A single day, 9 August 2007, will go down in history as "debtonation day" - the beginning of the end of the deregulation and privatisation of finance that marks the era of globalisation.
It is a moment that I (alongside many others) had long predicted, most notably in an article for openDemocracy written in 2003 (see "The coming first world debt crisis" [1 September 2003], and my book of the same title [Palgrave, 2006]). The problem, as with Cassandras in other areas of life, was to gauge the precise timing of the global financial crisis that we knew was approaching.
A vital piece of evidence emerged in June 2007, when news broke that the New York-based Blackstone Group LP - the world's largest private-equity fund - had decided to go public. In other words its private owners had resolved (to the puzzlement of many) to make some activities transparent, and offer the company (both assets and liabilities) to shareholders. Many attributed a charitable motive to the company - a desire to ensure that the "little people" as well as the rich few should share in Blackstone's wealth (little mention was made of its losses).
It was at that point that the timing of the "debtonation" appeared imminent. It took two more months.
Ann Pettifor is executive director of Advocacy International. In the 1990s she helped design and lead the international campaign Jubilee 2000. She is author of The Real World Economic OutlookThe Coming First World Debt Crisis is published by Palgrave in October 2006). Her blog on the Guardian’shere commentisfree site is (Palgrave Macmillan, 2003). Her book
Also by Ann Pettifor on openDemocracy:
“The coming first world debt crisis” (1 September 2003)
“Ethiopia: the price of indifference” (19 February 2004)
"Gleneagles, 7/7 and Africa" (4 July 2006)
The problems revealed by "debtonation day" amount to a "system-crisis" that goes to the heart of the financial model which underpins that ephemeral economic concept, "globalisation" (see Tony Curzon Price, "The end of gentlemanly capitalism", 13 August 2007). It is the deregulated finance sector that has undermined the power and effectiveness of governments, and forced open capital and trade markets. It is deregulated finance that has forced down the price of labour, demanded excessive returns both of labour and the ecosystem, and further benefited the already very rich, most notably private-equity and hedge-fund managers and investors. And it is deregulated finance that has drowned the world in debt, and now precipitated a worldwide market crisis.
The bitter truth of grand market failure on 9 August 2007 is that when the financial sector faced meltdown it had to rely on the state - in the form of central banks in United States, Europe and Japan alike - to intervene in order to restore a semblance of stability. In the real world, citizens and taxpayers are once again obliged to bear responsibility, and pay the costs incurred by the reckless and unrestrained greed of the world of high finance.
Blackstone itself reinforced this message in a richly revealing statement released on 13 August. The company announced record profits for 2006-07 - though (as Bloomberg notes) it reported "a net loss of $52.3 million, or 20 cents a share, from June 19 to June 30, the only days in the period it was structured as a public company" (my italics).
The blindness of orthodoxy
The result of the financial-market "debtonation" is that the world faces a lengthy, painful and borderless depression.
The institutions most susceptible to the siren voices of the finance sector are in immediate danger. They include banks that have gambled by lending recklessly (estimates range from $400 billion upwards) to finance huge leveraged buy-outs, mergers and acquisitions. They hoped to play "pass the parcel" with these debts, and forward them on to other investors - but suddenly there are no takers. The next in the chain of vulnerability are companies - from Manchester United to Boots - that have burdened their shareholders, employees and consumers with debt.
But it is not the leading backers and officials of these institutions, the hedge-fund managers or private-equity owners, who will be most hurt by the "debtonation". It will be everyday citizens, many of whom will have been persuaded to borrow far beyond their means to pay, who will lose their pensions, homes, jobs and livelihoods - and their hoped-for futures. In doing so, they have propped up the global economy for the last two decades - yet they, not the "guardians of the nation's finances" (central bankers, finance ministers and regulators) will be forced to carry the blame for the crisis.
The full extent of the pending financial collapse is dawning on regulators and central bankers, whose panic led them to reverse their anti-inflationary policies and instead pump liquidity into a financial system frozen by the fear and mistrust that now exists between banks. On 13 August, the European central bank made its third consecutive daily injection of cash into the European banking network, bringing to almost $280 billion (£140 billion) its aggregated support for eurozone banks. Comparable amounts of cash have been provided to financial institutions in the US and Japan.
