Is the Goldman inquiry just a gesture?

On 11 February 1987 the US prosectuor Rudolph Giuliani was in the thick of his investigation into insider trading on Wall Street. He reached the conclusion that a Goldman Sachs arbitrageur named Ronald Freeman was part of the insider trading ring led by Michael Milken and Ivan Boesky. He arran-ged to have Freeman picked up.

The next morning, "with snow flurries whirling through the gray canyons of the financial district", writes James B Stewart in Den of Thieves, three federal officers showed up outside Freeman's glass-enclosed office on the 29th floor of Goldman's headquarters on Broad Street. "I have a federal warrant for your arrest," said one.

Freeman was then frisked. "The incident created something of a commotion on the trading floor," Stewart writes. Freeman was escorted to the lift, taken to the building's lobby, handcuffed, and led off.

Freeman's arrest constitutes, at best, a footnote in the history of the famous Justice Department investigation. Three years later the arbitrageur served four months in jail and was released having paid his debt to society.

None the less, the sight of handcuffs at the headquarters of Goldman Sachs remains one of the visual images etched in the collective mind of Wall Street. When news broke on Friday that the US Justice Department was investigating Goldman and 24 other Wall Street firms for allegedly fixing the prices of underwriting fees on initial public offerings, a host of nightmarish images must have revisited the district.

Quickly repressed, quickly brought under spin control, the images may, indeed, prove irrelevant. A Justice Department investigation indicates nothing more than that the US government is curious about some of the things that are going on on Wall Street.

Nevertheless, it is one more bit of evidence that the global financial markets are becoming the fulcrum of a gigantic, worldwide, if still emerging, political debate over the merits of globalisation.

On Wall Street's own terms, doubts about globalisation are receding. By tomorrow night 15 per cent of Goldman will be safely in the hands of pension funds, mutual funds and insurance companies which, despite Friday's news, will have fought like cats and dogs to get in on the action.

Eight months after Goldman was forced to postpone its IPO as a result of a near-panic in financial markets, the financial crisis has been pronounced at an end by no less an authority than International Monetary Fund managing director Michel Camdessus.

Here are the headlines. Forget a crash. Forget, even, a recession. The IMF has forecast a recovery. Its experts say the world economy will grow by a pallid 2.3 per cent this year, but will pick up to a respectable 3.4 per cent next.

In some quarters this change in the world's perceived state has been conflated into finger-wagging at irresponsible doom-mongers. You predicted a crash, the sentiment goes. You were wrong. Eat your hat.

What actually happened, what is happening now, of course, was, and is, more complicated. After shocks in Asia, Russia and Latin America, worldwide business confidence was shaken to breaking point.

The financial crisis not only prompted fears of a stock market crash, it led to a seizing up of the credit system - the circulatory system for the world economy. Bankers briefly stopped lending. A few more steps down this path and the world could have suffered a deflation. Deflation could have sparked a genuine depression.

But it didn't happen. Central banks cut interest rates. This cheered investors. Confidence returned to the stock markets. The rebound in stock markets gave new heart to bankers. Renewed lending has helped restore confidence in the business world as a whole.

This is, indeed, all seriously good news. It should, and does, chasten bears like me from propounding facile pessimistic scenarios.

Still, the trend of events at an historic, if not financial market, forecasting level remains worrying. The world is progressively being stripped of the institutions set up by Keynes & co after the Second World War to guarantee international financial stability.

In the 1970s we lost fixed exchange rates. In the 1980s it was the orderly flow of funds from the industrial to the developing world. Last August, with the default of Russia, and the decision by the IMF not to step in and bail out Russia, we lost all sense that the Fund was a lender of last resort. Last autumn, for a matter of weeks, it seemed, one man, Federal Reserve chairman Alan Greenspan, stood between the world economy and the abyss.

Since then there has been more talk about a new world financial architecture. Hedge funds are being investigated and noodled all over the place. On top of this we have the ventilation of pieties about the need for greater transparency in emerging markets. All this activity has its point. Hedge funds do need to be reined in. The world will be safer if and when we know that Asian banks are lending sensibly, and not to cronies. The so- called Stabilisation Forum set up in the wake of last year's financial crisis met in Washington last month, and, according to one participant, "achieved all that was achievable, given the politics between Group of Seven governments".

Still, the impression remains. The world's financial markets have become a law unto themselves. More, they rule the world. While it's party time, the public doesn't mind. It joins in. Last Saturday 20 flats went on sale in the Euston Road at 10.30 in the morning, at prices ranging from pounds 150,00 to pounds 275,000, and within two hours all but two were sold. By the end of the day all were sold.

On the fringes, however, there are signs of trouble. What does the war in Kosovo have to do with Russia's economic collapse? Maybe nothing. It's not clear. But then again ...

What do the London bombings have to do with the rush on the 20 flats in the Euston Road? To link the two is worthless. It's cocktail chatter. There's no proof one way or another that there is any such link. And yet ...

In the face of all such inchoate history in the making, Goldman will certainly be within its rights to celebrate the success of its IPO tomorrow. It is patently unfair to single it out from the other Wall Street firms under investigation by the US Justice Department, simply because news of this investigation comes at the time of the IPO.

And yet. Politics has become largely a matter of gesture. Washington's lawsuit against Microsoft for violation of US competition law was one such gesture. Its investigation of Wall Street for alleged price fixing is another gesture. It will be interesting to see what gesture Wall Street makes in response.