Political Promise

An opportunity missed? A reflection on the ‘Great Recession’

In Ani Mathur on October 18, 2010 at 7:00 am

As the UK witnesses the release of the credit-crunch-centred Wall Street 2, Ani Mathur tells the story of the worst crash since 1929.

The ‘Great Recession’ needs no introduction; it has dominated our mind frames for seemingly ever, particularly after the once inexorable Lehman Brothers fell on that fateful September weekend. As the seeds of global recovery appear to be sprouting, with the somewhat apocalyptic events predicted not having come into fruition, a feeling of relief has gripped international power brokers: the worst is over. Even if austerity is the theme of the day, impending abyss no longer looms. However given that the fallout from the crisis is yet to show its full effects, and given that all of us are going to suffer when these effects are revealed, it is startling to see how little has really changed.

The tide of events after the collapse of the financial behemoths was one that concentrated largely upon what was happening to the elite. International news channels focused in on unemployed bankers from Lehman Brothers emptying their offices in New York. They scrutinised various meetings of global leaders, as they attempted to co-ordinate international responses and ameliorate what some regarded as the end of capitalism as we know it. $15 trillion was summoned internationally to rescue and guarantee financial institutions; a quarter of global GDP*. That the banks needed to be rescued from too many years of arrogance and idiocy is not questionable. The consequences otherwise would have been too significant, putting us in an incomprehensible position. But the tide of events now, with deep and swift cuts (the cogency of which is a whole different topic!), focuses on everyone. There is a lot of righteous anger, given what we face, and the least we’d expect policy makers to do is learn from what went wrong. Fancy lending another £30k (the cost of the bailout to the average tax payer) a few years down the road for another bailout?

It is a fact that every crisis offers opportunities; to learn what went wrong and change things for the better. The ‘Great Recession,’ no matter how bad it was, offered us the same. We saw the need for a diverse economy – whereas Germany’s wide manufacturing base saw them return to good growth, Britain was more exposed. We saw the need for boring banks and bankers. Most importantly we saw the need for policymakers and economists to rethink their flawed assumptions. The unfettered market is not perfect, because all of humanity is not perfectly rational economic man. We saw the need for real structural change.

But as things looked up, it went back to business as usual. Change practices in the city? No way! Think of the tax money they deliver us. Cause lasting structural reform? No way! Think of how uncompetitive we’ll be! Develop rigorous international oversight of international finance? No way! Think of the political difficulties!

It is important and cannot be reiterated enough, that business cannot return to usual. Forget the doctrine of TINA, (there is no alternative), because there is. Reform must be deep, and the short termism shown by policy makers (BoJo comes to mind) in arguing for leaving things be will simply guarantee more boom and bust. But this isn’t a matter of idealistic ranting – real, sensible solutions can and must be enacted.

Firstly, banks must no longer be too big to fail. This can only happen if the necessary high street functions are separated from casino banking. The spirit and measures of the Glass-Steagall Act (which helped to give America the boring bankers we now desperately need) must be reinstated. It was foolish to scrap it on the back of a stock market boom in 1999, and many in the economic establishment such as Mervyn King (governor of the Bank of England) recognise that.

The standard regulation proposed, of forcing banks to create higher capital ratios to act as a buffer should their assets go rotten isn’t adequate; capital is a malleable word, and the intelligence of the banking sector to manipulate meanings to their advantage cannot be underestimated. Therefore such simplistic measures are likely to result in balance sheets that are only ostensibly healthy.

Secondly, we need to streamline ourselves more internationally. The crisis was great in creating a spirit of co-operation that dealt effectively with the immediate dangers, but that soon faded as things started looking up. We can’t rely on our leaders being pally; we need proper structures to streamline regulation. Politically difficult? Maybe. Economically necessary? Definitely. This can stop banks being the dictators of terms to society: the whole do as we say or we jet off idea. Difficult but necessary reforms can be pushed through. Both the G20 and a reformed IMF are brilliant vessels to do this. And this brings us on to an underexplored but very interesting potential.

The Tobin tax, a tax on currency transactions, must be seriously considered. The global currency market, worth $4 trillion a day, can be taxed not only to stabilise it and stop levels of speculation that can damage healthy economies (as put forward by Tobin, an ardent free-marketeer) but also as an impressive source of revenue collection. A mere 0.005% tax, for example, getting rid of the most short-term speculation, would raise $60 billion a year globally. Thus if it were used not just to end speculation but as a means of creating progressive justice, with say 0.1 – 0.2% (which would be low enough to undermine arguments that long term investment would be diminished), the amount that could be potentially garnered to help those made the worst of by the crisis is staggering. There is opposition, and it seems difficult to challenge the status quo, but we can never know until the idea is seriously discussed.

The position where we are now and how we choose to act reflects upon a greater idea: how we learn and advance and progress. To merely follow the see no evil, hear no evil, speak no evil approach advocated by many within financial centres, that the crisis is starting to end so let’s just forget about it, shows a distinct lack of understanding how serious a position we were in. For the self proclaimed masters of the universe were wrong; the market is limited. And we’ve made some progress in realising that; laissez-faire looks more and more dead. Although it may be hard to reform, and strong leadership is necessary, the need is evident: every minute around the world 100 people are forced into extreme poverty as a result of this economic crisis.* More locally, it is going to bring us pain for years to come. History cannot be allowed to repeat itself; if we don’t act boom and bust will return. We have a compulsion to take this opportunity for reform and execute it.

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