Monday, November 24, 2008

A 1989 moment?

by Costas Lapavitsas

The current crisis is a regime break for the global economy, irrespective of its eventual resolution. For more than two decades the premise of economic policy-making has been ‘private good - public bad’, always favouring market solutions to state-based interventions. This has now been damaged beyond repair. Policy-making can be expected to put fresh stress on the public though the form this will take is not yet clear.

Keeping the proportions, the crisis has analogies with the collapse of the Eastern Bloc in 1989-1991. After the fall of the Soviet Union the credibility of socialist ideas and policies received a body blow. The best that the Left could do was call for ‘anti-capitalist’ policies or ‘resistance’ to the neo-liberal onslaught. This is likely to change, though a lot will depend on whether the Left can put forth innovative ideas and proposals.

There are several reasons why this crisis might lead to such profound change, four of which immediately come to mind. The first is its sheer magnitude. Global losses for banks already stand around $650bn. In the USA alone 17 major financial institutions have failed so far. By the time the crisis is over the cost for the USA is likely to run to several percentage points of GDP, perhaps in double digits. In other economies, for instance, the UK, Ireland and Iceland, things could be even worse. And that is without counting the social cost of the coming global recession.

Second, the crisis has been created by private finance at the heart of developed countries. It has nothing to do with bumbling state intervention, or war, drought and other external shocks. And nor is it the outcome of corruption or cronyism, the favourite bogeys of neo-liberals when it comes to financial crises in developing country. The crisis arose because freely competitive, private financial institution in developed capitalist countries proved to be inherently inefficient in organising society’s financial affairs.

Third, the crisis was caused primarily by the advance of finance to private individuals rather than to corporations or small businesses. Since the 1980s, big business has relied less on banks and more on open markets to obtain finance. Banks have turned to lending for mortgages and consumption as well as commissions from mediating financial transactions. Meanwhile, the withdrawal of public provision in housing, pensions, health, education and consumption has driven people into the arms of finance. The costs have been enormous. In the USA alone, close to 20% of disposable income was paid to financial institutions as interest and other charges in 2005, 2006 and 2007. But these costs are likely to be dwarfed by the impact of the crisis on working people.

Fourth, the only factor preventing complete disintegration of the financial system has been global state intervention. Liquidity provision by central banks has been limitless, running into trillions of dollars. Indeterminately large sums of public money have been committed to nationalising (partly or fully) commercial banks, insurance companies and mortgage providers in the USA, the UK and across Europe. Hundreds more billions of dollars are likely to be eventually committed to cleaning up the balance sheets of banks.

The crisis, then, has destroyed the conceit that freely competitive capitalist activity is the most efficient, or even the only, way of organising economic life. Once its sharp phase is over there will be debate on how to rebalance private and public in the economy. The Left should make definite proposals to replace private and individual with public and collective mechanisms in finance and more generally across the economy. A start could be made with housing, pensions, education and health. And, you never know, socialism might be mentioned again.

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