3.4.4 The Subsidiarity of the Financial System
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.
New technologies and the increased ownership of mobile devices are enabling financial services to develop rapidly, in what The Economist described as The fintech revolution:
“From payments to wealth management, from peer-to-peer lending to crowdfunding, a new generation of startups is taking aim at the heart of the industry—and a pot of revenues that Goldman Sachs estimates is worth $4.7 trillion.”
Although financial services have been dominated by Wall Street and the City of London, The Economist has noted that: In fintech, China shows the way:
“It is far and away the biggest market for digital payments, accounting for nearly half of the global total. It is dominant in online lending, occupying three-quarters of the global market. A ranking of the world’s most innovative fintech firms gave Chinese companies four of the top five slots last year.”
The regulatory issues arising from these technologies are still evolving. “We need to change how we regulate financial technology (fintech) companies” wrote Kathryn Petralia in Fortune: Regulate Fintechs for What They Do, Not What They Don’t.
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 on the Cafe Hayek blog, On savings:
“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.”
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(3.8.3).
- They may also, on behalf of government, act as regulatory authorities (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 – as reported by Reuters: G20 on financial crisis response: It worked.
International bodies were set up to provide necessary finance to countries in difficulty. The World Bank described itself thus:
“The World Bank Group works in every major area of development. We provide a wide array of financial products and technical assistance, and we help countries share and apply innovative knowledge and solutions to the challenges they face.”
The International Monetary Fund (IMF) “is an organization of 189 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world”, according to its website.
As discussed later (3.5.5), further improvements are needed to stabilise the global financial system.