The redesign of the global financial architecture the return of state authority

Its central claim is that the reformsconstituted a paradigm shift, a move from the dominance of market authority to the reassertion of state authority over financial markets and actors.Th

Financial Architecture

In 2007–2008 the global financial and economic system was in turmoil Thisvolume focuses on how the global financial architecture was redesignedfollowing the financial crash of 2008 Its central claim is that the reformsconstituted a paradigm shift, a move from the dominance of market authority

to the reassertion of state authority over financial markets and actors.The book underscores that the cycle of boom and bust, of crisis response,reform and eventual relapse are not only economic but also conceptual andideological Ideas matter in the political and economic calculus of policy-making Economies are underpinned by and linked to ideological narrative, aprevailing policy consensus that places limits on policy actions and optionsand constitutes a dominant worldview or paradigm To become real, to belasting, to impact actual policy choices and market actor decisions, a re-regulatoryparadigm shift cannot just be conceptual or ideological It must also be pre-sent in the institutional constructs and policy decisions that flow from theideological regulatory shift To gauge thefluctuating strength of the paradigmshift, the book addresses the Group of Twenty (G20) summit process, thecreation of the FSB and the policy output of the new forums, and looks forsigns of permanency, strength and possible effectiveness

This work presents important new material on the financial crisis and theregulatory response to the crisis It will be valuable for researchers, teachersand students alike

Stuart P M Mackintosh is the Executive Director of the Group of Thirty(G30), an international financial think tank composed of the leading centralbankers,financial leaders and academic economists from across the globe

Edited by Barry K Gills, University of Helsinki, Finland and Kevin Gray University of Sussex, UK

This series is designed to break new ground in the literature on globalization andits academic and popular understanding Rather than perpetuating or simplyreacting to the economic understanding of globalization, this series seeks tocapture the term and broaden its meaning to encompass a wide range of issuesand disciplines and convey a sense of alternative possibilities for the future

Edited by Barry K Gills

and William R Thompson

3 Rethinking Civilization

Communication and terror in

the global village

Majid Tehranian

4 Globalization and Contestation

The new great counter-movement

Ronaldo Munck

5 Global Activism

Ruth Reitan

6 Globalization, the City and Civil

Society in Pacific Asia

Edited by Mike Douglass, K.C

Ho and Giok Ling Ooi

7 Challenging Euro-America’s

Politics of Identity

The return of the native

Jorge Luis Andrade Fernandes

8 The Global Politics

of Globalization

“Empire” vs “Cosmopolis”Edited by Barry K Gills

9 The Globalization ofEnvironmental CrisisEdited by Jan Oosthoekand Barry K Gills

10 Globalization asEvolutionary ProcessModeling global changeEdited by Geroge Modelski,Tessaleno Devezas andWilliam R Thompson

11 The Political Economy ofGlobal Security

War, future crisesand changes inglobal governanceHeikki Patomäki

12 Cultures of GlobalizationCoherence, hybridity,contestation

Edited by Kevin Archer, M.Martin Bosman, M Mark Amenand Ella Schmidt

Politics of Justice

Edited by Barry K Gills

14 Global Economy Contested

Power and conflict

across the international division

of labor

Edited by Marcus Taylor

15 Rethinking Insecurity, War

and Violence

Beyond savage globalization?

Edited by Damian Grenfell and

Edited by Hasmet M Uluorta

18 The Global Governance of Food

Edited by Sara R Curran, April

Linton, Abigail Cooke and

Desmond McNeill and

Asunción Lera St Clair

22 Globalization, Knowledgeand Labour

Education for solidarity withinspaces of resistance

Edited by Mario Novelli andAnibel Ferus-Comelo

23 Dying EmpireU.S imperialism andglobal resistanceFrancis Shor

24 Alternative Globalizations

An integrative approach

to studying dissidentknowledge in the globaljustice movement

S A Hamed Hosseini

25 Global Restructuring, Labourand the Challenges forTransnational SolidarityEdited by Andreas Bieler andIngemar Lindberg

26 Global South to the RescueEmerging humanitariansuperpowers and globalizingrescue industries

Edited by Paul Amar

27 Global Ideologies andUrban LandscapesEdited by Manfred B Stegerand Anne McNevin

28 Power andTransnational ActivismEdited by Thomas Olesen

Edited by Barry K Gills

30 Andre Gunder Frank and

Global Development

Visions, remembrances

and explorations

Edited by Patrick Manning

and Barry K Gills

31 Global Social Justice

Edited by Heather Widdows

and Nicola J Smith

32 Globalization, Labor Export

Edited by Lara Montesinos

Coleman and Karen Tucker

34 A History of World Order

and Resistance

The making and unmaking of

global subjects

André C Drainville

35 Migration, Work and

Citizenship in the New

Global Order

Edited by Ronaldo Munck,

Carl-Ulrik Schierup and

Raúl Delgado Wise

36 Edges of Global Justice

The World Social Forum

and its‘Others’

Janet Conway

Global GovernanceEdited by Matias E Margulis,Nora McKeon and

Saturnino Borras Jr

38 Dialectics in World PoliticsEdited by Shannon Brincat

39 Crisis, Movement,ManagementGlobalising dynamicsEdited by James Goodman andJonathan Paul Marshall

40 China’s DevelopmentCapitalism and empireMichel Aglietta and Guo Bai

41 Global Governance andNGO ParticipationCharlotte Dany

42 Arab Revolutions andWorld TransformationsEdited by Anna M Agathangelouand Nevzat Soguk

43 Global MovementEdited by Ruth Reitan

44 Free Trade andthe TransnationalLabour MovementEdited by Andreas Bieler,Bruno Ciccaglione, John Hilaryand Ingemar Lindberg

45 Counter-Globalization andSocialism in the 21st CenturyThe Bolivarian Alliancefor the peoples ofour AmericaThomas Muhr

48 Social Movements, the Poor and

the New Politics of the Americas

Edited by Håvard Haarstad, Mark

Amen and Asuncion Lera St Clair

49 Development in an Era of

Neoliberal Globalization

Edited by Henry Veltmeyer

50 The State–Capital Nexus in the

Global Crisis

Rebound of the capitalist state

Edited by Bastiaan van Apeldoorn,

Naná de Graaff and

Henk W Overbeek

51 From Empires to Imperialism

The state and the rise of

54 Global Capitalism and

Transnational Class Formation

Edited by Jason Struna

Globalizing World

A preferred futureEdited by Leanne Weber

56 Global Governance, Legitimacyand Legitimation

Edited by Magdalena Bexell

57 Critical Rationalismand GlobalizationTowards the sociology of theOpen Global SocietyMasoud Mohammadi Alamuti

58 Globalization Development andSocial Justice

A propositionalpolitical approachEdited by Ann El-Khoury

59 GlobalizationThe career of a conceptEdited by Manfred Stegerand Paul James

60 Globalization andCapitalist GeopoliticsSovereignty and state power in amultipolar world

63 Markets and DevelopmentCivil society, citizens and thepolitics of neoliberalismEdited by Toby Carroll andDarryl S L Jarvis

The Redesign of the Global Financial Architecture

The return of state authority

2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN

and by Routledge

711 Third Avenue, New York, NY 10017

Routledge is an imprint of the Taylor & Francis Group, an informa business

© 2016 Stuart P M Mackintosh

The right of Stuart P M Mackintosh to be identi fied as author of this work has been asserted by him in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988.

