Het Neoliberale Geloof 477

http://www.guardian.co.uk/business/2009/nov/02/globalisation-financial-markets-reforms


Painful death of the American economic dream

This crisis has been a long time in coming, and history suggests that the
period of upheaval will be long and painful, just as it was between 1914
and 1945

It wasn't really supposed to end up like this. When the Berlin Wall came
crashing down 20 years ago, the cold war ended with triumph for the west.
Instead of two superpowers, there was one. Instead of competing ideologies,
there was capitalism, and a particularly brash form of capitalism at that.

The elder George Bush said the world should learn how to do things the
American way. "We know what works," he said. "Free markets work."

The reach of the market grew longer for two decades, encompassing China and
India as well as the former Soviet Union and its satellites. Rapid growth
brought impressive poverty reduction in China and India; there are few
Poles or Czechs who hanker after the days when Moscow pulled the strings.

But it was always inevitable that, sooner or later, globalisation would run
into a crisis, and what we have seen in the past two years is just the
start of it. Don't be fooled by the sucker's rally of the past six months
– Americans are once again running down savings to consume goods they
can't afford; China's exports are booming.

The global imbalances are back. A combination of political change and
technological revolution has always produced upheaval. That was true when
the spinning jenny met the Enlightenment, and it was true when a second
wave of inventions – cinema, electric light, the automobile, aircraft –
coincided with a crumbling of the 19th century balance of power.

Digital technology and bioscience will drive the third industrial
revolution, but these changes take place at a time when the spread of the
market has vastly increased the reserve army of labour. America's hegemony
is being threatened by the rise of China.

These, then, are combustible times. This crisis has been a long time in
coming, and history suggests that the period of upheaval will be long and
painful, just as it was between 1914 and 1945.

It didn't take long for the first cracks in the new global order to appear.
The golden age lasted for barely half a decade – the period between the
lifting of the iron curtain and the creation of the World Trade
Organisation in 1994. Even during that half-decade there were signs of
trouble, not least the impact of the shock treatment on the Russian economy
in the early 1990s.

But it was the succession of financial crises that began on the periphery
of the global economy and gradually worked their way towards the core that
gave the lie to the notion that there would be a smooth and steady
transition to market nirvana. The warnings from Mexico, Thailand and South
Korea, from the collapse of the hedge fund Long Term Capital Management and
from the dotcom bubble were ignored.

Policymakers found it easy to dismiss these flashpoints as teething
troubles. Growth was strong and inflation was low. The early 1990s to the
mid-2000s were what Mervyn King, the governor of the Bank of England, once
described as the NICE decade – the years of noninflationary continual
expansion.

Debt, of course, was the key. The loss of bargaining and spending power of
workers in the west was compensated by raging asset price booms which
allowed consumers to borrow against the rising price of their homes.

This was not just true of developed economies such as the US and Britain.
The annual transition report by the European Bank for Reconstruction and
Development, released today, says that large-scale capital inflows into
eastern European countries had "contributed to credit booms and foreign
currency lending. These, in turn, made the crisis deeper and complicated
its management."

Just as in Britain and the US, the easy availability of credit meant
excessive levels of debt when the global economy turned down and demanded
concerted international action to prevent an Iceland-style banking
meltdown.

Understandably, policymakers have been left bemused by the first systemic
crisis of the global age. Up until 2007 they thought their job was to
tinker with market economies; instead they face an existential challenge:
where do we go from here?

Option one is the Schumpeterian one: this is an era of creative
destruction, so we may as well grin and bear it. The problem of the
financial system is that the market has not been allowed to function
properly: badly run banks need to be allowed to fail so that good banks can
thrive. The second option is business as usual, which, predictably enough,
is the one favoured by the City and Wall Street. Given the size of their
welfare cheques from the taxpayer, big finance can hardly demur at the
prospect of tougher regulation, but it is lobbying hard against more
radical change. There is plenty of talk of throwing the baby out with the
bathwater and killing the goose that lays the golden eggs.

The Conservatives are in this camp, not just because David Cameron
bizarrely thinks the crisis was caused by too much government rather than
too little but because Boris Johnson is actively lobbying on behalf of City
hedge funds and private equity firms to block tougher European regulation.

Option three is business as usual plus extras. This recognises that there
has been a systemic problem in the financial sector but sees the answer as
tighter supervision, better surveillance of the global economy from the
International Monetary Fund, changes to capital adequacy rules to ensure
that banks can't lend as freely during booms, and new incentive structures
for financiers that will favour long-term growth of the business over
short-term speculative activity. This, no prizes for guessing, is where you
would find Gordon Brown and Barack Obama.

But there is a motley band of discontents for whom business as usual, in
whatever form, means that another crisis will erupt before too long. They
argue that the exiguous nature of current reform proposals is explained by
the institutional capture of governments by the investment banks, the
world's most powerful lobbying groups.

King's ideas for splitting up the banks into retail and investment arms
puts him in the option four group, as does Adair Turner's support for
financial transaction taxes. Others would go further. A recent report by
the United Nations committee on trade and development (Unctad) urged a
rethink of the "conventional wisdom that dismantling all obstacles to
cross-border private capital flows is the best recipe for countries to
advance their economic development. Those who support a green new deal –
expansionary monetary and fiscal policies designed to boost renewable
energy and support firms developing environmental technologies – say that
quantitative easing should have been used to support sustainable,
productive investment rather than to re-inflate asset prices. If the root
cause of the financial crisis was the imbalances in the global economy
prompted by the search for higher profits, real reform will require higher
real wages in the west, so that consumers are less dependent on debt. That
means a shift in the balance of power between labour and capital; it also
means a rethink of the shareholder model of capitalism.

Finally, there are those who believe that any conventional reform is doomed
because any growth-based model is at odds with the viability of the planet.

Where is the political centre of gravity now? Somewhere between option two
and three. That represents not just a missed opportunity but a profound
lack of judgment.

The seeds of the next crisis are being sown. Right here, right now.

larry.elliott@guardian.co.uk

guardian.co.uk/business/economics