It is now clear that what began as the Great Credit Crunch of 2007 has developed into a contraction of wider scope and great tenacity, centred in the main oecd countries. Governments acted to avert collapse, but in doing so themselves became a target. Bail-out measures adopted during the early phase of the crisis between 2007–09 saw the us, uk and eurozone authorities increase public indebtedness by 20–40 per cent of gdp, with large current-account deficits. The transfer of debt from private to public hands was carried out in the name of averting systemic failure, but in some ways it aggravated the debt problem since bank failure, however disruptive, is actually less devastating than state failure. Before long, the bond markets were demanding plans to cut these deficits by slashing public spending and shrinking social protection. The centre left and the centre right were already persuaded that the welfare state was too expensive and bureaucratic, and needed to be downsized and handed over to private suppliers. Public services and institutions were leveraged by means of commercial debt, at the expense of future revenues and the intelligibility of the public accounts. Determined not to waste a good crisis, neoliberal policymakers and commentators seized on the disarray to further advance such schemes. Japan, the us and the uk are heavily waterlogged, but their control over their own currency allows them to print money and to devalue. Such expedients have been denied the eurozone states so far. However, the more fortunately placed countries are still highly vulnerable to euroland’s miseries because they are invested in its assets and count on it as a trading partner.
The governments of the us and the eurozone do not face exactly the same problems but are seemingly paralysed, stumbling from one palliative to the next. The weaker eurozone countries have austerity imposed upon them while the stronger states proclaim the need to liquidate deficits even though a chorus of eminent economic analysts—from Martin Wolf to Paul Krugman, Wolfgang Münchau to Nouriel Roubini—insist that austerity will only hamper recovery. No case more fully bears out their warning than the uk, since its government has voluntarily used its margin of autonomy to commit to a thoroughly counter-productive retrenchment.
While governments and international organizations wrestle with the crisis, they seem to find it impossible to act on the scale such a momentous contraction requires. Public opinion has turned against the bankers but governments are still in thrall to bond markets that demand cuts in social protection and a further boost to the privatization and commodification of pensions, health and education. Social protection is being dismantled as employees, young and old, are thrown on the scrap heap. The jobless face misery, those still employed are ‘nudged’—if not shoved—into the arms of expensive private suppliers. As more countries commit to austerity they help to aggravate the Great Recession, drive their citizens towards commercial suppliers, and strengthen the grip of a new regime of finance capital. But commodification and private finance are beset by inherent limits and obstacles. Private finance, no matter how skilfully leveraged, lacks the scale needed to overcome the contraction. Commercial suppliers of pensions and other social protection are plagued by insecurity, marketing costs and a logic that encourages them to discriminate against women and minorities. At an even more fundamental level, the web has weakened ‘intellectual property’ rights, sapped the commercial media and broken the music industry. The sequencing of the human genome and the deployment of nanotechnology have likewise resisted commodification. The colonization of cyberspace by capital—for example through Facebook’s intimate commodification—is, as yet, on too small a scale to compensate for these blockages.
As the crisis deepens, constructive proposals for a genuine exit from it to the left will be ever more urgently needed. In what follows, I discuss some of the alternative policies that have been proposed within the existing system, and set out some more radical—transitional—perspectives for the longer term. Firstly, however, I will look in more detail at some of the ‘rescue measures’ applied so far and give an account of the multiplying woes of the Crisis 2.0 world, in which governments, households and financial concerns are all seeking to unwind their debts, or ‘de-leverage’. The result has been stagnation, unemployment, the destruction of welfare and the installation of technocratic coalitions bereft of an electoral mandate. I argue that effective resistance strategies will need to address the underlying causes of the crisis—global over-capacity, deficient demand and anarchic credit creation. I urge a broad-based expansion of aggregate global demand based on higher wages in low-wage countries, debt relief in poor and richer countries, new schemes of social protection and a financial architecture geared to public utility.
The current travails of the oecd economies are a product of trends strongly promoted by neoliberalism and globalization—extreme inequality, poverty, financial deregulation, privatization and a pervasive commodification of the life course, via mortgages, credit-card debt, student fees and private pensions. Low wages in emerging economies, and growing indebtedness in the richer countries, created mounting trade imbalances. Together with the deregulation of financial markets, this generated a succession of asset bubbles. The investment banks and hedge funds further expanded credit through the creation of new types of derivative valued at ‘model prices’ and sold ‘over the counter’ to institutional investors, thus giving rise to an off-balance-sheet ‘shadow banking system’ which soon dwarfed the formal, regulated exchanges. The banks’ heedless pursuit of short-term advantage led to the largest destruction of value in world history during the Crash of 2008. Government rescue measures were to offer unlimited liquidity to the financial sector, while leaving the system largely intact.
October 2008 saw the apparent assertion of government discipline over America’s nine largest banks. Their ceos were summoned to Washington by Hank Paulson, the Treasury Secretary, who informed them that they faced bankruptcy unless they accepted government recapitalization. In less than an hour, all had signed a letter Paulson had prepared, offering the Federal authorities equity stakes in their concerns in exchange for injections of new capital from the just-established $700bn ‘Troubled Asset Relief Programme’. Goldman Sachs changed its legal status to a bank holding company in order to qualify for tarp funds. The government acquired a majority holding in Citibank, the largest bank on Wall Street. At the moment of greatest danger all the banks undertook to abide by certain rules. These measures followed a state takeover of aig, the world’s biggest insurance company, and of Fannie Mae and Freddie Mac, the two largest mortgage brokers. For its part, the British government had been forced to rescue first Northern Rock, then Lloyds tsb group and the Royal Bank of Scotland. Barclays and hsbc did their utmost to avoid becoming entangled in rescue operations, but were nevertheless obliged to accept help from the us tarp.
At no point, however, did the Treasury use its position as owner and creditor to impose on the financial companies that it had saved lending policies that would benefit the broader economy. The Dodd–Frank Act, signed with great fanfare by Obama in July 2010, contained a ratio of law to loophole of 13:87, according to one analysis.footnote1 Strange to relate, both Wall Street and the City of London emerged essentially unscathed from legislators’ attempts to rein them in; ‘too big to fail’ banks, outrageous bonuses, perverse incentives, slender capitalization, obscure accounting rules, off-balance-sheet items and special-purpose entities remained untouched. The rescued banks declined to resume normal lending to small and medium-sized businesses, ensuring a lingering ‘credit crunch’. The Treasury and the Fed were unhappy but gave no marching orders. The banks, keenly aware of one another’s problems—they were still sheltering huge unacknowledged losses—also shunned inter-bank lending. All had invested in a range of very dubious assets, not just sub-prime mortgage and other credit derivatives, but also vulnerable corporate and public bonds, not least those issued by weaker members of the eurozone.