All rights reserved No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers.

Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identi fication and explanation without intent to infringe.

British Library Cataloguing in Publication Data

A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data

Mackintosh, Stuart P M.

The redesign of the global financial architecture: the return of state authority/Stuart P M Mackintosh.

pages cm (Rethinking globalizations; 62)

1 International finance 2 Financial crises I Title.

Typeset in Times New Roman

by Taylor & Francis Books

List of illustrations xii

3 The 2009 G20 summits: the apogee of reformist zeal 44

4 The emergence of dissension within the G20 66

5 The Financial Stability Board: its creation, structure

6 Making the paradigm real: the FSB’s key policy outcomes 124

1.1 Two-level games in a non-crisis period and during a period of

1.2 The epistemic community, policy consensus and paradigm shift 18

3.1 The diplomatic, economic and FSB technical waves 52

5.2 Structure of the Financial Stability Board 107

Box

2.1 Structure, membership and operation of the G20 37

I would like to thank all those who have supported me during my research forthis book My particular thanks to Phil Daniels and Barry Gills for their carefulencouragement, support, and intellectual guidance They are an outstandingteam and it has been a pleasure to work with them.

I cannot name, but must warmly acknowledge and thank, the scores ofindividuals who were so generous of their time and who allowed me to inter-view them regarding the 2007–2008 financial crisis and G20-led intergovern-mental response since then I feel honoured to have been given the time andcounsel of presidential and prime ministerial advisors,finance ministers, G20sherpas, central bank governors and deputy governors, treasury and ministry

offinance officials, numerous IMF executive directors, academics, and formersenior policymakers Without their frank insights and personal narratives ofthe events that they experienced, often first-hand, this research would nothave been possible

I must also thank my wife, Jean, for allowing me the space to complete thisendeavour and for her tolerance of far too many discussions of the subject,the process, and the difficulties it presented I would also thank my goodfriend and mentor, Alan Coe, for his advice and support throughout, andDiane Stamm for her careful eye as to style and presentation I also mustacknowledge the support of my employers and, in particular, of GeoffreyBell, who wholeheartedly backed my decision to write this book Finally Imust thank Nicola Parkin and Lydia deCruz, both superb editors, whoshepherded the book from its raw form to completion

Stuart P M MackintoshWashington DC, April, 2015

AIG American International Group

BCBS Basel Committee on Banking Supervision

BIS Bank for International Settlements

CCPs central counterparties

CDSs credit default swaps

CEO chief executive officer

CIS Commonwealth of Independent States

ECB European Central Bank

FASB Financial Accounting Standards Board

FDIC Federal Deposit Insurance Corporation

Fed Federal Reserve

FOREX foreign exchange

FSA Financial Services Authority

FSB Financial Stability Board

FSF Financial Stability Forum

GAAP generally accepted accounting principles

GATT General Agreement on Tariffs and Trade

GDP gross domestic product

GE General Electric

GHOS Group of Governors and Heads of Supervision

GSIFIs global systemically importantfinancial institutions

G7 Group of Seven; composed of leaders,finance ministers, and

central bank governors from Canada, France, Germany, Italy,Japan, the United Kingdom, and the United States

G20 Group of Twenty; composed of Argentina, Australia, Brazil,

Canada, China, France, Germany, India, Indonesia, Italy,Japan, Mexico, Russia, Saudi Arabia, South Africa, SouthKorea, Turkey, United Kingdom, United States, EuropeanUnion Other participants: Spain (permanent guest); Interna-tional Monetary Fund; World Bank; International Monetaryand Finance Committee (ex officio); Development Committee

of the International Monetary Fund and the World Bank

(ex officio) Other countries are invited at the discretion of thehost country

G30 Group of Thirty (international think tank)

IAIS International Association of Insurance Supervisors

IASB International Accounting Standards Board

ICCP International Climate Change Partnership

IFI internationalfinancial institutions

IFRS internationalfinancial reporting standards

IMF International Monetary Fund

IOSCO International Organization of Securities Commissions

LIBOR London Interbank Offered Rate

MAP mutual assessment process

MDB multilateral development bank

MIT Massachusetts Institute of Technology

NAB New Arrangements to Borrow

OTC over-the-counter

RCGs regional consultative groupings

RBS Royal Bank of Scotland

SDRs special drawing rights

SIVs structured investment vehicles

SPEs special purpose entities

SSB standard-setting body

TARP troubled asset relief program

TBTF too big to fail

TLAC total loss-absorbing capital

In the years prior to the 2007–2008 economic and financial crisis, leaders andtheir governments allowed and facilitated a progressive erosion and diffusion

of state power to other actors, through a series of deliberate decisions andnondecisions (Bachrach and Baratz, 1963) Governmental acts or refusal toact were underpinned by ideological and economic beliefs, a worldview thatchampioned unregulated markets ahead of state prerogatives (Ackerlof andSchiller, 2009; Padoa-Schioppa, 2010; Stiglitz, 2010) There was a weakening

of state power and a gradual retreat of the state’s desire and authority toregulate a rapidly growing global financial system and bank and nonbankactors as a corollary to this deregulatory neoliberal paradigm (Strange, 1986,1996)

As state power retreated, there was a concomitant increase in the size,impact and influence of the liberalized financial sector, and within that ofsystemically important interconnected financial firms and banks, and thelevels and magnitude of the compensation of their traders and investmentbankers spiked upwards (FCIC, 2011: 62) Unregulated or under-regulated,the shadow banking sector grew simultaneously with a series of unregulatednew complex derivatives markets (Tett, 2009), nonbank housingfinance firms(MacLean and Nocera, 2010) and products that increased leverage and magnifiedrisk (Lewis, 2009, 2010)

This financial engineering brought the illusion of wealth but did little tosupport genuinely sustainable growth As with booms in the past, during theperiod of irrational exuberance, rising asset prices, rising house prices, low

inflation and solid employment numbers (boosted by housing constructionjobs) made consumers feel wealthier The immediate short-term effects there-fore appeared positive Credit-fuelled personal consumption (mortgage refisanyone?) sustained modest economic growth rates, despite real median wagesbeingflat in much of the developed world, as the Chinese economy opened upand placed downward pressure on wages Observers, market participants,policymakers and the many viewers of such reality TV gems as Flip thisHouse and Million Dollar Listing felt the positive effects of leveraging equity

in their principal assets – their houses The negative downsides of leveragewere, of course, overlooked (Mina and Sufi, 2014)

