Oct. 21 - New Memo Shows WTO Roots of Financial Crisis

Posted: 10/21/2008

Full memo (PDF, updated 9/09)

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Deregulation of the financial service sector ? including banking, insurance, asset management, pension funds, securities, financial information, and financial advisory services ? has been among the most important, but least discussed aspects of the World Trade Organization?s (WTO) agenda since its 1995 inception. As part of its original WTO commitments, the United States agreed to conform a broad array of financial services to comply with regulatory limits established in the WTO?s General Agreement on Trade in Services (GATS). Given the decade-plus push by various financial service firms to roll back domestic regulation, some of the U.S. WTO commitments simply locked into place existing policies. In other cases, for instance regarding the ?firewall? policies established in the 1933 Glass-Steagall Act that forbade bank holding companies from operating other financial services, U.S. WTO commitments that contradicted domestic policy were used to push for domestic revocation of existing laws. The United States then used ongoing WTO financial service negotiations to export the U.S. model of extreme financial service deregulation to the other 100-plus WTO signatory countries, including through a 1999 WTO Financial Service Agreement (FSA).

...In the final analysis, the WTO agreements have more to do with governance than with trade. Over the past century, U.S. financial regulation has shifted from strict financial controls over banking and capital markets following the Great Depression, to periods of deregulation in the 1980s and 1990s. The WTO GATS locks in the U.S. status quo at a time of unprecedented financial liberalization, and exports this model worldwide. Whether this extreme deregulatory model is beneficial to most people ? or sustainable ? is a highly contested question. By imposing the model worldwide, the WTO GATS subjects millions of people to becoming unwilling guinea pigs in a radical policy experiment. And, if the experiment goes bad, and absent changes to these international commercial agreements, governments worldwide could face daunting difficulties if they seek to reverse the trend toward financial service deregulation.

Read the full memo here (PDF).