Why have central bankers, all ideologically committed to the role of the "invisible hand" in financial markets, acted in this way? Because commercial banks no longer trust the solvency of other banks, and so on 9 August effectively went on strike; i.e. stopped lending to each other, forcing central bankers to step in to provide lending to those that needed it. The fact that central banks continue to do so today, indicates that regulators are in a bind: they have lost faith in the "invisible hand", but have not yet dealt with the solvency issue. As a result, fear still stalks the markets, and easy money continues to be passed around as if there were no tomorrow.
But while central bankers are no longer "asleep at the wheel" others remain in deep denial. Speculators in stock markets, politicians and economists - including International Monetary Fund (IMF) economists - continue to rely on flawed, ideologically-driven economic analyses.
The fund issued a statement on 10 August, saying: "We continue to believe that the systemic consequences of the reassessment of credit risk that is taking place will be manageable. The fundamentals supporting strong global growth remain in place."
IMF economists, like all those in thrall to the dominant orthodoxy, have a blindspot about finance. Economists conduct their analyses without reference to the creation of credit and debt, focusing instead on goods and services, supply and demand. They regard money as "neutral" and on the whole ignore the role of credit. As Joseph Schumpeter once wrote, economists treat the "phenomena of economic life ...in terms of goods and services, of decisions about them, and of relations between them. Money enters the picture only in the modest role of a technical device that has been adopted in order to facilitate transactions." So the Bank of England's model of the United Kingdom economy has no debt components. True, it is recognised that there are, every so often, monetary "disorders" - but money is "of secondary importance in the explanation of the economic process of reality."
This explains economic orthodoxy's blindspot and its continued indifference over the creation of today's gigantic credit/debt bubble. It also explains why the IMF believes that "underlying economic fundamentals" bear little relation to the collapse of confidence in a finance sector overburdened by debt, excessive gambling, speculation and profit-taking. A speech on 31 July 2007 by IMF deputy managing director, John Lipsky, was remarkable in this respect:
"The fundamental underpinnings of the current global expansion appear to be reasonably solid. If so, the current market strains most likely will help set the stage for both financial and fundamental adjustments. These, in turn, will help set the stage for a new leg of the global expansion."
In other words, the failure of the privatised financial system, the threatened collapse of banks, the bankruptcy of mortgage companies, the collapse of private-equity deals, the burden of unpayable corporate debts, the systemic effects of the sub-prime lending crisis, the repossession of private homes - all these "adjustments" do not threaten "fundamental underpinnings" but rather set "the stage for a new leg of global expansion".
This is delusional, a profound failure of economic analysis by establishment economists and by those charged to act as guardians of the finances of nations. As a result these policy-makers will weaken and delay the right policy responses - which will prolong the crisis further.
A politics for economics
Where are the politicians in all this, amid a crisis that affects the lives of millions of people who are also democratic citizens and voters?
Those in Britain who have backed the City of London in its role as financial centre, and overseen and cheered on the deregulation of the finance sector, seem to have been struck dumb. At the time of writing, there has been no word from the country's prime minister (and ex-chancellor) Gordon Brown, current chancellor Alistair Darling, or indeed the mayor of London, Ken Livingstone. However, even as concern about the financial markets pushed share prices worldwide into slump on 9 August, President Bush used his White House press conference to comment on the issue.
He said the US economy "remains ‘the envy of the world', enjoying low unemployment and inflation.......I am told there is enough liquidity in the system to allow markets to correct". Like the orchestrated statement from the IMF, these remarks were intended to restore confidence. They brought to mind the "spin" put on the great crash of 1929, when an earlier Republican president - Herbert Hoover - was encouraged not to refer to financial "panics" as this induced further panic, and so the word "depression" was invented to describe the collapse of the economy (spin-doctors today have devised an even more evasive phrase: "growth recession").
On 29 October 1929, the day when stock prices hit their lowest point and over $30 billion disappeared from the American economy, the elderly JD Rockefeller was encouraged (no doubt by another eager public-relations person) to issue a statement:
"These are days when many are discouraged. In the 93 years of my life, depressions have come and gone. Prosperity has always returned and will again."
Twenty economically destructive years and a world war later, prosperity began to return. But only because governments had learned, at the feet of John Maynard Keynes, that the finance sector had to be humbled, and restored to its role as servant of the global economy, not master. Governments had to take back powers to control flows of capital and the creation of credit - powers that the private sector had so recklessly deployed in the 1920s. A generation after they were learned, those lessons were deliberately abandoned: after President Richard Nixon precipitated the collapse of the Bretton Woods system in 1971, governments inspired by free-market ideology surrendered control over and regulation of the finance sector. A series of world leaders has refused to intervene, or to coordinate at G8 summits, to restore balance to a global economy suffering from excessive credit creation, asset-price inflation and severe trade and financial imbalances.