A deregulatory, laissez-faire, neoliberal Anglo-Saxon worldview and tive championing economic markets over regulatory vigour underlay thesedevelopments This was parroted by leaders, such as Bill Clinton, George W.Bush and Gordon Brown, and major regulators such as the United States (US)Federal Reserve (Fed) and the United Kingdom (UK) Financial ServicesAuthority (FSA) Policymakers thought this deregulatory approach appeared

narra-to pay dividends, and so determined narra-to laissez les bons temps rouler

Markets were said to be self-correcting and would always return to stableequilibrium unaided Excessive risk, speculation, manias and dangerousbooms and busts were a thing of the past, or so many policymakers believed,blind to the lessons of economic history (Kindleberger and Aliber, 1978;Minsky, 2008) The‘great moderation’ was said to be underway According tothis mind-setfinancial engineering made the markets safer, not riskier.During this period of excess credit, liquidity and the worship of the dereg-ulatory gods, the magnitude and frequency of boom-and-bust cycles grew(Allen and Gale, 2007), and the number and severity of banking crises rose to

a level last seen in the pre-World War I era (King, 2011)

In theory,financial risk was spread In reality, no one could gauge the risk

or who held it Few regulators lost any sleep over or thought to question thisnarrative or to consider the dangers they might engender Those who didexpress concern, such as Raghuram Rajan, former International MonetaryFund chief economist, or the officials at the Bank for International Settlements(BIS), were not heeded (Rajan, 2005; BIS, 2008)

The dominant deregulatory, largely Western and Anglo-American narrativeprovided intellectual justification for the progressive erosion of conservativeprudential supervision of majorfinancial institutions and actors in major markets,including the US and the UK in particular, as regulators became‘captured’ bythose firms they regulated, i.e the major financial market actors Neoclassicaleconomic beliefs – in market equilibrium, in rational actors and in the effi-ciency of liberalized markets– were championed, and behavioural economicslanguished, notwithstanding the latter’s greater explanatory power regardingthe business cycle and the nature of booms and busts

Historical memory of the drivers of individuals and investors, of the monalities in past boom-and-bust cycles, was forgotten Too few (almostnone) of the existing policymaking community had experienced severe crises.Instead, they viewed events discreetly, individually, not systemically as awhole and across entire markets Regulators and central bankers had seensmall numbers of individual bank failures Certainly Systemically linked,synchronized collapse or near collapse of hundreds and thousands of smallbanks and scores of regionally and globally significant firms in a very shortperiod? Certainly not

com-Just as in past booms, ‘this time’ was thought to be ‘different’ It was not(Galbraith, 1954; Rogoff and Reinhart, 2009) Ultimately, the latest, largest,most interconnected, highly leveraged, opaque credit and US-real-estate-driven boom, fuelled by a great many market and regulatory failings, turned

to bust The mania turned to panic and near global economic collapse, ashouse prices collapsed, families’ marginal propensity to consume collapsed,firms toppled, markets shook and economies contracted.

In 2007–2008, the global economy faced the worst economic crisis in 80years The autumn of 2008 saw the bankruptcy of Lehman Brothers, the USgovernment takeover of American International Group (AIG), the forcedmerger of Merrill Lynch with Bank of America and action to secure theremaining two American investment banks, Goldman Sachs Group Inc andMorgan Stanley (Federal Reserve Bank of St Louis, 2008) Scores of otherlarge banks and financial firms closed their doors (FDIC, 2013) Elsewhereacross the globe other giants of finance were already wards of the state, such

as the Royal Bank of Scotland (RBS) and HBOS

By September 2008, the globalfinancial system was under huge stress andthe economic crisis in the US had accelerated Credit remained tight or almostnonexistent International trade flows had collapsed (OECD, 2009) Marketsand investors were in a panic Certain types of asset classes or ‘sociallyworthless’ instruments (Turner, 2009), composed of poorly underwritten sub-prime mortgages sold in the US and securitized, had collapsed in value orcould not be sold at any price The overnight repo market had frozen(Gorton, 2010, 2012) The US plunged into its most severe contraction in 80years Families saw a loss of a greater proportion of their net worth thanoccurred in the Great Depression, and jobs disappeared at the rate of 800,000per month (Goolsbee, 2011) Many other nations, such as the UK, China,France and Spain, also faced economic contractions that would develop intofull-blown recessions

Policymakers confronted ‘the limits of unrestricted globalization [and] …the intrinsic tension between global financial markets and sovereign states’(Subacchi, 2010, p 258) Leaders were faced‘not only with the collapse of afinancial system, but also with the collapse of a worldview’ (Assenza et al., 2011;Fergusson et al., 2009) Laissez-faire neoliberalism confronted a legitimacycrisis (Chorev and Babb, 2009), and the spell of the ‘mystical Anglo-Saxonmodel of liberalization and deregulation’ was broken (El-Erian, 2009)

Leaders, shocked, were galvanized into action Only governments, and theircentral banks, could act as the economic backstop, as lenders of last resort, inextremis, for private markets andfirms In taking action, political leaders andtheir central bank governors would move rapidly away from the deregulatorylaissez-faire neoliberal worldview They would reassert state authority overmarkets The retreat of the state would be reversed Leaders and their elitecentral banking community would begin a rare paradigm shift in their over-arching crisis-altered regulatory policy narrative and worldview (Constancio,2010)

This book examines the internationally coordinated, state-led response tothe 2007–2008 economic and financial crisis It involves the examination ofthe construction of‘alternative narratives’ which encompass a rejection of thelaissez-faire neoliberal paradigm, with a particular emphasis on the role of

international financial regulatory authority, its rules and institutionalization.The book addresses the manner in which acute and severe crisis episodes such

as this one provoke and also reveal the underlying tension and contestationbetween ‘market authority’ and ‘state authority’ in relation to the regulation

of the world economy and especially the financial system and firms, with thegoal of ensuring maximization of long-term systemic stability and crisis pre-vention The construction of alternative crisis-driven narratives is in part areaction to the previous ideological hegemonic domination of the laissez-faire

‘neoliberal’ beliefs as applied to deregulation (i.e of self-regulation by kets and private sector actors in thefinancial sector) The book identifies andexamines a paradigm shift underway in response to the crisis: a move fromthe dominance of market authority to the reassertion of state authority overfinancial markets and actors It addresses this crisis as an instance of thegreater set of historical cases of severe financial crises which transmute intoeconomic crises and illuminates the way in which crisis narratives are con-structed in response to such episodes and the policy outcomes of a paradigmshift when they occur

mar-The book examines the elite state-level crisis response, the institutionalreforms most important to the construction of a ‘new global financial archi-tecture’ and the policy outcomes Calls for a new architecture have occurred inthe past; there were similar demands following the 1997/1998 global and EastAsian financial crisis A principal argument within the book is that theseverity of thefinancial crisis in this case precipitated an important shift in thepolicy narrative, a paradigm shift, and a series of reforms and policies designed

to collectively apply and internationally coordinate regulatory authority overglobal financial markets and private sector actors in a more robust manner.This book draws upon a series of 34 high-level, qualitative interviews withmany of the governmental, central bank, and supervisory principals presentand active in key decision-making meetings and roles from 2008 onwards.Those actors and officials interviewed played central roles in the paradigmshift, crisis response, architectural redesign and, since then, the maintenanceand strengthening of the re-regulatory paradigm Chapter 1 addresses theimportance of these sources and of their collective remembrances of andnarratives constructed around the crisis response

