The Global Financial Crisis: Learning fromRegulatory and Governance Studies
CHRISTOPHER ARUP
Regulatory and governance studies help locate power and responsibility in the global financial crisis. I argue that corporate and state power worked together incenters like New York and London to shape regulation and that power was spread around the world. In the response to the crisis, responsibility for regulation will remain largely systems-based rather than centrally directed. However, thosesystems should be located in the culture of the elites, which are socially and spatially based, as much as in the economics of the markets or the cognition of the firms. And that responsibility has limits, so there should be greater democraticcontrol of finance and less dependence on finance capitalism for essential services,social security, and environment protection.
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The global financial crisis (GFC) has been devastating for many people andhas revealed the instability of the world economy. Yet it would seem the crisishas allowed some people to profit, and it appears likely that large risks willremain in the system (International Monetary Fund 2009). The GFChas raised many issues of concern, the greatest overall being the governabilityof the financial system. How might regulatory and governance studies helppolicymakers and citizens to think about that systemic issue?
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My forumpiece, drafted in the early stages of the GFC “meltdown,” pursues thisquestion and suggests where those studies might and might not assist.My premise is not a novel one; the prospects for reform of regulation canonly be assessed once we locate power and responsibility within the financialsystem. Corporate and state power often work together. Thus, we mustconsider whether the responses to the GFC recognize that configuration of power well enough to reform financial regulation. My main suggestion is thatthe cultures of the elites are as important to that reform as the economics of the markets. The piece has a rather pessimistic conclusion: if elite culturescannot be encouraged to reform, democracies should reduce dependenceon finance capitalism for housing, essential services, social security, andenvironmental sustainability.
Address correspondence to Chris Arup, Department of Business Law, Faculty of Businessand Economics, Monash University, PO Box 197, Caulfield East, Victoria, Australia 3145.Telephone:
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61 3 9903 1026; E-mail: christopher.arup@buseco.monash.edu.au.LAW & POLICY, Vol. 32, No. 3, July 2010 ISSN 0265–8240© 2010 The AuthorJournal compilation © 2010 The University of Denver/Colorado Seminary
I. LOCATING POWER
In this first section, I rehearse ways to think about the governance of powerto regulate financial systems. Recent theories of regulation and governancecan help us to locate power among corporations and states. I take up thetools of this theory, first with regard to the experience of regulation in thefinancial center of New York and second with regard to the means by whichthe power of this center was spread through the world.
A. THE RELEVANCE OF REGULATORY AND NEW GOVERNANCE STUDIES
If regulation is the capacity to influence the actions of others (Baldwin andCave 1999), then many actors may be said to be involved in regulation of the financial system. Similarly, many different people are responsible forthe global financial crisis, including bankers, fund managers, investors,sellers, advisors, householders, consumers, economists, journalists, politi-cians, and government officials. Regulatory studies has been especiallyenlightening in showing how private actors regulate along with public agen-cies, mapping all the different directions in which regulation operates andcharacterizing the variety of forms regulation assumes (Picciotto 2008;Scott 2009).There is much merit in theories that accommodate such a multiplicity of actors and relations. After all, our first task is to comprehend. Yet this senseof pluralism does not necessarily tell us a lot about the distribution of poweramong the relevant actors and relationships. When the framework is accom-modating like this, it is tempting to think that power must be decentered andtransferable. If responsibility is to be encouraged, policymakers must graspthis complexity and fluidity of power in financial markets, so that they canfocus and apply pressure where it is most productive to do so—where itcounts the most (Braithwaite 2009). We should avoid conspiracy theories, yetstill be prepared to hold people responsible for their actions, nominally at thevery least.In new governance theory (King 2008), the concept of the “node” assistsunderstanding of how power is shaped and exercised within key systems.The structure of nodes is important; the way they are set up is likely tofavor certain actors (Shaffer 2004). Yet the theory is dynamic and progres-sive in its expectations. Influence is attributed to agency and action—thepower of ideas and conversations—so outcomes can be altered and evenstructures and cultures transformed (Sell 2003). A crisis might be a catalystfor change.I believe this insight is crucial to how we assess the potential for reform of the financial system. Of special relevance is the notion of metaregulation—that those within the system might be given encouragement and guidance tothink better of the consequences of their actions for others (see Parker 2002).If regulation is to further social responsibility, it must be smart regulation364
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© 2010 The AuthorJournal compilation © 2010 The University of Denver/Colorado Seminary
that employs soft responsive and reflexive techniques to enlist the supportof those with power. The combination of corporate and state power is notnecessarily a negative.Yet the query should be raised: does governance or systems-based regula-tion really offer such potential (Santos and Rodriguez-Garavito 2005)? Somepeople seem habitually on the receiving end of regulation, while others enjoythe benefits of legal freedoms and entitlements. It is possible that those withpower do not desire to take responsibility for regulation and contribute to itscoordination, except perhaps temporarily when they overreach and endangertheir own interests. While destabilizing, a crisis may be the opportunity forthem to profit from others (Harvey 2006). At first blush, the GFC seems to belike that.
B. CORPORATE AND STATE POWER IN THE UNITED STATES
How was power organized in the period leading up to the GFC, particularlyin the financial center of New York? This subsection suggests that corporateand state power were concentrated together. Contrary to what many com-mentators suggest, neoliberal policies did not lead to deregulation, reductionof state power, and the dispersal of corporate power. Instead, corporate andstate power combined in financial centers such as New York and was thenprojected outwards to other parts of the world. Philosophies were influentialhere, such as the efficient markets hypothesis, but also influential were theinterests of powerful market players who benefited from the changes in theconfiguration of power on a global scale.The dominant account of the GFC portrays it as the result of deregulation,a largely Anglo-American governance phenomenon in which the staterelaxed its controls on the activities of the financiers and the supervision of their trades. Now the crisis raises the prospects for reregulation. Provoca-tively, Panitch and Konings (2009) describe this as a myth—part of whatSlavoj Zizek (2009) calls the battle for interpretation of events. Neoliberalcommentators say that deregulation just went a little too far and that now asympathetic fine tuning will eradicate the excesses and correct the failures of finance.The situation was always more complicated than this dominant accountallows (see Pistor and Milhaupt 2008). Among their virtues, regulatory andnew governance studies downplay the demarcation between public andprivate in characterizing how these systems work (Scott 2009). Theory re-cognizes that law is involved in constructing and legitimating markets(Bordieu 2006), not just in containing them. Markets are not “presocial.”They are not a natural phenomenon in which law and other kinds of regu-lation simply interfere. This is especially true of financial and other “paper”markets (Huault and Le-Montagner 2009).Granted, there was something of a standoff between corporation and statein the strategies that the banks employed to avoid prudential requirements.
Arup THE GLOBAL FINANCIAL CRISIS
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© 2010 The AuthorJournal compilation © 2010 The University of Denver/Colorado Seminary
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