Reflections on: Konings, Martijn. (2008) âThe Institutional Foundations of US Structural Power in International Finance: From the Re-Emergence of Global Finance to the Monetarist Turn.â Review of International Political Economy 15 (1): 35â61.
As suggested by the title, Konings is attempting to construct a chronology of causal factors leading to the strengthening of US structural power in global finance. Structural power is here defined as the capacity to finance payments deficits by (1) selling dollar debt and (2) dumping liquidity onto the rest of the world. Koningsâ claim is that understanding this structural power in international finance can be advanced by paying more attention to its institutional basis and technical underpinnings.
Koningsâ positions his own account in dialectical relation to previous narratives of âneoliberalismâ and âfinancialisationâ in International Political economy. Ostensibly, Koningsâ approach is different to those scholars who focus on âderegulationâ, as he advocates an âinstitution-based approachâ, owing to a specific âinstitutional configurationâ of the Federal Reserve, financial markets, and banks. The author specifically states that he doesnât want to reduce his analysis to one or two aspects or "juxtapose institutions and markets" (42).
Central to his analysis is the phenomenon of disintermediation. New Deal regulations in the United States that capped interest rates also created direct investment in financial instruments through mortgages and pension funds. Moreover, when market interest rates rose in the 1950s, the deposit base of banks shrunk  large depositors started to buy short term securities instead.-- lending money came less from banks and more from money markets. Non-bank financial intermediaries (who offered access to secondary capital markets) proved competition to banks.
So, in the 1960s banks would set a target for asset growth, 'extend credit' or lend accordingly, and then then go to the money market to buy money in order to match the assets. This process Konings calls âliability managementâ. This process of liability management was dependent upon the sale of certificates of deposit. Â What is important to remember is that the markets on which certificates of deposit were traded are not pre-given entities. Rather the key component here is the extension of liquidity and tradeability. Certificates of Deposit have no essential difference to Time Deposits in that they also have a fixed interest rate and date of maturity (as well of penalty if you cash it in early), the difference is their tradeability on secondary markets. The secondary market is not somewhere the banks GO in order to trade CDs, but rather something they constitute in trading them; their legitimacy is determined by their lawfulness.
Konings emphases the fact that these markets are constituted via the activities themselves by stating that had the Federal Reserve wanted to, the nascent market in certificates of deposit could have been killed off by lowering the interest rate ceilings on time deposits. Instead, it raised them and eventually the secondary market in CDs had grown to such an extent that killing it at that point would have caused a "serious financial crisis" (46-47)
Because the euromarket was not subject to new deal regulations, banks could access the treasury dollars (from money markets) held in London or other financial centers outside of the United States by exploiting their branches overseas to raise even more funds from the markets. Total liabilities rose from 2 billion to 13 billion from 1967 to 1969. (48) At a certain point the European countries locked themselves into a Dollar standard because getting rid of the dollars held abroad would devalue the US currency and thereby make it more competitive.
The relationship that previously allowed the Fed to control interest rates according to their relation to 'free reserves' (i.e. above reserve requirements, liquidity ratio) deteriorated because banks were able in the 1970s to actively acquire liabilities (especially in the Euromarket). Konings states that when inflation rose to high levels in the 1970s, the Fed under Volcker started targeting total reserves rather than free reserves. It worked to limit inflation but did not slow down credit creation. Fed stopped trying to regulate the Euromarket because the "ongoing expansion of money and credit no longer resulted in high rates of inflation".
What is left unclear is Konings insistence that the the Volcker shocks solved the âcontradictionâ or âJanus faceâ of US led liability creation abroad that would devalue their currency. Why is it that incessant credit/money creation has no bearing on inflation anymore? Konings stated that this is because of the export of the âinstitutional configurationâ from the US to the rest of the world. But if the money supply is expanding, does this mean that inflation is concentrated in specific assets? If so, what are these assets and how is it related to the distribution of wealth in the economy and thereby consumer behavior?