Treasure Islands spent a bit of time looking at the last big era of ‘financial repression’ for the roughly quarter century following the Second World War – tight controls over cross-border flows of capital, high taxes, tightly regulated domestic financial sectors, and more. It was a period that was largely free of financial crises and which saw countries around the world enjoy extremely high and broad-based growth. It was an approach summarised by John Maynard Keynes’ famous call:
“Let finance be primarily national”
Now Bloomberg is carrying a comment article by Carmen Reinhart, a co-author of one of the most respected modern historical accounts on financial crises. She sees a new era of ‘financial repression’ emerging following the emergence of the global financial and economic crisis – undoubtedly less stringently applied than during that ‘golden age’ period of high growth, but still important nevertheless. She notes what seems to be going on:
- negative real interest rates — that is, interest rates that yield less than the rate of inflation) that are equivalent to a tax on bondholders and savers.
- Emerging markets increasingly looking to financial regulatory measures to keep international capital “out”, involving increased regulation and/or restrictions on international financial flows and, more broadly, the return to more tightly regulated domestic financial environments. (See what Brazil is doing, for instance.)
- Advanced economies wanting to keep capital “in” to help finance high existing levels of public debt.
- Increased regulations. “Although some of these requirements may be motivated by a government’s desire to curb money laundering and tax evasion, the measures also amount, in some cases, to administrative capital controls.”
The overall result, she notes, is “a process of financial deglobalization (the reappearance of home bias in finance) and the re-emergence of more heavily regulated domestic financial markets.” And she concludes:
“Financial repression in its many guises (with its dual aims of keeping interest rates low and creating or maintaining captive domestic audiences) will probably find renewed favor and will likely be with us for a long time.”
Which, given the lessons of history, may well be very welcome news indeed. It’s a shame that politicians are mostly still too cowed by the ‘deregulate everything’ dogma to call explicitly for financial ‘repression.’ Far easier to do this through stealthier forms of financial repression, such as negative real interest rates, than to call for administrative controls. But history shows us that financial repression – at least if it is done in the right way – may well be what was needed all along.