The structure of the book

The book addresses the economic and diplomatic processes first, i.e., thecreation and dynamics of Group of Twenty (G20) summitry It then turns tothe creation of the Financial Stability Board (FSB) and its key role in policyformulation and implementation

Rather than looking at the summits as discrete events in chronologicalorder, the book addresses G20, the summitry, as a process It divides thesummitry into three phases: crisis management, concrete reform and a return

to dissension among states Each of these phases is looked at separately

Chapter 2 addresses the creation of the G20 leaders’ forum from an earlier,more limited construct It focuses on the genesis of the G20– as an exercise incrisis management– in the heat of the crisis, and dynamics behind the first G20summit in Washington (November 14–15, 2008) Even at this very early stage,some elements of the new policy consensus started to take shape What wasbegun would be a process of reform, not a single episode Somewhat surprisingly,

a reluctant, lame-duck US president succeeded in creating the G20 and in ting a crucial summit, which sketched out the first unilateral and coordinatedmacroeconomic responses and outlined the contours of the reform endeavour.Chapter 3 illuminates the second phase – of concrete reform – in the G20’srapid evolution It addresses the apogee of the G20 financial reform impulseand encompasses the summits in London (2 April 2009) and Pittsburgh(24–25 September 2009) and their results Events in 2009 signalled the beginning

hos-of a meaningful shift in the balance hos-of state authority over financial marketandfirms, a re-regulatory paradigm shift Observers and participants recognizethat these summits, and especially London, exceeded limited pre-summit expec-tations Leaders announced major macroeconomic interventions (collectivelyand individually); they laid out detailed action plans that defined a multiyear,multifaceted, extremely ambitious reform process that would not have beenpossible absent the centripetal and clarifying effects of the crisis, and thequiescence of a temporarily embarrassed global banking industry

Chapter 4 addresses the G20 summitry in the third phase – characterized

by a return to dissension – of the evolution of the leaders’ forum, as theimmediate global crisis wanes, in part due to the successful coordinated G20

efforts in phases one and two of the response It encompasses the summits inToronto (26–27 June 2010), Seoul (11–12 November 2010), Cannes (3–4November 2011), Los Cabos (18–19 June 2012), St Petersburg (5–6 Septem-ber 2013) and Brisbane (15–16 November 2014) In this third phase, the G20consensus (at the political level) dissipates, and the centrifugal forces onnational interests re-emerge and pull leaders apart Summits become increas-ingly acrimonious as the limits of the new paradigm are reached But, even asvoices are increasingly raised andfingers are pointed during this period, pro-gress continues on constructing the newfinancial regulatory architecture that

is gradually strengthening the new paradigm

Chapter 5 focusses on the birth, structure and operation of the FSB as theinstitutional masterstroke of the G20 and central banking community The FSB

is part of and essential to the paradigm shift The chapter explores the politicaldynamics behind the creation of the FSB and its structure and functioning atthe centre of the new global financial architecture It dissects how this elite,opaque, obscure body functions as the central coordinator, backed by reformerscomposed primarily of hawks from the central banking epistemic community

It addresses how the FSB was fashioned and is still evolving as a nascent butpowerful international institution, one dominated by a central banking andsupervisory community, a community which is essential to the creation andmaintenance of the financial re-regulatory paradigm shift

Chapter 6 highlights aspects of the policy output of the FSB In the end, ashift in policy consensus, of the central banking and technocratic commu-nity’s narrative, is meaningful only if it is reflected in the actual policies pur-sued and implemented Policy output matters It is the concrete realization ofthe rebalancing of state authority over market authority, the expression of thenew normal The bookfinds that the policy output fluctuates and is stronger

in some areas and weaker in others, ranging from Hall’s first-, to second- andthird-order changes (Hall, 1993) Viewed in their entirety, however, the policyreforms suggest that the ideological shift, although lumpy in effect, is beingmade real on the ground, but it is still to be completed and is being defended,maintained and built upon by its community

Chapter 7 looks at the paradigm now under construction It addressescomplaints by critics that what is observed does not amount to third-orderchange, that the process is too slow to be considered meaningful Itfinds thatinstitutional and policy responses, when viewed as a whole, with proper per-spective, do constitute elements of an ongoing paradigm shift The chapteridentifies instead evidence of a strengthening of the worldview and underlyingcultural changes that perhaps are supportive of the re-regulatory norms.Finally, the chapter lays out three possible scenarios for the future evolution

of the G20, the FSB and the altered worldview which they represent and inwhich they now operate

References

Ackerlof, G.A and Schiller, R.A (2009) Animal spirits: how human psychology drivesthe economy, and why it matters for global capitalism Princeton, NJ: PrincetonUniversity Press

University Press

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Economist, 1 October [Online] Available at: www.economist.com/node/14530138(accessed: 10 November 2009)

FCIC (Financial Crisis Inquiry Commission) (2011) [Online] Available at: http://

February 2015)

FDIC (Federal Deposit Insurance Corporation) (2013) ‘Failed bank list’ [Online].Available at: www2.fdic.gov/hsob/hsobRpt.asp (accessed: 8 January 2013).

policy actions’ [Online] Available at: http://timeline.stlouisfed.org/index.cfm?p=timeline (accessed: 4 February 2011)

Goolsbee, A (2011) Speech delivered to the National Association for BusinessEconomics, Washington, DC, 8 March

Gorton, G (2010) Slapped by the invisible hand Oxford: Oxford University Press

Oxford: Oxford University Press

Kindleberger, C.P and Aliber, R (1978) Manias, panics and crashes: a history offinancial crises Hoboken, NJ: John Wiley & Son

Stability Review Banque de France, February [Online] Available at: www.bankofengland.co.uk/publications/speeches/2011/speech473.pdf (accessed: 8 March 2011).Lewis, M (2009) The big short: inside the doomsday machine New York: W.W Norton

& Company

MacLean, B and Nocera, J (2010) All the devils are here: the hidden history of thefinancial crisis New York: Portfolio

Minsky, H (2008) Stabilizing an unstable economy New York: McGraw Hill

flows collapse in Q4 2008 but signs of falls easing in early 2009’ [Online] Availableat: www.oecd.org/dataoecd/29/36/42668007.pdf (accessed: 2 March 2011)

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Princeton, NJ: Princeton University Press

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Strange, S (1986) Casino capitalism Manchester: Manchester University Press

