By Ann Pettifor. An edited version of this piece was published on Left Foot Forward, 14 September, 2011. This original, longer version posted 19 September, 2011.
The game is up. The 2007-9 private banking crisis that started with the unpayable debts of the US sub-prime sector, was never over. The crisis has now moved on to include the unpayable debts of sovereigns owed to private European bankers. It is increasingly clear that there is declining political and institutional support for further private bank bailouts. The dramatic resignation on Friday 9th September of Jürgen Stark, architect of Europe’s equivalent of the Gold Standard – the Growth and Stability Pact – marks an important step in the resistance to bailouts by the ECB; in the inevitable collapse of the Maastricht Pact, and with it, the utopian vision of the neoliberal Euro.
And so the age of liberalised, de-regulated finance appears to be over – at least in Europe. That is the conclusion of investors in both Wall St and the City of London and explains the collapse of confidence in banks and the volatility of stock markets as investors rush for the exits, transferring speculative gains into the safety of government bonds.
The Growth and Stability Pact was, and is repeatedly flouted by Greece and other eurozone countries – even by Germany under Gerhard Schröder. The ECB, led by Jean Claude Trichet is also obliged to flout its terms, by effectively adopting a fiscal role – buying up the bonds of deficit countries – and thereby causing the resignation of not just Mr Stark, but also Germany’s Axel Weber.
This resistance represents a Polanyian counter-movement – however weak – which defies orthodox economists, central bankers and Haute Finance. Across the Eurozone, Europeans resist further private sector bailouts; and refuse to march like lemmings to their own destruction across cliffs of unemployment, deflation and social unrest.
The Eurozone and its economic framework was designed as a financial ‘straitjacket’; to undermine the sovereignty of Europe’s elected governments; to transfer power over financial and therefore economic policy to unaccountable central bankers; powers then enforced by ‘the invisible hand’ – ‘the markets’ – international speculators on foreign exchange and financial markets. It was also, its protagonists argued, designed to ensure peace across Europe.
But so utopian is the vision of liberalised, unaccountable finance, that it has achieved the very reverse: the divergence, not convergence of European economies; sovereign insolvency, bank failures, rising unemployment, the degradation of public services, and with it the intensification of tensions and conflict across Europe.
Regrettably we have been here before. The very same policies – and liberal finance model – were tried in the 1930s, under the Gold Standard. By 1933 their failure was complete, challenged effectively by both Karl Polanyi and John Maynard Keynes. The latter took on the responsibility of outlining and implementing a ‘Plan B’ – one which endured until overturned by neoliberals in the late 1960s and early 1970s.
So as we witness the death throes of this second experiment in liberal finance, what is today’s progressive alternative? What is the left’s Plan B?
The failure of the left to pose an alternative to liberal finance was striking both before, during and after the 2007-9 financial crisis. In the wake of the greatest financial catastrophe of our lifetimes, the loudest complaints were aimed at bankers’ bonuses, and at the failure of rich elites to pay taxes. Recently, the pro-austerity Institute for Fiscal Studies has tried to turn this into a debate about the mal-distribution of wealth.
But while these are important issues, they do not touch on the structural injustice of a liberalised financial system that is capable of wrecking the global economy; denies economic sovereignty to democratic states, and that stratifies the polarisation of wealth between rich and poor. Nor does the debate on bonuses or the addition of taxes structurally alter the role of Haute Finance as ‘stupid master’ (to quote Labour’s Employment manifesto of 1944) as opposed to ‘servant’ of the real economy.
So what should the left’s macro-economic Plan B look like? Clearly it will have to embrace both monetary and fiscal policy, with monetary policy more important in the long-run; but fiscal expansion needed immediately to deal with the collapse of employment and private sector activity.
The first element of any plan must be the careful and coordinated sequencing of both quantitative easing and fiscal expansion. This will involve the financing of a programme of public works expenditures designed not just for socially and ecologically essential projects, but also to stimulate private economic activity. Central banks are eager to supply liquidity to private bankers when they wreck both their own institutions and threaten the global economy; they should now act to supply liquidity to governments that need to stimulate economic recovery, and finance the transformation of the economy away from fossil fuels. (For more on this see ‘The Green New Deal’ co-authored by this blogger.)
Next, it will be essential to manage in an orderly fashion the massive write-off or ‘re-structuring’ of unpayable debts – to replace the current disorder of random de-leveraging by sovereigns, corporations, households and individuals. Many of these debts are phantom debts, and cannot ever be repaid. That reality must be faced. It is time for another debt Jubilee.
