This month marks an important anniversary: 10 years since global markets were rocked by the collapse of a major U.S. financial institution, capping a year of crises.
Sound familiar? Substitute Long-Term Capital Management (September, 1998) for Lehman Brothers (September, 2008) and it's hard not to get a sense of déjà vu. But although the parallels may be striking - the current global financial crisis is certainly at least as serious as the 1997-98 meltdown - the political implications couldn't be more different.
At the time, that crisis was widely seen to have discredited state-led capitalism in East Asia and other points of origin. Afterward, market-oriented Anglo-American financial practices were trumpeted as a model - indeed, so strong was G7 policy-makers' trust in financial markets that they began to assign more and more international regulatory functions to private actors, from banks to credit-rating agencies.
That trust has now crumbled. The same private institutions that were assigned important self-regulatory roles over the past decade are now suddenly being severely criticized. This clamour grows more intense as public authorities fork out billions to bail out institutions deemed too big, too "interconnected," to fail. After seeing bankers reap large bonuses in the boom times, taxpayers find it difficult to swallow the socialization of private-sector losses. This policy has been made politically viable only with the promise of reregulation.
But what kind of reregulation? Advanced industrial countries have already been tightening disclosure requirements. Banks are being forced to improve liquidity management and set aside more capital against various activities. Initiatives are under way to strengthen international supervisory co-operation.
The recent bubble-and-bust cycle is also prompting reconsideration of the pro-cyclical consequences of relying on market prices for valuing assets and risk within existing regulation. When markets are rising, firms become less constrained by such rules - often, just at the time they need more discipline. And when markets are falling, the pressures to sell are reinforced.
Having underestimated the risks before the crisis, credit-rating agencies are also facing new regulatory constraints. So, too, are participants in the massive over-the-counter derivatives markets, the source of so much consternation. And there are debates about whether capital requirements should be extended to a wider range of leveraged institutions.
All of this signals important change. So, too, does the fact that regulators are facing strong political pressure not to rely so heavily on self-regulation for changing corporate and market behaviour. The new mood was captured by economist Willem Buiter, who quipped that "self-regulation stands in relation to regulation the way self-importance stands in relation to importance."
The crisis has bolstered the case for a larger state role in other parts of the world as well. In many developing countries, analysts see capital controls and large foreign-exchange reserves as useful tools to insulate themselves from Western market instability.
The subprime crisis has also undermined the idea that Anglo-American financial ways should serve as a kind of best-practice model for others. Indeed, it has been tempting for developing-country analysts to critique their regulatory weaknesses and failures in the same way that they themselves were criticized a decade ago.
Some have gone further. German policy-makers have expressed an interest in seeing the euro zone take a larger role in international regulatory politics, to dilute the dominance of Anglo-American financial agendas. At the ASEAN Plus Three meetings in May, Japan even proposed the creation of an Asian version of the Financial Stability Forum.
These developments suggest that the crisis may be pushing us toward a more decentralized and reregulated global financial order. Such an order could be more compatible with diverse forms of capitalism, but it might also sit less comfortably with an entirely liberal set of rules for the movement of capital and financial services.
In short, the world that emerges from this financial mess could be quite different from what we had for the past decade. The state is returning with a vengeance. What a difference a decade makes.