Cambridge: Cambridge University Press

Niblett, R (ed.) America and a changed world: a question of leadership London:Wiley-Blackwell/Chatham House, pp 258–274

corrupted by Wall Street greed and unleashed a catastrophe New York: Free Press

1 Crises and paradigm shift

In 1543, a little-known amateur astronomer published his magnum opus Onthe Revolutions of Heavenly Spheres (1543) secured Nicolaus Copernicus’splace in the history of science and constituted the beginning of what ThomasKuhn (1962) described as a paradigm shift in scientific thought BeforeCopernicus, the sun and the planets were believed to revolve around theearth But astronomers had increasingly been bothered by growing observa-tional anomalies with the Aristotelean, geocentric view Copernicus hypothe-sized that, contrary to the dominant view, the earth revolved around the sun, asdid the planets, a new, radical, heliocentric model He was right But Copernicus’stheory did not result in a sudden or instantaneous shift in worldview Theshift took longer to become solid as the scientific consensus adjusted, and then,more slowly, it was accompanied by a more gradual process, a societal andcultural shift supporting the new model, with empirical observations, such asGalileo’s discovery of the moons of Jupiter, underpinning its validity Thesetypes of rare disjunctive shifts occur not only in the scientific realm, but also

in the economic and regulatory policy spheres, and this book addresses one: anarrative and international regulatory policy consensus shift that began in

2008 and which continues today

Economic cycles: crises, response, and relapse

Global and national economies and markets operate in cycles of growth that,when unrestrained, can turn into booms, which are eventually punctured bybusts resulting in recessions of varying severity (Galbraith, 1954; Kindle-berger and Aliber, 1978; Minsky, 2008) During the boom phase, fewremember economic history, believing that this time is different (Rogoff andReinhart, 2009; Schiller, 2006), but it never is, and booms always eventuallyturn to bust Global economic cycles operate on a longer frequency thannational cycles, because it is rare that the credit expansions and contractions

of national economies align to create a synchronous collapse of the globaleconomy as a whole Normally, a national recession or a banking calamity inone part of the world is balanced partially by growth and prosperityelsewhere

The rhythm within these cycles is not only economic but also conceptualand ideological ‘Constructionists’ are right: ideas do matter in the politicaland economic calculus of policymaking Economies are underpinned by andlinked to ideological narratives, a prevailing policy consensus that placeslimits on policy actions and options, and constitutes a dominant worldview orparadigm.

In some, but by no means all, financial crises, a paradigm shift (Kuhn,1962) can be triggered and becomes part of the cycle and process, particularly

in severe economic crises For instance, economic failures and stagflation inthe UK (a slow-motion bust) in the 1970s paved the way for the Thatchervictory in 1979 and a significant ideological and economic policy shift thatimpacted the UK for decades thereafter (Blyth, 2002; Gamble, 1988)

On the international level, as with economic cycles, the ideological cycle isalso of a longer frequency, measured in decades, not years But when a suffi-ciently severe exogenous event or economic andfinancial crisis occurs, it canshake the prevailing worldview More rarely still, a shock may result in aparadigm shift in ideological and regulatory concepts held by leaders andpolicymakers In such cases, a rapid evolutionary burst of action and reform,

a shift in the policy consensus and worldview, can occur

In 1971, one economic and financial paradigm, embedded liberalism andthe system of globally managed exchange rates (Ruggie, 1982), ended with USpresident Richard Nixon’s closure of the gold window The end of that eragradually gave birth to another, which over time came to be characterized in part

by laissez-faire neoliberalism (Gamble, 2009: 71–86), or market fundamentalism(Stiglitz, 2008), and later by the Washington Consensus (Wade, 2008; Williamson,

1993, 1994) This ideological worldview involved a championing of deregulated,unfettered global markets and firms This shift moved economies and thefinancial system away from a rules-based system (Elson, 2011, pp 208–209)

to competing based onflexible exchange rates and fostering the success of theirnational economic models within increasingly globalized economies reliant

on (it was assumed) efficient markets (Wade, 2008: 2) The series of policydecisions and nondecisions that flowed from this deregulatory narrative tookshape in the late 1970s, gathered strength in the 1980s and thundered forward

in the 1990s and early years of the twenty-first century

During the decades before the 2007–2008 financial crisis, governmentsallowed and facilitated the erosion and diffusion of state power to otheractors – a weakening of state power coupled with a retreat of the state’s will-ingness to supervise growing global markets and firms (Strange, 1986, 1996).Markets grew Governmental acts or refusal to act were underpinned by theideological and economic belief in unregulated markets rather than state reg-ulatory power (Ackerlof and Schiller, 2009; Padoa-Schioppa, 2010; Stiglitz,2008) Firms grew and morphed from national retail banks into global behe-moths with operations interconnected across the globe The size, impact andinfluence of these firms rapidly increased, as did the complexity of marketsand instruments (Maclean and Nocera, 2010; Tett, 2009), the leverage seen

(Turner, 2009: 19), the risks taken and levels of compensation paid to theiremployees (FCIC, 2011: 62; Johnson and Kwak, 2010).

There were voices raised against the dominant paradigm (Rajan, 2005;White, 2008) But they did not alter the worldview The macro-level neoliberalnarrative defended questionable economic truths and orthodoxies, blockedhistorical memory of previous crises, allowed regulatory laxity, overlooked the

‘capture’ of the regulators by the regulated, permitted dangerous market andfirm-level risks to build up, causing mounting systemic risk, and resistedaction to mitigate the worst effects until the crisis was all but upon us

As in other previous ideological and economic cycles, the existing worldviewblotted out historical memory amongst leaders and technocrats Deregulationand self-regulation (the latter now viewed as an oxymoron) was the norm.During this period, the frequency of national boom-and-bust cycles grew(Allen and Gale, 2007), and the number and severity of national bankingcrises rose (King, 2011), but few paid attention The Anglo-Saxon paradigmand narrative worshipped by political leaders and regulators precluded actorsfrom seeing the‘black swan’, or the extreme exogenous event or crisis, coming(Taleb, 2010); instead, a great stabilization was supposedly underway (withminimisation of systemic risk)

In this manner, the worldview provided ideological justification for the boom

of the 1990s and 2000s It fostered the creation of markets,firms and instrumentsthat would in 2007 rapidly transmit price declines in houses and condos inNevada and Florida sold to poor, credit-challenged Americans to banks in the

UK and Germany, and then around the globe As the credit crunch and nomic contagion spread, the panic grew, and leaders faced the most significanteconomic andfinancial crisis since the Great Depression in 1929

eco-Confronted by a crisis of historic proportions, old solutions were insucient A breakpoint occurs and, as a result,‘the possibilities for major changeare particularly great and scope of possibilities and outcomes is unusuallywide’ (Ikenberry, 1992: 318; see also Helleiner, 2009: 16) This time the UScould not fashion the solution alone or solely with its Group of Seven (G7)2colleagues and allies, as it had in the past The days when two men, PaulVolcker, Chairman of the US Federal Reserve from 1979 to 1987, and RobinLea Pemberton, Governor of the Bank of England from 1983 to 1993, could

ffi-do a deal on international bank regulation that was pressed upon the rest ofthe world were long gone (Goodhart, 2011; Kapstein, 1992)

In 2008, US hegemonic power was in decline, and rising powers, especiallyChina, Brazil and India, demanded a voice and a role, and they had thereserves to back their demands Emerging countries had to be included.Recognizing this reality and making the switch to a larger leadership group-ing at the topmost tier of international economic and financial diplomacywould be necessary to make any possible solutions truly global in impact and

to ensure the legitimacy of the decisions taken in response to the crisis As aresult, while the crisis response in 2007–2008 exhibits common elements withprior cycles, the constructs created as a result of the architectural impulse

would be markedly different, indicative of the evolution of geopolitical powerrelations and balances since the last major shift in 1971.