Now, after "debtonation day", the lessons Keynes taught will have to be relearned if stability and sustainable prosperity are to be restored to the global economy. The prolonged financial crisis in prospect guarantees that the process will be painful.
Also in openDemocracy on the global financial turmoil: Tony Curzon Price, "The end of gentlemanly capitalism", 13 August 2007 |
Comments
Did you pay your $50 Steven ?
The current flutters on world markets, caused - so it is said - by the crisis in the American mortgage business due to "sub-prime" lending, has led to fairly predictable calls for "greater regulation" and a return to Keynesian policies, in which the flow of capital is managed by the state (as in Ann Pettifor's clever, though in my view unfounded, prediction of the coming "debtonation" of the world economy.) These calls are often accompanied by attacks on capitalist profiteers and a denunciation of "greed", by which is meant profits made by someone other than oneself. And yet they seldom stoop to making comparative judgments, or to examine the actual results of controlling markets in the way they recommend.
It is surely one of the strengths of capitalism that, when investors make mistakes, they pay for them. What Marx described as the "crisis of capitalism" is constantly occurring - and is a proof of capitalism's health. Bad debts get cancelled along with the fortunes of those foolish enough to supply them, bad businesses go bankrupt, thieves and fraudsters are exposed, since they are unable to shelter behind their state connections (as they do in Russia), and people with daft economic theories, like Marx, get dropped from the syllabus (alas all too slowly). In short malice and stupidity are punished, and people learn.
Surely that is what is happening now. Banks and private financiers, eager for quick profits, rushed in to the "sub-prime" market, seeing an easy way of putting money out at interest without the cost of supervising its use. And they paid the price. Fantastic! Another victory for reality over fantasy, and wisdom over stupidity.
The reply comes that it is not just the speculators who suffer: it is all those people who must lose their homes, the poorest of the community, those who precisely qualified as "sub-prime" for the purposes of loan security. Here, it seems to me, is where the real snobbery of the Keynesian position displays itself. At the start of the sub-prime lending craze those people had no hope of a home. They willingly undertook the risk of interest payments, in the hope of joining the class of home-owners. And 12 million of them have succeeded in America - half of them members of ethnic minorities. It seems that the Keynesians would prefer to keep those people in state-run accommodation or trailer-parks, in the condition of dependency from which they had been trying to escape. True, some of these borrowers must now pay the price for having made a risky deal with someone whose transparent stupidity ought to have impressed them rather more than his apparent liquidity. So what? To protect people from taking such risks is to despise both their freedom and their intelligence. And in any case, losing their home merely puts them back where they started.
When I and my then wife first tried to acquire a flat in London, my salary as a university lecturer was regarded as insufficient proof of my credit-worthiness. Strict controls made it virtually impossible to raise a mortgage, and no-one would look at you if you couldn't prove that you had a deposit equal to 10% of the price of the house. The house itself had to be in the kind of surveyor-proof condition that made it unaffordable. Interest rates were at 13%. If we were lucky in eventually acquiring somewhere and paying the exorbitant interest, it was because our jobs were secure and our salaries rising. Most people from the lower orders were far less lucky.
Americans don't like it when whole classes of their society have no chance to rise. Hence they welcomed the development of sub-prime lending as at last giving an opportunity to those at the bottom to join the American dream. Here was a new and untried financial instrument which no state would ever have developed, since states don't take that kind of risk; and its early use has been riddled with mistakes, the results of which we are now seeing. Isn't that good news? Those who have used the instrument wisely will be glad to see their more stupid competitors go bankrupt. And the instrument itself will be improved. Capitalism has taken a step further along its historical path, of providing opportunities for everyone.
Roger's defense of capitalism against central control is quite right: the market works in a Darwinian way, by punishing bad "mutations", or "behaviours". The market allows for learning in the realm of production. Roger also points out that this Darwinian process works through the responsibility that actors have for their mistakes. This is a principle of good organisation and decentralisation which it would be very foolish for anyone, of whatever political persuasion, to doubt anymore. It was seriously contested by the apologists of central planning, and the victory, at the level of an organisational rule of thumb, of Hayekian decentralisation over Langian planning should be taken as given.
