An end and a beginning

Godfrey Hodgson
5 January 2009

In 1961 a British studio produced a sci-fi film that sticks in the memory for a single line of dialogue.

It was called The Day the Earth Caught Fire. The plot-line - involving simultaneous nuclear-test explosions by the Soviet Union and the United States which knock the earth off its course - is absurd but in its way gripping. openDemocracy writers analyse 2008's financial turmoil:

Ann Pettifor, "The week that changed everything" (22 September 2008)

Fred Halliday, "The revenge of ideas: Karl Polanyi and Susan Strange" (24 September 2008)

Tony Curzon Price, "Unprincipled madness" (1 October 2008)

Grahame Thompson, "Deglobalising the crisis" (3 October 2008)

Will Hutton, "Wanted: a fairer capitalism" (6 October 2008)

Avinash Persaud, "Europe's financial crisis: the integration lesson" (7 October 2008)

Paul Rogers, "A world in flux: crisis to agency" (16 October 2008)

Andrew Dobson & David Hayes, "A politics of crisis: low-energy cosmopolitanism" (22 October 2008)

Paul Rogers,"A crisis opportunity moment" (23 October 2008)

Ann Pettifor, "Beyond the triple crisis: a green new deal" (27 October 2008)

Mike Hulme, "Amid the financial storm: redirecting climate change" (30 October 2008)

Simon Maxwell & Dirk Messner, "A new global order: Bretton Woods II...and San Francisco II" (11 November 2008)

Andre Wilkens, "The global financial crisis: opportunities for change" (10 November 2008)

Paul Rogers, "A world in the balance" (13 November 2008)

Krzysztof Rybinski, "A new world order" (4 December 2008)

For much of the action, it looks as though the earth will be burned to a cinder by the sun. In the end, providentially, the world's nations unite to launch four megaton bombs which succeed - just - in kicking the earth back into orbit. A world-saving denoument ensures that life can go on.

The action was set in the newsroom of the London Daily Express, then owned by the Canadian tycoon Lord Beaverbrook and the last word in The Front Page-style journalism.

As the earth careers away on its doomed trajectory towards the sun, the paper prepares two headlines for its possibly final edition: "World Doomed" and "World Saved". The hardbitten editor Arthur Christiansen calls the Moscow correspondent Chris Dobson (both men playing themselves).

"Look after yourself, boy", says Christiansen, "but first give us 800 words. And, Chris, keep the tone reasonably optimistic".

A chill wind

It is an equally hard injunction for a world that, after the epic financial crash of 2008, seems to have lost its moorings as it enters 2009.

The slow meltdown saw some of the shining towers of American capitalism collapsing, being taken over, or forced into humbling reinvention: Bear Stearns, Fannie Mae and Freddie Mac, Merrill Lynch, AIG (the world's biggest insurance company) Citibank, JP Morgan, Goldman Sachs, General Motors, Ford and Chrysler. Many other household names are on the brink of extinction.

On the seventeenth floor of the Lipstick Building in mid-town Manhattan, Bernard L Madoff- a quiet man and devoted supporter of several charitable foundations - calmly admitted to a detective that his immense and envied financial business worth $50 billion was a Ponzi-style fraud. The new customers' money was paid out as dividends to the old. There was actually no real business at all to go on paying the dividends that had sailed serenely along at 10%-12%.

The fallout from reckless, deregulated markets in New York is global. From Shanghai to Toronto, from Tokyo to London by way of Sydney, Frankfurt, and Paris, from New York to Chicago, stock exchanges have seen values more or less halved. China and Russia have been no more immune than Germany or France.

Now the damage is coming down to the human scale: bankrupt factories, laid- off workers, unsold inventory, repossessed homes. Fear, and for some destitution. Aspirations wiped out. Children's futures transformed. 

It's difficult, indeed, to keep the tone even reasonably optimistic.

The force of folly

The best minds in economics and politics don't know what to do. Unimaginable sums have been poured into the effort to recapitalise the banks. But that has only created a market in the toxic securities that caused the trouble.

How wise is it to twist the banks' arms to start lending again, when it was their reckless and indiscriminate lending that caused the trouble in the first place? How wise is it to borrow, if those debts will have to be repaid out of shrinking economic activity and devalued currencies? If hundreds of billions of dollars go to the banks and the financial sector, what about the manufacturing enterprises that will also be crashing around us?

Why did it all happen? It happened because mortgage-lenders lent to people who had no hope of repaying, on terms that virtually guaranteed that many of them would stop paying within a couple of years. Then the kind of people who give cleverness a bad name wrapped worthless paper up in fancy-sounding derivatives and unloaded them on the kind of bankers who will follow any fashion. As with Madoff's clients, the trendiest punters were the worst hit.

The contributing factors included mindless over-optimism, intellectual conceit, and plain old-fashioned fraud. All these have long been part of the Wall Street and the City of London worlds. An additional element in virtually every example of large-scale commercial deceit is greed, and of the victims as well as the fraudsman.

But more is involved. It was institutions and individuals in search of a no-questions-asked interest-rate boost that poured money into Icelandic banks, which in a transformed financial climate that melted down with startling rapidity. Mere folly? Not necessarily: sometimes it was a fiduciary duty to earn the highest rates available that led trustees, local government and charities to invest in Icelandic banks or Bernard Madoff's funds.

The market fetish

A further ingredient of the catastrophe has been at the heart of the business climate and the markets since the dawn of the neo-liberal era in the late 1970s: contempt for government. Ronald Reagan's inaugural apophthegm - that government is not the solution to our problem; government is the problem - was, after all, immensely popular among many constituencies.