The internationally coordinated collective response in 2008 and since is part

of this history of cycles of booms and busts, crisis management, and reformand gradual relapse This especially severe crisis forced a financial regulatoryparadigm shift in worldview amongst government leaders, states and theirtechnocratic central banking community There was a rapid evolution in thecollective policymaking narrative, which underpinned new and refurbishedinternational political, regulatory and architectural constructs This was ‘anew phase’ (Wade, 2008: 3) – one which entailed the rejection of key aspects

of the laissez-faire neoliberal worldview and its assumptions

Utilizing Kuhn and Hall to understand crisis response

Thomas Kuhn described the process of paradigm shift A shift occurs whenanomalies arise that can only be effectively described, answered and dealtwith by new hitherto controversial explanations (theories) and an accom-panying worldview Only after a paradigm shift occurs does a series of dif-ferent truths take their place at the centre of the new worldview constructed

of new scientific facts and a new orthodoxy Peter Hall applied the concept ofparadigm shift to analyse intellectual and political forces centred on economicpolicymaking in Britain and a dramatic shift from established Keynesiannorms to neoliberal monetarist supply-side economics in the 1980s; this was theconstruction of a new policy paradigm Hall posited three orders of change.First-order changes are forms of normal policymaking, ‘a process thatadjusts policy without challenging the overall terms of a given policy para-digm’ (Hall, 1993: 279) This is ‘paradigm maintenance’ (Skogstad, 2008: 16):adjustments or small changes in focus and direction within an agreed narra-tive construction Existing truths are not challenged and are not in dispute.Second-order changes are moderately more significant, where the instrument

of a policy is adjusted but not the overarching policy Bothfirst- and order changes are characterized by incrementalism (Hall, 1993) Third-orderchanges reflect radical changes to the overarching terms of the discourseand indicate that a paradigm shift or replacement is occurring They involvethe accumulation of anomalies, experimentation, failures and a reappraisal ofexisting truths The process is likely to be contested An intensification ofdebate about economic issues will occur Issues of authority (i.e power) arecentral Third-order change, the paradigm shift described by Kuhn in thescientific world and Hall in the economic context, is a major reappraisal, anevent at least an order of magnitude greater than first- and second-orderchanges This book identifies a shift in narrative worldview to some extentamongst political leaders, but especially amongst the elite of the world’scentral banking community, who adjust their policy consensus and championfirst-, second- and third-order changes that collectively constitute the beginning

second-of a paradigm shift

Paradigms tend to be championed by leaders, experts and transnationalactors, and are characterized by periods of stability followed by abrupt episodes

of substantial change (Wilson, 2000), via a process of punctuated equilibrium.This is what we saw in the crisis response particularly in 2008–2009 For a policyparadigm shift to take place, policymaking actors must be challenged by modelfailures and growing anomalies (Weir and Skocpol, 1983) The paradigm or eracan be said to end when its basic illusions are seen as false Thefinancial crisiscreated conditions for a paradigm replacement because the dominant laissez-faire neoliberal deregulatory model of financial architecture of the last threedecades was compromised (Wade, 2008) This allowed the intellectual economicbeliefs behind the prevailing paradigm to be increasingly challenged (El-Erian,2009; Stiglitz, 2009, 2010), leading some to suggest that the Anglo-Americanderegulatory laissez-faire, neoliberal, neoclassical economic paradigm hadbecome exhausted (Palley, 2009) A strong challenge to the dominant world-view is then possible because the severe economic crisis creates a transforma-tional opportunity, a paradigmatic moment (Assenza et al., 2011; Fergusson etal., 2009; Soros, 2008)

In essence, for a paradigm shift to occur, the consensus policy narrative in acommunity must make a jump, when confronted by increasing anomalies;there has to be the abandonment of the old and the taking up of a new theoryand related policy positions in response to recognized anomalies and failures

in the past worldview This is what began in 2008 and is still underway in2015

Whether or not a paradigm shift is underway is a matter of dispute Someobservers, such as Helleiner (2014), see the current crisis and response assimply a maintenance of the status quo He is joined by Blyth (2013), whoviews changes underway as onlyfirst and second order; in Blyth’s formulation1+2 does not equal 3, i.e incrementalism alone does not signal a paradigmshift Still others try to bridge the ‘paradigm gap’ by stretching Hall’s defini-tion and arguing that paradigms can indeed shift via progressive incrementalsteps alone (Moschella and Tsingou, 2013)

This book rejects the proposition that the crisis resulted in little or nochange in community narratives and policy outcomes, and finds that, whenthe response and reform waves are viewed as a whole and within the broadercultural context, with sufficient temporal distance from events, the crisisresponse was not just an exercise in incrementalism, but something muchmore significant There was in fact a break, a jump, a third-order shift, which

is then supported by smaller, less substantial,first- and second-order changes:

a crisis-induced narrative shift The new narrative moves away from marketauthority and towards a broad-based reassertion of state authority, and itsignals a rejection of aspects of laissez-faire neoliberalism, as it was applied tothe regulation of globalfinancial markets and firms At this point, seven years

on from the apogee of the crisis, the shift is confined to a macroprudentialpolicy consensus and to regulatory policies that are largely controlled anddirected by the central banking community Critics are right that the shift

does not encompass a rejection of the neoliberal market economy model as awhole; it is presently a narrower, technical paradigm shift.