But that is not the end of the matter. There is still much to be said about how to organise ourselves to permit good lives. For example, with the current financial crisis, the real, and the worry about all such crises, is that the link of responsibility between action and punishment/reward is broken. Under systemic crisis, as in 1929, many people lose livelihoods without any link to "punishment". Moreover, most economists believe that crises like this can sometimes be avoided. It would be callous dogmatism to refuse regulation of financial flows, State intervention in the market in one form or other, in such cases. A worry with the current crisis is in some ways the opposite, but still points to a failure of responsibility.
The US Federal Reserve has been bailing out one financial sector after another since 1998. The famous "Greenspan put" is the view that assets are a one-way bet today, because the US Fed fears the effects on the real economy of letting asset prices fall. "The toothpaste is out of the tube", and the central banks are not quite sure how to get it back in without making a mess. But in this situation, lenders can lend in the knowledge that they are likely to be bailed out. Again, the link to responsibility is broken, and we face an aberration of the market, not a phenomenon to celebrate.
True, if such market aberrations allow some people to fulfil life goals such as owning a house, then that is to be counted in their favour. But it does not make the pattern of behaviour that created these anecdotally good outcomes itself a good outcome --- to accept that would be justify any populist economics, from Chavez and Putin to Blair or Chirac. There are many signs of the poor investment patterns that we have encouraged for 10 years. It would be surprising if they had not made _some_ people better off. But years of mis-investment, I fear, will lead to a very Marxist crisis in the profitability of capital. The social consequences of that will certainly not be the rosy ones anticipated in The Communist Manifesto. So a conservative, concerned with the preservation of order, ought to accept that financial markets need State intervention.
joefranks69,
India is hardly a good example of a country based on neoliberal or free marked policies. They still have a lot of state intervention, regulation, subsidies, restrictive foreign ownership laws and tradepolicy from their quasi socialist policy after their independence. They are only slowly reforming their economy (it`s political difficult to cut subsidies and trade protection when the companies and their workers are unable to compete on the open marked. And of cource, foreign ownership is dangerous!)
What improvements ?
Yes, China under communsim was good for the population. Let`s forget about the lack of political freedom, the economic stagnation, mass deportation and killing under the culture revolution or the pollution from excessive heavy industry. It makes you wonder why they gradually ended this economic policy in the 80`s , if their government regulated and economic planninng was that successful ? And of course, lets forget about the collapse of the Soviet Union and their economic foundation.
"China's experiment in socialist "stagnation" resulted in a truly remarkable increase in life expectancy, one of many improvements "stagnant" Chinese socialism recorded."
You make the false assumption that this wouldn`t be the case if China had adopted a marked based economy (Germany, Sweden or Japan.)
Another of the achievements of China's stagnant period was the creation of state-owned industries; which, like the zaibatsu in Japan and the chaebol in Korea, were protected by the state from global competitors in order for them to grow and become more productive and efficient. Unlike the chaebol and zaibatsu, of course, China's companies were entirely state-owned and were not run on a profit-driven basis. During the period when China's rulers adopted elements of neoliberalism ("globalization"), unprofitable state-owned enterprises were chopped up and parceled out in a manner somewhat analogous to what often happens in a leveraged buy-out.
Yes, compared to the growth rate since the 80`s with the gradual adoption of markedeconomy or the growth they could have achieved with a free marked policy instead of state planning under communism, China did suffer under crushing stagnant socialism for over 40 years. The creation of state-owned industries are not achievemnts, but a gigantic waste of resources. Protection from competition don`t make companies more competetive in the global marked, quite the opposite. Most of the state run chinese companies were created based on government preferences, overreliance on heavy industry and would never be able to stand up to competion without restructuring under private ownership and competition.
You also make the same mistake in the belief that chinese companies would`t be able to compete on the global marked with a liberal trade policy in a marked based economy from the very beginning. If protective companies are able to compete in the marked, they would have been able to compete anyway in the first place, without wasteful govenment support or trade protection.
"So in addition to the amount of capital generated by the foreign investment China has attracted - and attracted, mind you, due to the well-educated workforce and fundamental infrastructure that are also the products of "stagnant" Chinese socialism - much of what the successful, "globalized" Chinese economy comprises are remnants of state-owned enterprises, the legacy, again, of the crushing "stagnant" socialism China had to suffer under over 40 years."
Yes, "remnants" Under private ownership and under competive pressure. I also doubt that most foreign investment in China these days are directed towards the state-owned enterprises.
