Last year’s two big shocks — Brexit and the Trump presidency — were separate and different events. Brexit may lead to the UK becoming a champion for free trade, while the US slides — at least temporarily — into an unattractive protectionism. But Brexit and the Trump-quake did share one very important feature: they were protests from national democracies against international bureaucracy. Many US and UK voters resented the extent to which the power of their own government had been transferred to international institutions and arrangements, directed by people over whom their own leaders had no immediate control.
In the UK the resentment was focused on the European Commission. In the US it was diffuse, with Nafta and the Paris climate change accord only the most salient of several targets. Much of the trouble arose from the anonymous and unaccountable character of the foreign organisations, usually known by an acronym (EU, WTO, IMF).
The political philosopher Kenneth Minogue invented the collective noun “acronymia” for them. He did not mean it kindly. John O’Sullivan, speechwriter to Margaret Thatcher and now editor of the Australian conservative journal Quadrant, has said that “acronymia” exists in “a kind of penumbra”. The organisations may have been vital to the postwar global order and done an immense amount of good since 1945, but they lack the legitimacy that comes from democratic endorsement at a local level.
From 1945 to June 23, 2016, the power of acronymia had been growing at the expense of national governments. Whatever one may feel about Donald Trump (and I am not a fan), he is the commander-in-chief of the democracies’ counter-attack against the international bureaucracies. Suddenly and unexpectedly, the top people in the IMF, the WTO, the EU and so on realise that they have to justify themselves. In one area in particular, banking regulation, the Trump counter-attack could have major economic effects.
A few weeks after the intensification of the financial crisis in September 2008, the leaders of the G20 countries met in Washington to organise a response. Their expert advisers told them that banks were to blame for what had gone wrong and ought to be more tightly regulated. The job of enforcing the tighter regulatory regime was given to the BIS (Bank for International Settlements), a sort of international financial civil service located in Basel, Switzerland. Since then the Basel rules (Basel II, Basel III, Basel IV, etc) have been applied to the banking systems of a few dozen countries, including the US and the UK, with the explicit intention of making banks less risky.
The essence of banking is that risks are assumed in order to generate a return, which can be split between depositors and shareholders. The demands that banks have less risk on their balance sheets have caused banks to shrink their risk assets and hence their deposit liabilities. But nowadays deposits are the principal means of payment and dominate the quantity of money. So a reduction in banks’ risk assets destroys money. Monetarism may or may not be fashionable, but that is beside the point. Just as in 1929, ahead of the US’s Great Depression, it was true in 2008 and 2009 that a fall in the quantity of money would lead to a fall in spending, output and employment. The implementation of the Basel banking rule-book was one reason — perhaps the main reason — that macro-economic conditions deteriorated in early 2009 and stayed sluggish for the next few years.
The BIS’s insistence that banks become less risky has also infuriated their shareholders, and indeed the managements, who must answer to shareholders. Donald Trump — who as a property developer had to be chummy with bankers — found it harder to finance new hotels after the crash than before. Whatever they say in public about Basel and the BIS, bankers’ remarks in private are wholly unprintable; they could indeed be characterised as “locker-room talk”, to recall one of the memorable phrases of 2016. Still, public denunciations have come from some top bankers. Perhaps the most notable was in January 2015 from Jamie Dimon, chief executive of JP Morgan, the biggest bank in America. Noting that his business was “under assault” from regulatory officialdom, he branded the Basel rules “un-American”. It was widely reported that Dimon was Trump’s first choice for Treasury Secretary. Trump and Dimon have undoubtedly had locker-room talk about the BIS. So now the Basel rules are themselves under assault. The key macroeconomic implication is that bank credit to the private sector and the quantity of money will grow faster in the next few years than in the doldrum period since the Great Recession.
Will this be one sphere of international policy-making where the counter-attack on acronymia has benign results?