But, because of the power and authority of the central bank communitypromulgating and defending the new narrative, architecture and agreed poli-cies, what is underway has potentially greater importance for the current andfuture governance of the global markets, firms and, by extension, the opera-tion of the real economy In other words what is being observed is a narrativeand technocratic shift with macroeconomic implications That was a goal ofthe architects who designed the new global structures – to apply technicalpolicy changes, collectively and individually, that would, it was hoped,enhance the stability of the globalfinancial system in the future

The narrative and policy shift that underpinned collective policy actionsafter 2008 is recognized by leaders, participants and actors as a ‘new con-sensus’ based on agreed macroprudential policies and tools applied to theworld’s largest banks and other actions designed to re-regulate global finan-cial markets This is significant, because this collective realization of a shift inthe community consensus strengthens the position of those who hold the newworldview, and they henceforth view the policymaking process through a newlens, one that comports with the new worldview and one which, once it is inplace, is resistant to attack, to dismemberment

Why narratives matter

Narratives matter in political economy because they help clarify and provide

a foundation for decision making and policy actions Faced by sudden severeevents, the narratives adopted by a community help it address key questionsthat arise in response to crises: how we got there, what went wrong and what

to do to stop it from happening again These narratives reduce uncertaintyand galvanize action In analysing and dissecting the crisis response andpolicy process that began in 2008 and continues in 2015, the underlying nar-ratives allow us a window into the crisis dynamics and formulation of the newpolicy consensus, which underpins and supports the policy paradigm shiftthat follows from it

The book draws upon a series of 34 high-level, qualitative interviews withmany of the governmental, central bank and supervisory principals presentand active in key decision-making meetings and roles from 2008 onwards(from 11 G20 and five non-G20 states) These interviews involved the socialproduction of knowledge; they provided a conversational window into eventswhich is ‘contextual, linguistic, narrative and pragmatic’ (Kvale and Brink-mann, 2009: 18) In using such narrative material, we are‘putting oneself inthe place of the other’ (Crotty, 1998: 76) Of course, recalled narratives aroundevents in the past are subjective and reflective of the individuals’ own biasesand perspectives Nonetheless the sources can, according to the interactionisttradition, ‘give an authentic insight into people’s experiences’ (Silverman,2001: 87) The subjects interviewed had direct personal experience of the crisis

management from 2007–2008, of the response since then, and were senioractors in the decision-making processes Seniority is important, especiallywhen analysing an opaque, elite, leader-driven diplomatic and technocraticpolicymaking process with relatively few key actors and players The interviewsprovided a view of the policy consensus, political economy and diplomaticfactors behind the evolution of the post-crisis international architectural andregulatory policy response, through the creation of the G20 and the creation

of the Financial Stability Board

Fundamentally, it is these policy narratives, their strengths and weaknesses, thedisputes seen, and policy outcomes observed, which enable us to understand whatoccurred in response to the crisis and what continues to unfold today The bookfinds that the extent to which a common narrative and a new policy consensusemerges is linked to the strength of the outcomes observed and the robustness (ornot) of the paradigm shift that results Policy change is about narratives, but it isalso, in this case, about the negotiating processes in international diplomacy andG20 summitry, which exhibits its own dynamics and rhythm

The ‘two-level game’ in normal times and crisis

Readers require models to understand the dynamics in international macy and G20 summitry This book applies Putnam’s two-level game to theG20 summits process (Putnam, 1988; Putnam and Bayne, 1984) Putnam usedgame theory to design a model in which international negotiations betweenstates comprise simultaneous negotiations at the international level, betweengovernments (level-one negotiations), and at the intranational level or domesticinternal negotiations, between actors (level-two negotiations) In the domesticnegotiations, the government weighs demands by actors and constructs coali-tions At the international level, the government seeks to address demandswithout committing to anything that could prove unacceptable to majordomestic interests Agreements in summitry are composed of what Putnamcalls ‘win sets’, which occur when the positions of the actors at both theinternational and national levels overlap and permit agreement This two-levelgame analytical framework illuminates the G20 process

diplo-The book identifies a difference between Putnam’s construct in non-crisisperiods and when it is applied in a period of economic crisis, as in Figure 1.1 Innon-crisis periods, level-one negotiation positions of A and B may indeed havelimited overlap Each actor’s position is distinct and can be in conflict Forexample, in non-crisis periods, US negotiators rarely see overlap with the level-one goals of their Chinese counterparts In normal times, domestic interests onboth sides also drive them apart, creating little if any win sets For example,domestic US demands for market access by major USfinancial firms to Chinesemarkets fall on deaf ears in Beijing because this conflicts with the position ofChina’s state-owned banks to restrict new entrants into the domestic market.Result: no level-one or level-two win-set space, and no progress In crisis periodsthe nature of the two-level game is distinctly different

Figure 1.1 Two-level games in a non-crisis period and during a period of economic

crisis

Non-crisis Period

Negotiator A

Level-One Goals Overlap in goals limited (if at all)

Positions distinct and possibly

conflictual

Level-Two Goals A's domestic interests diverge

Level-One Goals Overlap in goals limited (if at all) Positions distinct and possibly conflictual Negotiator B

Negotiator A

Level-One Goals , Overlap can be seen Forced convergence in position's

Level-Two Goals

A's domestic interests can be overridden

and/or win sets expand

- \ — Level-One Goals

\ Overlap can be seen Forded convergence in positions

Negotiator A

In a period of global economic crisis, the diplomatic negotiating calculuschanges The goals of level-one negotiators in country A and country B converge

or overlap Win sets open up as domestic interests either temporarily diminish inimportance or can be overridden by level-one goals Result: a consensus, andpolicy actions can be agreed and acted upon Putnam suggests, and we see inthe G20-FSB crisis-response that: ‘the greater the autonomy of central deci-sion makers from their level two constituents the larger the win set’ (Putnam,1988: 449) The crisis provides evidence of this, with G20 leaders negotiatingand agreeing to deals fashioned by central bank and supervisory technocrats(who were independent and faced no electoral pressure) Those G20 leadersand, especially their senior central banking proxies, in phases one and two ofthe crisis, were able to take positions opposed by their own national level-twoconstituents (i.e the world’s largest banks) A senior participant in the G20process captured the effect of crisis upon the two-level game: leaders under-stood the ‘need for comprehensive action’ and this view was ‘widely shared’There was a ‘real changing of views’, a consensus amongst level-one actors(Mackintosh, 2012, 24, pp 3–4).3

Figure 1.1 graphically represents the two-levelgame operating in non-crisis and crisis periods

Putnam’s two-level game also operates in complex or contentious financialreform areas

The book identifies instances where the G20 technical negotiators went backfor legislative solutions to a problem agreed to at the macro-G20 level In thosecases, leaders and technocrats had to engage in parliamentary and nationalnegotiations with level-two domestic interests As a result, the complexity and

difficulty of securing final ratification, and agreement amongst national actors,and thus implementation, increased This is in line with Putnam’s model

As the financial and economic crisis eased in severity from 2010 onwards,especially in areas where the lead central banking community had weaker (or no)levers of policy control, the outcomes were notably less robust, because wins setsare once again limited, and level-one and level-two interests clash With little or

no consensus, there is much less progress and only first-order changes inpolicies Putnam’s model thus helps the reader understand the dynamics inG20 summitry and in the technical negotiations below them But we mustalso be alert to the impact of the central banking community that dominatedthose technical negotiations below the G20, which was and remains pivotal tothe policy reforms and paradigm shift observed

The central banking epistemic community and paradigm shift

The book explores not only G20 summitry, but also focuses on the narrativeshift and technical-level architectural and policy outcomes that were agreed inprinciple by the G20 but which were designed and executed by a cohesive,elite, central banking community, led by North American and European fig-ures These individuals operated as the dominant epistemic community duringthe crisis response and reform processes This same community continues to

drive the building, maintenance and defence of the new re-regulatory view and the reassertion of state authority over global financial markets andfirms in 2015.

