The State and Global Finance

There is no question that the financial crisis now shaking up Wall Street is the worst since the Great Depression and portends to have a major impact on the United States and the global economy. Over the past week, the face of the nucleus of the global financial sector, in the US, has been transformed beyond recognition by failures, takeovers, and government intervention.

Whether the State can step in to control the damage and m itigate its effects is itself not clear. There are three aspects of the relationship between the State and global finance that recent events illustrate. The first is that notwithstanding the commitment to deregulation and messianic faith in market forces, marketfriendly governments have no choice but to step in when large financial institutions, including non-bank institutions, are on the verge of failure. The second is that sustaining this kind of intervention b ecomes difficult when the crisis is systemic. State rescues increase moral hazard problems, but necessitate the i rrational practice of using government resources to cover the costs of p rivate malpractice or imprudence, especially in institutions that unlike banks are not at the core of the financial system. The third aspect is that even if the State intervenes, it is not clear – as the events of the past week have shown – that the crisis can be managed and stalled. The State, it appears, will have to think anew and combine short-term fire-fighting measures with longer term policies that strike at the root of the problem.