More Like Us, or More Like Them? The New York Times' Keith Bradsher reported today in a fine piece that U.S. hedge funds are bankrolling Chinese high-tech surveillance operations. What a perfect marriage of capitalism and totalitarianism! What a perfect symbol of the weird permutations of globalization. Capitalists, of course, are famous for getting along with almost any brand of dictator. German industry coexisted nicely with Hitler and had many American business partners such as DuPont and Standard Oil, right up until the United States entered World War II. U.S corporate interests likewise had congenial relations with despotic regimes in Iran, Iraq, Cuba, the Dominican Republic -- and often influenced American foreign policy to keep these regimes propped up.
But you would think the one exception to the marriage of convenience between capitalists and despots would be... communists! You have to wonder which party to the deal has less shame -- the Wall Street guys or the commies. Aren't capitalists the sworn enemies of communists? At least in the good old days of the Cold War, there was a bright line: totalitarian socialism on one side and capitalist democracy on the other. And though the very occasional American entrepreneur, such as Armand Hammer, did business with the Ruskies, the last thing our capitalists would sell the Reds was stuff with which to repress their own people.
What a difference a couple of decades make. This globalization stuff gets curiouser and curiouser. Not so long ago, many writers were claiming that we would soon see a happy convergence, in which formerly communist nations would become more capitalist. And as they became more market-oriented, they would also become more democratic. However, recent history suggests the possibility of a rather darker convergence. Nations like China remain repressive one-party states, enabled by American multinationals. Far from creating a pro-worker communist society, the current Chinese mandarins actually help foreign capital get access to a cheap and docile workforce. Meanwhile, the western democracies become more despotic themselves, and the convergence is in the direction of a universal security state in league with global finance. As background reading, I recommend Jim Mann's fine piece from the February American Prospect, "America's China Fantasy," which warned of the wrong sort of convergence.
On the other hand, we are also seeing global regulatory divergence. This is rather dangerous, as the current financial meltdown demonstrates, because it is just too easy for corporations and investors to do end runs around the nation with adequate regulations -- and too hard for the regulatory fraternity to act in concert during a crisis. The bank regulators have been attempting, to no avail, to create common worldwide capital standards. Meanwhile, national regulators have rather different strategies of what to do in the current crisis, which frustrates necessary central bank coordination. These differences also pervade national financial cultures.
For instance, the other day Josef Ackerman, the CEO of Deutsche Bank, Germany's largest, told the Financial Times that he thought it was "crucial" that bank assets -- loans to hedge finds, sub-prime mortgage companies, and the like -- be "marked to market" -- in other words reduced in the value carried on the banks' balance sheets to reflect the current worsened market conditions. But the Federal Reserve, on several occasions, has done just the opposite. Every time banks face a credit crunch -- as in their huge losses on third-world lending in the 1980s and the Fed's rescue of Citibank in 1990 -- the Fed desists from marking down dubious bank assets for fear of deepening the crisis. The time to fix the roof, as it were, is when it's not raining. Ackerman is right to call for much tighter regulatory standards, but this is not exactly the most propitious time to accelerate the credit crunch.
However, the divergence in European and U.S. views on how tightly to regulate financial speculation is one more paradox of globalization. Britain, home to Europe's hedge fund industry, also runs a much tighter ship when it comes to regulation. Britain's Financial Services Authority requires disclosures of large hedge funds not required by our SEC. The E.U. has tougher anti-trust standards, too.
There was a time when American industry and finance just assumed the world's rules of capitalism would simply be made over in the U.S. image, because of the overarching strength of our economy. Today that fantasy is about as sound as a dollar.
