed post-war international monetary relations. It was replaced by the Dollar-Wall Street regime. As Professor Peter Gowan showed in his influential work "The Global Gamble, under the Dollar Wall-Street Regime", the US was given autocratic power over international monetary affairs; US-dominated financial markets are now at the centre of macroeconomic management across the globe.

The dollar standard

As its name suggests, the Dollar-Wall Street regime consists of two main pillars. The first of these was the adoption of the US dollar as the only standard in international monetary relations. This was done in 1971 by cutting of the official link between the dollar and the value of gold that prevailed under the Bretton Woods system. 
The continued centrality of the US dollar was shown by the latest International Bank of Settlements Triennial Central Bank Survey of foreign exchange and derivatives market activity. While perhaps declining slowly during the mid-2000s, “the US dollar continues to be the dominant currency in foreign exchange markets, being on one side of around 86% of all foreign exchange transactions in April 2007.” 
As Gowan showed, the significance of the dollar standard in international financial relations is that it frees the US from the balance of payments constraints faced by all other states. The US alone can shift the value of its currency without drastic economic consequences and “substitute the sale of Treasury bills for a domestic pool of foreign exchange reserves and run its economy without large reserves.” 

The second pillar of the Dollar Wall-Street Regime is that private financial markets (like Wall Street) have become the primary site for international financial relations. This shift was accomplished through two key moves undertaken by the US during the early 1970s. The first move was the pumping of a vast quantity of petrodollars accumulated by Arab oil producers as a result of the 1973 world oil crisis through New York investment banks. 

Following the quadrupling of world oil prices in 1973, a massive new body of liquid cash, totalling almost US$50 billion during the period from 1974 to 1976, fell into the hands of a small number of oil producers (especially Saudi Arabia). Despite opposition from Japan and Western Europe, these funds were transferred to capital-hungry developing economies via Wall Street. This moved US-dominated financial markets into the centre of global financial relations because for finance capital, more so than for any other fraction of capital, size is the key determining factor in market competition. 
The second move was the ending of the so-called financial ‘repression’ of Bretton Woods through the abolition of capital and exchange controls. From this point on, private markets largely took over the work previously done by government banks. The bulk of the world’s domestic financial systems and exchange rates became vulnerable to Wall Street, with the stability of a nation’s currency’s stability resting on its ‘creditworthiness’ in international financial markets. 
Two pillars
These two pillars of the Dollar-Wall St regime are mutually reinforcing. The primacy of the dollar pushes states and corporations towards US-dominated banks for their financial needs. Because most important commodities are bought and sold in the dollar, most players will try to hold most of their foreign exchange reserves in dollars and finance their operations though Wall Street or City of London operators. Holding substantial dollar reserves to hedge against foreign exchange instability is made doubly necessary by the floating foreign exchange rates that have become normal government practice. This pressure is shown by the expansion of US dollar foreign exchange reserves mapped out in the table.
Together these factors, deriving from the dollar standard, have substantially expanded both the volume and velocity of capital turnover within the core international private financial markets, reinforcing again the competitive advantage of private finance markets. The dominance of Wall Street is reinforced by the dominance of the dollar because its scope and resources render it a safer and more competitive market. 

Market madness

Under the Dollar-Wall St regime, foreign exchange market volatility has increased dramatically. New Zealand’s experience has been no exception to this broader global trend. That volatility may be due to market madness if former World Bank chief economist Joseph Stiglitz is right. He has argued that the “notion that markets are rational has been called into question.” Instead, he says, “markets may suffer from irrational exuberance as well as irrational pessimism, and the swings between the two can be rapid.” 
Foreign exchange market volatility is a problem for the “floating dollar” regime of all NZ governments since the Lange government. Volatility undermines economic stability. A rise in the NZ dollar undermines the export sector and falls in the NZ dollar lead to capital outflows and higher domestic interest rates. Worse for NZ, as Reserve Bank economists Nils Bjorksten and Anne-Marie Brook argue, “the more important external trade is to an economy”, the greater the likely impact of such developments. So, as with other relatively small, open, developed economies with a moderately large tradables sector, eg Iceland, Norway, Australia and Canada, the costs of a floating dollar are high.  

Belt-tightening

The foreign exchange volatility of the Dollar-Wall St regime demands that the Key government entrench the “belt-tightening” approach to fiscal policy formulation. An advantage of international finance markets was supposed to be that international borrowing by a government would not increase domestic interest rates. But global financial markets “tend to impose a risk premium on borrowing countries.”  Governments perceived to be in debt face markets seeking to reduce their exposure to risk, resulting in rising interest rates and a falling foreign exchange rate. That’s why the Key government made managing debt as a percentage of GDP the cornerstone of its fiscal strategy. 
Budget 2009 reflects perfectly the way that New Zealand’s exposure to a volatile financial market dominated by US trading banks demands ongoing commitment to neoliberal economics. This means cuts to education, health and social services and more demands on the time and energy of working people.

Byron G 

Further reading
 P. Gowan, 1999. The Global Gamble: Washington’s Faustian Bid for World Dominance. London; New York: Verso.
J. Stiglitz 2001, “Monetary and Exchange Rate Policy in Small Open Economies: The Case of Iceland”, Central Bank of Iceland Working Papers, no. 15 (November), 2.
N. Bjorksten and A.M. Brook 2002. “Exchange Rate Strategies for Small Open Developed Economies such as New Zealand”, Reserve Bank of New Zealand Bulletin, Vol. 65, No. 1 (March 2002).
D. Held et al, 1999. Global Transformations: Politics, Economics and Culture (Cambridge: Polity Press).