world-An epistemic community is a network of professionals with recognizedexpertise and policy competence and knowledge in a specific field While allmembers of the community need not come from the same speciality, com-munity members share in common a set of normative and principled beliefs,which underpin the interaction of the community; these are causal beliefsbased on an analysis of the shared problems that they confront, possiblepolicy actions, and desired outcomes; they are notions of validity – of inter-subjective, internally defined criteria for judging knowledge in their area ofexpertise; and they will be engaged in a common policy enterprise addressingthe identified common problems related to their area of expertise which theybelieve will result in improvements to the commonwealth (Haas, 1992: 3).The G20 leaders relied on trusted central bankers and this small epistemiccommunity Leaders stood side by side with their central bankers in theimmediate responses to the global economic crisis, rescuing the system via acoordinated policy response to the financial crisis with exceptional fiscal andmonetary policy actions Leaders often deferred to the community’s technicalknowledge and looked to the central bankers for solutions After all, the G20politicians did not have the time or the ability to determine the detailedreform agenda But they knew action was needed and needed fast And theywere prepared to strongly back the central banking community’s reformagenda That agenda was girded and anchored in a crisis-altered new narrativeand policy consensus within the central banking community The narrativecentred on the importance of enhanced institutionalized international regulatorycoordination and cooperation, and a championing of macroprudential policytools and mechanisms to ensure the future financial stability of the globaleconomy

The book will show that the success of a particular reform endeavour isrelated to the extent to which the central banking community recognizesanomalies, its international and national policymaking strength in the policyspace and the degree to which it has a common policy narrative and con-sensus It is the combination of these three factors that influences the strength,the success or the failure of policy reforms in particular cases, and hence thedegree of paradigm shift It is useful at this point to view these interactionsgraphically, as is done in Figure 1.2 The axes are:

1 The build-up of recognized critical anomalies in the system (top X-axis);

2 The strength of the central banking epistemic community in policymakingand implementation (bottom X-axis);

3 The strength of the policy consensus seen in the policy area (right-handY-axis);

4 The Kuhn/Hall paradigm shift andfirst-, second- and third-order changes(left-hand Y-axis)

The sloping line running diagonally through the chart represents differentpolicy outcomes.

In Policy A: the number of collectively recognized anomalies is small.The central banking epistemic community is weak in the policy area Theresulting policy consensus is also weak and the results arefirst-order changes.The combination of these factors (too few anomalies, a weak or conflictedpolicy community and a weak consensus) together produces poor policyoutcomes

In Policy B: a greater number of anomalies are recognized The centralepistemic community is stronger in the policy arena The policy consensus ismore robust The resulting policy outcome can therefore be stronger and ofsecond-order magnitude

In Policy C: huge anomalies are present and are recognized by a majority

of the central banking community and actors The community is in control ofpolicy and recognizes the anomalies A strong new policy consensus is agreed.The community has power and influence in the policy area This results in athird-order paradigm shift

What the figure underscores is that it is the combination of these factorsthat impacts the policy outcomes and orders of change, or degrees of para-digm shift This dynamic will be observed in particular in Chapter 6, on FSBpolicy outcomes

Figure 1.2 The epistemic community, policy consensus and paradigm shift

Watching and dissecting the shift underway

To conclude, this book addresses the crisis response in 2008–2014 by advancedand emerging country leaders and their most trusted technocrats from centralbanks It identifies a crisis-influenced change in the underlying policy narra-tives amongst both groups, but especially amongst the community composed

of advanced and emerging country leaders This worldview signalled a sertion of state authority on financial markets and firms, and a retreat ofmarket authority and laissez-faire neoliberalism in the regulatory sphere Thewave of crisis management actions and reforms began in 2008, gatheredmomentum in 2009 and continues at a slower pace in 2015, supported by theG20 and the FSB community

reas-This book will show that, as in Figure 1.3, the G20-FSB regulatory reformwave rises in 2008 and peaks in 2009 But, from that point on, the reform processcontinues, even though the crisis abates What is observed is the extended dura-tion of the regulatory reform wave (as per line A) Contrary to the ‘statusquo’ arguments, the regulatory reforms begun in 2008–2009 have not rapidlydiminished in force (as in line B) To the contrary, they are being defended,buttressed, built upon This is what you should see as a paradigm shiftbecomes durable – third-order changes, followed by first- and second-orderadditions to the global regulatory architecture and polices

In 2015, the consensual certainties of the past have been jettisoned and aparadigm shift in the globalfinancial regulatory architecture and policy frame-work is underway But, as with such major shifts in the past, the shift takesyears to coalesce It is a fluid process, and some individual policy waves aremore significant than others This is to be expected because a major shift, aKuhnian wave in ideological and financial regulatory approach, is notinstantaneous The Copernican revolution took years to become broadly

Figure 1.3 The regulatory reform wave

Frequency and Amplitude Over Time

Waves of financial boom, crisis and bust

Septembei

2008 /

Eurozone Crisis

B Maximal

accepted Mrs Thatcher’s impact was not fully recognized until years later.Today, this shift remains partly formed and in dispute But it is being defended

by its community of strongest adherents: the central banking community

As a paradigm shift takes place, each observer is a single surfer, ridingupon the wave, so close to it that their perspective can be distorted, making it

difficult to judge the size of the wave, or when it may crest A person standingfurther back from the seascape can better judge the size of the wave uponwhich we find ourselves This book suggests that, viewed as whole and withenough distance from the surface of the reform wave, the full scope andamplitude of the paradigm shift underway can be more easily seen Otherfactors that may also be effecting the swell, such as shifts in the cultural andsocietal ideological weather patterns within which waves are formed, rise andfall, and these are also visible from this wider perspective

We now turn our attention to the first G20 summit, which took place inWashington in November, 2008 Thefinancial and economic crisis was surging.Political leaders frantically sought a mechanism through which to respond Theybegan crisis management But this would not just be the old G7 club takingcharge This time many more leaders were called to sit at the diplomatic tableand join the crisis response, as the crisis was at the core, not the periphery,and the former needed the help and the resources of the latter to address theglobal crisis Leaders would seek to calm the panicked markets Even at thisvery early stage, leaders and central bankers also began to delineate the contours

of thefinancial reform endeavour that they would engage upon collectively Stateauthority over markets would be reasserted over markets The retreat of thestate would halt and change direction A new paradigm would start tobecome visible

Notes

1 This chapter draws on work previously published by the author in ‘Crises and

2 The Group of Seven is composed of leaders, finance ministers and central bankgovernors from the following countries: Canada, France, Germany, Italy, Japan, theUnited Kingdom and the United States

3 Author’s note: interviews are referenced throughout the text as follows: author’sname, year of the interview, number of the interview and page number or numbers

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