The power of financial markets and financial actors over economies and societies is as hard to deny as it is to conclusively prove. From subprime mortgages to Greek debts to microloans, different people and different sectors all feel it in their own ways. “Financialisation” (Epstein, Krippner), “finance-led growth regime” (Boyer), “financial market capitalism” (Windolf) represent only some of the attempts to come to grips with this sea change; but none have provided decisive answers as to the “why” and “how”.
A new book proposes seeing finance (in the tradition of the French “Régulation School”) as a type of regulator – a subtle, insidious one. “Finance: The Discreet Regulator: How Financial Activities Shape and Transform the World” collects perspectives on how “financial markets are the seat of regulatory processes initiated and developed by core-capitalist financial institutions such as banks and audit firms”.
Financial actors manage interdependencies strategically in order to work on the formulation and implementation of norms and standards they intend to impose on society. They have an extensive ability … to influence broader changes while at the same time defining what they contend to be the public interest. These regulators are ‘discreet’… While they do not actually hide, they do not seek to be out in the open; they are often to be found behind the scenes, in the shadow of the business world. Their visible, official power shows no dramatic increase, but their ability to regulate markets discreetly in the background gives them unrivalled power. (3)
It is in this sense that Michael Power in the foreword speaks of “a body of knowledge called ‘financial economics'” as increasingly possessing a power of its own. It exerts a regulatory power “over both the regulator and the regulated … who must act and govern according to its precepts and imperatives” (xiii).
An interesting feature is that this book presents a distinctly francophone perspective (in English) on the roles of of financial markets and financial actors in shaping the world they operate in, and we live in. Not only are some lesser-known issues of financial political economy, which typically escape Anglo-Saxon perspectives, exposed; but also several chapters’ engagement with how different professions (controlling, accounting, compliance) navigate and construct the financial “iron cage” of their firms hark back to a distinctly French sociological approach, which focuses on the subtle hierarchies and situationally contingent types of “capital” which truly define the power to influence others.
Highlights of this edited volume
A chapter by Marc Lenglet on compliance officers shows how their apparently technical job in practice allows them to navigate ambiguous rules and frameworks, which they have the authority to communicate and interpret within the firm. “With their pivotal locus in the organization, compliance officers appear as intermediaries holding a nodal position between several interests, private and public, complementary and contradictory” (79). Far from being “box-tickers”, under regulatory frameworks increasingly geared towards financial markets’ requirements, compliance officers interpret and define – and even “moralize” (69) – corporate behaviour in a financial way. (In a similar vein is Morales and Pezet’s chapter on financial controlling.)
Another fascinating (multi-author) chapter details the role played by large banks in structuring Public-Private Partnerships (PPPs) in France. Faced with savvy industrial consortia and investment funds, the under-funded and inexperienced public agencies often depend on banks for advice on contractual intricacies in the PPP; details with vast long-term effects. The result is that “the financial world apparently holds a decisive role: it is able to impose its interests, and therefore its own idea of the PPP contract… The banks are undeniably masters of debt … holding a position that currently enables them discreetly to regulate the French Public Contracts milieu” (130, 131).
There is also the eminently readable chapter by Angelo Riva and Paul Lagneau-Ymonet (a contributor to this blog) on the revision of the EU’s “MiFID” (Markets in Financial Instruments Directive), which served to institutionalise competition in and between financial markets as a key central pillar of European financial governance. The authors posit that the commonplace “regulatory capture” conception of regulation falsely “suggests that regulators do not want to be captured”, but “this assumption remains to be proven” (146). In the ongoing reform of the MiFID, they show how large financial institutions have been – often through UK-based interest associations – best-positioned to impose their own view of “welfare maximisation” onto the debates over transparency and regulation; a fact detrimental of peripheral marketplaces like Paris.
Finally, there is the interesting chapter by Elise Penalva-Icher which argues that “finance is succeeding in discreetly imposing its view” (194) on Socially Responsible Investing (SRI) through – of all means – trade unions. SRI in France is oriented mainly at employee pension funds, and trade unions play a central role in governing these fairly new pension schemes. The unions have sought to define “socially responsible” mainly along criteria of employment generation. But Penalva-Ilcher argues that the focus on shareholder activism under SRI has brought these unions into a conflictive position where they must represent both worker and financial interests simultaneously; through the financial market, to boot.
For lack of an edited conclusion (the only evident weakness of the book), my take-home message was that the sheer complexity of financial frameworks, sufficient knowledge of which necessarily evades most of us, has a self-reinforcing regulatory effect: financial knowledge is a key source of legitimacy in social decision-making processes, which in turn shapes future frameworks and rules in ways which further benefit those who possess financial knowledge. Finance may be a “discreet” regulator, because it operates through what often appears as technical minutiae, but its discreet power continues to grow through these processes.