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.
Shadow boxing over this question dominates politics at national and international levels in Europe and the United States. Yesterday’s agreement by euro zone leaders to negotiate a new banking supervision regime by the end of the year at least brings the issue into the foreground. It pitches creditor states against debtor ones in the EU, especially over historic or legacy debts now held by states that rescued banks.
If these are indeed to become separated from sovereign debt by enabling the European Central Bank to invest directly in banks as was agreed last June and has now been reaffirmed as a possible outcome, the reality of that contradiction will be acknowledged.
But the political and economic logic involved tracks back to the interconnection between lenders and borrowers during the spree, potentially exposing German, French and other core banks and states to sharing those costs.
That unmasks the narrative established in the creditor states that peripheral profligacy and moral turpitude are to blame for the crisis. This difficulty may explain Angela Merkel’s statement in Brussels yesterday that recapitalisation would only be possible for future not past debts.
So this is a political game with very high and alarming stakes – including the rapid emergence of an explicitly fascist party in Greece, despite the amount of debt that has already been written off there. Ireland is now aligned with France, Italy and Spain in calling for debt relief and mutualisation. Eurobonds are once more on the agenda as a way of doing that mutualisation effectively. They could help scale down the financial sector, as could stricter regulation of so-called systemic banks.
So too could a financial transaction tax, now supported by enough EU states to go ahead with it. Ireland rejects that if London does, thereby illustrating very well another feature of the surviving neoliberal policy regime highlighted by Crouch – the ability of these global corporations to capture governments, as seen in the Irish case by their complete domination of the committee dealing with the tax in the Taoiseach’s office.
Crouch doubts it will be possible to dislodge the financial corporations, given their capacity to redefine a crisis caused by their own appalling behaviour as a crisis of public spending.
His hopes for a more engaged politics rest on creating a new balance between states, markets, corporations and civil society. Others will want to go further, including at European and global levels.