| October 22, 2008 | Wednesday | Shawwal 22, 1429 |
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‘Capitalism at bay’
Here I am, back in my favourite place in the UK, Hay-on-Wye, staying at the Net House, a cottage we borrow from friends from time to time. The River Wye is surging along in spate, looking fiercer than I have ever seen it. Usually, it is a meandering, pretty river, with ducks and the odd swan swimming gracefully along. But last month, it flooded its banks, ruining the carpets at the Net House. The leaves are turning into autumnal colours, and in places, the woods are a riot of flame-red.
As the wind has been blowing hard, we have had a log fire going in the fireplace, and without a working TV or an Internet connection, we have been reading much of the day. The weekend edition of the Financial Times is always a good read, and Saturday’s FT was, not surprisingly, full of the financial crisis currently gripping the globe. Ever since the system went into meltdown, I have been wondering at the breakdown of the various tiers of checks that should have prevented the kind of economic storm we are witnessing. Where, for instance, were the directors of banks appointed by the shareholders to safeguard their interests? What were the risk analysts doing? And how about the rating agencies that awarded shaky bonds AAA status? We know that government regulators were asleep at the controls, but what were the internal auditors and the head honchos of banks doing?
Although Karl Marx was wrong about many things, he had diagnosed accurately the cancer eating at the heart of unbridled capitalism. In 1893, he wrote in Das Kapital: “To the possessor of money capital, the process of production appears merely as an unavoidable intermediate link, as a necessary evil for the sake of money-making. All nations with a capitalist mode of production are therefore seized periodically by a feverish attempt to make money without the intervention of the process of production.” (Quoted by John Plender in his article ‘Shut Out’, published by the Financial Times on 18 October).
One could see this frenzy in the financial capitals of the world as young high-fliers made fortunes on shady deals that now threaten the global economy. In this casino, the only losers were the taxpayers who weren’t even gambling, but are now being asked to bail out the masters of the universe.
Another economist who was hugely influential in the first half of the last century was John Maynard Keynes, and who is being increasingly invoked today as governments grope for a way out of the fiscal impasse in which they find themselves. In the aftermath of the Great Depression of the Thirties, Keynes favoured state intervention in public works to create jobs. This increased employment would generate spending on consumer goods, and that in turn would cause factories to run at capacity, thereby generating more employment. Thus, the impact of cyclical recessions could be minimised. However, one problem Western economies face today is that most manufacturing jobs have been exported to the Far East.
Writing in 1933, Keynes said: “We have reached a critical point. We can … see clearly the gulf to which our present path is leading.” If governments did not take action, “we must expect the progressive breakdown of the existing structure of contract and instruments of indebtedness, accompanied by the utter discredit of orthodox leadership in finance and government, with what ultimate outcome we cannot predict.” (Quoted by Ed Crooks in his article ‘A prophet reborn’ in the same issue of the FT).
While state intervention to pull out the banking system from its present crisis is on every politician’s agenda, nobody really wants a return to the days of rigid controls over financial institutions and the money markets. While there is a broad consensus over the need for more effective controls, hardly anybody is clamouring for the stranglehold bureaucrats once had over the lifeblood of modern economies. The question is where to strike a balance.
The Economist has been a strong supporter of free trade since it came into being 165 years ago. In its leading article in the current issue, it argues: “If the bail-outs are well-handled, tax-payers could end up profiting from their reluctant investment in the banks. If regulators learn from this crisis, they could manage finance better in the future. If the worst is avoided, the healthy popular hostility to a strong state that normally pervades democracies should reassert itself. Capitalism is at bay, but those who believe in it must fight for it. For all its flaws, it is the best economic system man has invented yet.”
While the crisis continues to monopolise headlines and claim victims around the world, at least two politicians have benefited from it. Barack Obama now looks certain to win the American presidential election next month, and Gordon Brown has staged a miraculous recovery in his political fortunes. Until a fortnight ago, many people from his own Labour Party were predicting a swift end to his career. The betting was on his exit by the end of the year. Then came the meltdown, and ‘cometh the hour, cometh the man’. In a series of deft, decisive steps, Brown and his Chancellor, Alistair Darling, launched a comprehensive rescue plan for the banking system that left the world gasping with admiration. Indeed, many of the EU countries have adopted versions of the Brown plan. In a recent poll in the UK, 43 per cent of those surveyed say they trust Brown on the economy, compared to 35 per cent for the Tories.
However, even though these hundreds of billions might save the banking system, the global economy remains in bad shape. In the UK, employment has plunged with predictions of two million unemployed by Christmas. This figure is expected to go up to three million by 2010. As the lines at the dole lengthen, people are still wondering what hit them. Just a few months ago, they had considered themselves reasonably well-off. Suddenly, many have lost their jobs, and don’t know how they will pay the mortgages on their homes.
And as the British media and the public applaud Brown for his decisiveness, at some point they will start asking some tricky questions. After all, Brown was Chancellor of the Exchequer for the last decade, when he was the great champion of the deregulation that led to the current crisis in the first place.