Taxpayers, especially new, working-class taxpayers who found themselves in the 1970s for the first time paying income or property taxes - thanks to inflation and "bracket creep" - blamed government for their tax bills. Politicians, too, liked privatisation and the bigger role of the market that accompanied it because it saved them from hard choices that inflation was making intolerably difficult.

Businessmen liked privatisation. They saw opportunities for profit in businesses that had not been well run by bureaucrats, not necessarily because the bureaucrats were incompetent, but because they were charged with universal provision and with long-term responsibilities: pension-funds, infrastructure, training, investment in plant and machinery. Privatisers were happy to cherry-pick the bits they could make money on.

Godfrey Hodgson was director of the Reuters' Foundation Programme at Oxford University, and before that the Observer's correspondent in the United States and foreign editor of the Independent. His books include:

The World Turned Right Side Up: a history of the conservative ascendancy in America (Houghton Mifflin, 1996);

The Gentleman from New York: Senator Daniel Patrick Moynihan
(Houghton Mifflin, 2000)

More Equal Than Others: America from Nixon to the New Century
(Princeton University Press, 2006),

and A Great and Godly Adventure: The Pilgrims and the Myth of the First Thanksgiving (PublicAffairs, 2007)

Among Godfrey Hodgson's openDemocracy articles:

"Barack Obama: at the crossroads of victory" (11 June 2008)

"A game of two halves" (15 July 2008)

"Welcome to the party: American convention follies" (18 August 2008)

"America's foreign-policy election" (28 August 2008)

"America's economy election" (17 October 2008)

"Yes he can!" (6 November 2008)

"Change?" (2 December 2008)
Businessmen also loved deregulation. The immediate cause of the Wall Street disaster was financial deregulation, and in particular the repeal of the Depression-era legislation (the Glass-Steagall Act) that prevented  investment banks merging with commercial banks. Once that protection was gone, all the money in the world was available for speculation.

Many consumers liked privatisation, too, at first. It offered, or seemed to offer, brighter products, lower costs, glitz and glamour, the illusion of choice.

So government - and that wider notion it embodies, the public interest - suffered a bad press, and worse. There was a systematic assault with all the powerful weapons of modern public relations and political propaganda. The whole concept of public service was derided.

No wonder governments found it harder and harder to attract the brightest and the best. Their ranks were demoralised. In the United States, the permanent government was subordinated to at least two tiers of political appointees who descended like summer visitors, worked at the more glamorous jobs for a couple of years and returned to the private sector with enhanced status.

In Britain, and to a lesser extent in other European countries, the permanent civil service was harassed and subordinated by droves of higher-paid consultants and advisers.

The man given responsibility for overseeing the marking of exams for 11-year-olds was paid £328,000 a year, far more than any permanent under-secretary with a lifetime's training and experience. More than that: he negotiated membership in a posh yacht-club in his native Sydney - at the British taxpayers' expense. Nothing could demonstrate more clearly how little commitment he and so many other carpetbaggers had to the future of British schools or other public services.

Several in this army of functionaries of limited ability were brought into Britain from elsewhere in the Anglophone world to make fortunes at public expense in information technology, management consultancy, private-finance initiatives and other invasions of the integrity and self-esteem of government.

But this is only part of the story of how, in Britain and the United States in particular, so many government tasks have been performed for so long with striking inefficiency. American bridges have collapsed and highways have been left unmended. The regulation of banks and airlines has been a tragi-comedy. In Britain the introduction of computers into government has been a joke. The security of government records has been a farce. The standards of public hygiene from hospitals to animal-research stations have been a scandal. A principal reason has been that no one expects government to work. Therefore no one does what would be necessary to make it work.

The world turns

What, after all, is government? In member-countries of the Organisation for Economic Cooperation and Development (OECD), the couple of dozen most successful societies in the world, it is not an intrusive conspiracy against entrepreneurial business. Is it tyranny? Is it African kleptocracy or the failed states of the middle east? You might think so from reading British newspapers or watching American television.

Democratic government is the expression of the will and aspirations of the people. Its mechanisms are not perfect. But then nor are the mechanisms of corporate business, as is now painfully clear to all. 

The idea that has been fashionable for a generation, that bureaucracy is a characteristic only of government and not of shareholder-owned corporate business, was always an absurdity. Ask anyone who has had to deal with an insurance company, an airline or a commercial bank whether those institutions are free from bureaucracy.

As more and more citizens, on both sides of the Atlantic and further afield, find themselves having to renew mortgages, acquire new jobs, borrow money, sell houses or businesses - all in a climate of recession and perhaps full-blown depression - what will become of what Thomas Frank described as "market populism"?

That was the doctrine beloved of the followers of Margaret Thatcher and Ronald Reagan, not to mention Alan Greenspan of the Federal Reserve, that tried to persuade people that "the market" always works perfectly. The project required spinning the line that corporate managers, and salesmen on commission and bonuses, have the welfare of ordinary people, their customers, employees and shareholders, more reliably at heart than democratically elected politicians.

Politicians are not perfect. They have human failings. Perhaps - as a group - they even have rather more of those failings than most. But voters did choose them. They can get rid of them. That is more than is possible with the chairmen of banks, insurance companies or airlines, even if voters are able to scrape together the savings to buy a few shares in their enterprises.

If corporate business worked as the diminishing number of champions of the "free market" contend, how many of the multi-million dollar bonuses that have become a feature of the era of excess would be paid?

The denigration of government has been a disaster, one motivated by self-interest, intellectual error and often mindless, jeering spite. It is time to rehabilitate the only institution that has any hope of digging us out of the hole corporate business has dropped us in. It is time to set about proving Bill Clinton wrong when he betrayed the best traditions of democracy by saying (in January 1996) that "the era of big government is over".

Only then will it be possible to be "reasonably optimistic". In 2009, as in 1933, only government can make the earth regain its balance.

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