Having public pay bank debts just won't work

WORLD VIEW: A new balance must be struck between states, markets, corporations and civil society

FIGURES FOR the growth of worldwide financial markets in recent decades give a startling picture of how the sector has come to dominate economic activity in many parts of the world. Estimates for the value of financial assets (excluding derivatives) rose from 108 per cent of annual gross world product (GWP) in 1980 to 400 per cent in 2009.

The notional value of derivatives rose 15 times from $41 trillion (€31.5 trillion) in 1995 to $615 trillion in 2009 – about 10 times GWP.

We are living through the consequences of this system’s trauma in the global financial crisis of 2008-2009 and are daily surrounded by arguments over banking regulation and who should bear the costs of financial failure. It is possibly the end of the neoliberal era and policy regime characterised by capital mobility and deregulation, and could be the beginning of a new one with a different relationship between states and markets.

But a huge paradox pertains, well-captured in the title of a fine book published last year, The Strange Non-Death of Neoliberalism, by the political economist Colin Crouch. Neoliberalism’s predecessor policy regime, Keynesian demand management, collapsed in the inflation crisis of the 1970s, he argues, because the classes in whose interests it primarily operated – the manual workers of western industrial society – were in historical decline and losing their social power.

In contrast the forces that gain most from neoliberalism – global corporations and especially financial ones – have emerged from this crisis more powerful than before. Considered too big to fail, they have to be protected from their own folly following their credit and derivatives spree of the 1990s and 2000s.

He describes that as “privatised Keynesianism” – the substitution of private credit among poor and middle income people for state action, and the emergence of derivatives and futures markets among the very wealthy. The costs of the failure are being redistributed on cuts in public and welfare services – socialising the financial sector’s losses – while they return to privatising the gains now considered indispensable for economic recovery.

It is an audacious and arrogant claim for special treatment. And it is now entangled inescapably with state budgets and sovereignty, so that simply writing off the losses against bank shareholders, the supposedly normal practice of free market capitalism, is made more difficult.

But the debt hanging over states like Ireland, which went furthest with the spree and then with socialising the losses, is simply unsustainable. It suffocates recovery – as does the popular austerity imposed to transfer those losses. So the policies adopted are not working. There is a contradiction between saving the banks, enabling financial markets and sustainable economic growth.