3.4.4  Subsidiarity of the Financial System

(This is an archived extract from the book Patterns of Power: Edition 2)

Some consumer financial services have tended to be local, benefiting from face-to-face contact, but transactions are increasingly on-line and many companies are international – with their subsidiarity determined by organisational boundaries rather than political ones.

Many commercial banks are now international, though banking is not yet completely borderless – notably on foreign currency transactions[1] – due to a history of national protectionism, even within Europe.[2]

Financial services have a globalised reach but many activities are concentrated in dominant trading centres, including Wall Street and the City of London. 

Investment is increasingly international.  The foreign ownership of a company shouldn’t worry its workers or the country as a whole, as Donald Boudreaux remarked:

“As a worker I care whether or not my employer is modernizing his operations to increase my productivity; I don't care (or shouldn't care) whether the savings used to finance such investments come from Dallas or from Dubai.” [3]

Foreign direct investment benefits the recipient country by increasing its productive capacity and this is an incentive to countries to make things easy for foreign companies.  As mentioned earlier (3.4.2), however, tax avoidance by multinational companies is a problem.

It is an increasingly common pattern for countries’ central banks or, in the case of Eurozone countries, the European Central Bank to play a largely depoliticised role in macroeconomic management:

·      They act as lenders of last resort, to ensure the stability of commercial banks.

·      They control interest rates, and thereby the money supply and inflation (3.3.8.3).

·      They may also, on behalf of government, act as regulatory authorities (3.4.1).

These duties are better carried out in response to economic circumstances, rather than political expediency.  And, given the complexity of macroeconomics, the population cannot participate politically in the guidance of these activities.  The only political input that is necessary is to set broad performance targets for the central banks.

Macroeconomic management nowadays requires more co-ordinated decision-making with other countries.  Representatives of the world’s 20 biggest economies (the G20) played an important role in co-ordinating responses to the financial crisis of 2007-8, for example.[4]

International bodies – the World Bank[5] and the International Monetary Fund (IMF)[6] – were set up to provide necessary finance to countries in difficulty.  As discussed later (3.5.5), further improvements are needed to stabilise the global financial system.

© PatternsofPower.org, 2014