" Latin America (which you also encompass in your exposition of the conventional economic wisdom) did not have to endure 40 crushing years of stagnant socialism. It's capitalist/social democratic development worked creditably well from the '50s to the '70s. It is precisely when neoliberal economic policies were adopted/rammed down their throats in the '80s that economic growth in Latin America - what was your word? - yes, stagnated. As for the dire economic consequences neoliberal economic policies have caused, let me expand on what I wrote before. "
They would be better off if they truly had adopted a free marked economy and open trade policy instead of the quasi capitalist policy with heavy state intervension, regulation, heavy public borrowing and wasteful spending.
"In the U.S., average hours worked have skyrocketed while wages have stagnated;"
Really? Source? What time period are you talking about.
in Latin America, growth has stagnated, while in Africa growth has actually, in many cases, been negative. Tens of thousands of people die daily from hunger and malnutrition, and tens of thousands more from easily preventable or curable diseases. These are dire consequences arising in countries that have adopted neoliberal policy prescriptions to the greatest extent. India has had mixed results, with great wealth having been generated for those at the top, appreciable gains for some in the middle, but widespread poverty and food insecurity unrelieved, particularly in rural areas; China has seen a more widespread reduction in poverty but likewise is experiencing severe wealth disparities that is worrying the present leadership. Regardless, India and China, it is essential to note, are not model students of neoliberal economics. China in particular intervenes heavily in industry and financial markets, which is a big no-no for neoliberal economists who believe that markets work best with minimal governmental interference (where the government plays only the role of a referee). Likewise, development success stories such as Korea, Taiwan and Japan, which are the obvious examples, were terribly poor pupils of neoliberal economics, as they relied heavily on state-led and -protected development.
You are very selective in your facts and knowledge of history. Japan in the 19th century adopted a very liberal free marked economy (based on Britain) and grew extremely fast. It`s true that Japan (and Taiwan and Korea)after the war had an active industry policy with some protection and support for selected industries and companies, but they did not rely "heavily on state-led and -protected development". If anything, these trade protection and subsidies were wasteful and unnecessary, as these companies and industries would have been able to compete and grow without state support and protection. These countries adopted mainly a marked based economic policy and was able to compete very successfully in the the global marked.
Japan Even Singapore is an odd choice for neoliberal economists to trot out as a success story, because despite its adoption of many neoliberal-approved policies, it too is marked by significant state economic intervention. (Additionally, as Jeffrey Sachs has noted with specific regard to Singapore, it is remarkable how the conventional economic wisdom does not consider highly influential factors such as geography in deriving policy prescriptions from examples in the history of economic development.) That government intervention in the economy is a sine qua non of successful development is borne out by a review of the developmental histories of virtually every now-developed country (the relevance of the arguable exceptions to this principle - the Netherlands, Switzerland, Singapore and Hong Kong - is directly proportional to their size, I would presume). The question we need to answer is what kind of government intervention is best suited to which goals? If our goal is a highly stratified world economy with 1% of the population doing extremely well, 10% doing well, and the rest either making it by with more or less comfort - or starving to death, depending on which area of the world we are talking about - then the current spread of neoliberal economic policies should continue apace.
So, no more than 11% of the population in , lets say, France or Japan are doing well. Few, if any country, is free from government regulation and intervension, but a free marked economy is the best way for countries to grow and increase wealth.
As for Singapore and its economic policy: (from Wikipedia)
"Singapore has a highly developed market-based economy, which historically revolves around extended entrepot trade. ...Singapore has been rated as the most business-friendly economy in the world,"
If our goal were, for instance, to eliminate all deaths from hunger and easily preventable disease - even if the people dying are not light-skinned - then a radical economic reorganization is in order. Given the examples history has provided, a hybrid socialist/market-based system would seem to be most suitable. Democratically-controlled governments would lead efforts to refocus societal production on the dissemination of technologies and education throughout the world, would seek to provide a foundation of food, clothing, shelter, education and health care to everyone, whether through entirely government-run programs or through markets with government subsidies to ensure complete inclusivity, and unnecessary articles of consumption (which make up a sizable chuck of current industrialized economies) would be produced in a largely market-driven manner, with forms of government regulation and investment assistance in place that have proven effective in the past and are presently desired by the voting public.
Socialism have been tried. It didn`t turn out to be too effective. The world need less government intervention and more free marked.
I wonder how all those writers who lambasted this article are feeling today.
Suitably humbled I don't doubt.
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