Crisis in Slow Motion?

Financial hegemony died its first death during the crisis of 2008. Set off by the over-indebtedness of poor borrowers in the United States, this cataclysm demonstrated that the promises extended by complex financial products were nothing but phantasmagorias, unconnected to our economies’ real capacity to produce wealth. As if, in Marx’s phrase, ‘money could generate value and yield interest, much as it is an attribute of pear-trees to bear pears’.

The chain reaction that followed the Lehman Brothers bankruptcy exposed the myth of self-regulating financial markets. Incapable of supporting itself, finance had to abandon its claim to be the totalizing element of economic life, the site where the hopes of today would harmoniously align with the resources of tomorrow. At the commanding heights, however, this pretension persisted. In the throes of the Great Recession, amid the spasms of the Eurozone crisis and throughout the Covid-19 pandemic, the authorities never stopped prioritizing financial stability. For example, in 2020 and 2021, to ensure that the effects of lockdown did not cause another collapse, the European Central Bank practically doubled its balance sheet, adding liquidity and buying securities to the tune of €4,000 billion: roughly a third of the Eurozone GDP, or €12,000 per inhabitant.

Now, the second death of financial hegemony has come at the hands of wealthy investors in Californian tech. In 2008, the banks were saved, but bankrupt borrowers were forced to abandon their homes. In 2023, start-ups and venture capitalists pleaded for, and obtained, Washington’s support to recuperate their savings from Silicon Valley Bank. As panic mounted, banks were once again rescued by sovereign largesse and liquidity valves were opened wide. (A great irony for a sector impregnated with libertarian ideology and profoundly hostile to state intervention.)

The scale of this support can be increased as needed. On 12 March, the Fed introduced the Bank Term Funding Program, a mechanism through which it accepts as loan collateral assets priced at their nominal value: that is to say their purchase price, rather than what they are actually worth on the market. The balance sheets of financial institutions were thus, as if by magic, immunized against losses. Better still, when Credit Suisse was saved by its compatriot UBS, the Swiss National Bank opened a €100 billion liquidity line – accessible, this time, without any guarantees. It seems that the ‘de-risking state’, as the British-based economist Daniela Gabor calls it, is working overtime to prevent a debacle like that of 2008.

This makes another mega-crash improbable. Although, naturally, an act of monumental stupidity by someone or other cannot be excluded. Remember that the rate hikes announced in 2011 by Jean-Claude Trichet’s ECB helped to encourage speculative attacks on Greek debt. This obvious error, compounded by short-sightedness and incompetence on the part of European politicians, plunged the continent into a social and economic crisis that was perfectly avoidable. On 16 March, the decision by that same ECB to raise rates by 0.5%, this time under the direction of Christine Lagarde, brings back bad memories. But obstinacy in pursuing monetary tightening despite unfortunate precedent is, above all, revealing of a radically new macroeconomic context.

‘Given that the processes underlying price and financial stability differ’, observed the economist Claude Borio, ‘it is not surprising that there may be material tensions between the two objectives.’ With inflation around 8%, these ‘tensions’ have become a major dilemma for central banks – one that calls into question the hegemony of finance itself. At present, central banks can prioritize the fight against inflation at the risk of precipitating the collapse of the financial system; or else, to address banking and financial turbulence, they can enlarge access to liquidity through different channels. In the latter case, they run up against the restrictive policy aimed at proving their determination to control rising prices. This dynamic threatens to gradually erode the value of debt and financial assets. Condemned to contraction, finance must choose between apoplexy – a crash – or a slow decrepitude, under the effects of rising prices. The coming period may therefore be one of a long, slow-motion financial crisis.

This conjuncture may also mark an inflection point for ultra-powerful central banks. Whether it’s the fight against inflation or the conditions of financing the economy, these institutions appear to be in over their heads. Price caps, surveillance of business margins, multi-annual salary negotiations, credit policies, investment banks and public services, and the development of social protection are all instruments that permit better coordination of economic activity over the long term, on the condition that strict regulation arrives to deflate the unsustainable financial sphere. Our epoch has more important things to worry about than the ups and downs of the market. The time has come to say farewell to financialization for good. It will only die twice.

Translated by Grey Anderson. An earlier version of this essay appeared in Le Monde.

Read on: Cédric Durand, ‘The End of Financial Hegemony?’, NLR 138.