The third element should be the introduction by sovereign states of capital controls over the mobility of finance across borders, to strengthen democratic, accountable policy-making. In the words of Brazil’s President Rousseff, governments must protect their “internal markets.” The form these controls take will depend on local conditions and circumstances, and should be agreed by elected representatives of democratic states, with central bankers acting in the interests of domestic economies, not the proverbial ‘gnomes of Zurich’. Fourteen countries already impose capital controls, including China and Iceland; but each week new reports appear. The most recent is Indonesia which will require companies to repatriate about $33bn of foreign currency earned each year on exports (FT 9 September, 2011).
Fourth, central bankers, while regulating the creation of credit by private bankers to ensure loans are repayable, should also seek to bring down interest rates across the spectrum of lending: for safe and risky loans, short and long-term loans. Adam Posen’s recent proposal for a public bank that would make cheap loans available to SMEs should be given serious consideration. In other words, the rule should be ‘tight but cheap’ money.
Fifth, governments and central banks should be mandated to promote a) full employment and b) sustainable, localised economic activity, supporting the domestic economy – not a globalised financial elite. For just as employment makes things affordable for individuals and households so full employment will make things – including the transformation of the economy away from fossil fuels – affordable for government.
“Look after employment” as Keynes argued, “and the budget will look after itself.”
Add to the above, terms and conditions for banks bailed out by taxpayers; and a reformed taxation system and you have a coherent and plausible Plan B. Correct me if I am wrong, but so far it seems the most comprehensive one on the table.
11 thoughts on “The age of liberal finance over. The left’s Plan B?”
Ann, you have left out Hayek’s Road to Serfdom. My mention of it does not indicate advocacy. But it was, as was Polanyi’s Great Transformation, a response to the issues of its time.
Sorry, neglected to say what a good piece I think this is.
Thank you Larry!
Can you clarify a point for me? You liken the Euro to the Gold Standard, arguing that for economies under severe pressure, they’d be better getting out.
I agree with you on this point, but I’m wondering if there’s any tension between this and calling for the type of managed global architecture that we saw post-1945? Wasn’t the ‘Nixon shock’ that you criticise the contemporary version of leaving the Gold Standard?
Steffan…good question. The post-war Bretton Woods system, while based on a pegged currency (the dollar) linked to gold – was not in that sense like the Gold Standard. Basically Bretton Woods required countries to maintain a degree of balance in their current accounts…and not to build up either surpluses or deficits, but instead to periodically correct imbalances. Capital controls made it possible for governments both to manage inflows and outflows; but also helped central banks manage domestic interest rates…BW was not what Keynes had wanted, but nevertheless required governments to regulate and manage imbalances.
Under the Gold Standard, and in the absence of capital controls, capital mobility meant that the process of ‘re-balancing’ was managed ‘automatically’ by ‘markets’ – i.e. speculators and traders in the financial system – not governments. That is pretty much what happens in the Eurozone today. The ‘markets’ decided on capital flows – and on the price of lending…not central banks and finance ministries….The Nixon Shock freed up the markets to take up the role of ‘policing’ governments, punishing some and rewarding others…..because by unilaterally dismantling the system, capital mobility was restored, and the private sector could roam far and wide….mobilising funds to finance the US deficit for example. Hope this is helpful.
I have just watched your interview on ABC News. This is the first time I have seen a video interview by you, as opposed to reading one of your comment pieces. You performed very well, and I liked the way you were able to give quick appropriate answers.
It certainly seems unfair that everybody but Western bankers must endure pain at the moment, when Western bankers caused the crisis in the first place. It all goes back to the conquest of university economics departments in the West by neo-liberal economists. Keynesianism is a dirty word at the moment; why should it be treated any worse than Friedmanism, or Marxism?
Nice article as usual. It’s disheartening to see that the policy makers don’t accept that production not speculation is the activity to support. Its high time that they learnt and applied the lesson.
I have a request for you. Can you do an article on the idea of a basket currency for the world replacing the USD as the defacto world standard, particularly a basket that is defined by 5 developed countries and 5 developing countries? (I read about this idea a while back online but can’t find the link now)
Hardik…you are referring to Keynes’s proposal in the Bretton Woods discussions, for an international, independent clearing bank….which I very much support. Will try and find the piece I wrote on it for the book: “the real world economic outlook” I edited back in 2003…have long been a supporter of this proposal…to end the bias of one nation acting as the world’s banker…and enjoying all the power that endows….
Thank you Ann – that was very helpful. I was unsure of the logic of capital controls partly because of this, so I’m grateful you cleared that up for me.
On a (slightly) separate note, I’d be intrigued to know your thoughts on the IMF’s latest calls for halting the oxymoronic ‘expansionary contraction’ projects.
Thanks again for answering my question however!
Steffan…about to publish a little rant about the IMF’s turnaround…So hang on in there ….