Business

Globalization and 'Rogue' Economics

What does the collapse of communism have to do with the credit crunch? According to Italian economist Loretta Napoleoni, author of the best-selling book "Terror Inc: Tracing the Money Behind Global Terrorism," the fall of the Berlin wall set off a global economic transformation that led directly to the turmoil on Wall Street and will ultimately require a new era of regulation. Napoleoni, a senior partner at G Risk, a London-based risk agency, argues that the crisis won't end until the excesses of globalization—which include growing criminal markets in sex slaves and counterfeit drugs—are brought under control. Napoleoni spoke to NEWSWEEK's Temma Ehrenfeld about the credit crisis, its aftermath and the author's new book, "Rogue Economics: Capitalism's New Reality" (Seven Stories. $24.95). Excerpts:

NEWSWEEK: What exactly is "rogue economics"?
Loretta Napoleoni:
It's an umbrella term for black markets and criminal markets but also gray areas that aren't regulated. It occurs in periods of political upheaval when the economy moves faster than political sentiment and [at a rate which makes] politicians and governments lose control. The credit crisis is an example. Carlyle Capital borrowed $33 for every dollar it held in assets. Bear Stearns, its largest lender, went down when Carlyle Capital became insolvent. Nobody broke any laws because there was no legislation to limit debt exposure. But the consequences of their behavior negatively affected thousands of employees and depositors. Regulation would have prevented that … Right now, China can sell counterfeit products in the United States; they just alter the logo a little bit. You can buy anything on the Internet. It's a vehicle for prostitution, pornography, child pornography. Those are all examples of rogue economics.

You're critical of globalization. Why?
Globalization has helped rogue economics spread. In the 1970s, you knew where products came from; it was a smaller world. For example, now when you order fish in a restaurant, you don't know where it came from. Seventy percent of the fish we eat is black market, fished in violation of international laws. Our ignorance makes us unwilling partners in crime. Rogue economics is turning the global market into our worst nightmare.

You begin your book with the fall of the Berlin wall and the spread of democracy. How did these events lead to today's economic turbulence?
One example is the sex trade. After the collapse of communism, women from the former Soviet bloc were desperate. Unemployment went from virtually zero to 80 percent after the wall fell. So the women became prostitutes or sex slaves in the West. Also, the supply of labor in the West doubled as people came from the East. That led to a deflationary situation around the world in which interest rates fell and banks became more aggressive, looking for more and higher returns. Investment banks were hardly regulated; nearly everything was allowed.

So you'd like to see more regulation of American investment banks. Do you anticipate that will happen?
Yes, but you need global finance behind you. The bloodbath isn't big enough yet. Next in line are the British banks that went aggressively [into the] U.S. market. They're less capitalized than U.S. banks.

Do you expect to see a failure of a global British bank?
It's likely. And we won't be able to save it. We've already had the failure of a British bank, Northern Rock, which the British government nationalized in order to save it and prevent panic among depositors.

What might happen if a global bank fails? A 1929-like depression?
In 1929, no one realized what to do. This time, I'd expect four to five years of zero growth for the United States and the European community. The world's economy will move East. For example, after 9/11, fear of pipeline disruptions sent oil prices up from $18 a barrel to $100 and there's been an accumulation of money in the sovereign funds of Kuwait, Saudi Arabia … and Chile. They're keeping that money outside the balance of payments. It's true the Arabs invested in Merrill Lynch and the Chinese bought a share of Blackstone. But a lot of that money is in gold, and they will increasingly be investing among themselves, or in China, not in the West. They may as well wait until Wall Street reaches bottom.

So how will the West climb out of the rough period?
The West will have to rebuild and clean up the criminal economy that is contaminating everything else. It will have to regulate. Take Liechtenstein: it has been operating like an offshore bank providing shelter for tax evaders. Now Germany, Great Britain and the United States are all going after tax evaders [that may have used Liechtenstein as a haven]. Germany had to pay an informant to get information, but the cost was small compared to the money it will bring in.

How does rogue economics affect us as individuals?
It transforms all of us into the unwilling partners of rogue entrepreneurs, a disturbing thought. But the way forward is to become conscious of the new reality. As consumers and as voters we can say no to rogue economics and demand regulation. Globalization is a great thing, but it needs a legal framework in which to blossom.

Editor's Pick