Searching for a global New Deal

Markets need not just an invisible hand but also a visible heart. The state of the world’s financial markets demonstrates that turbo capitalism really does make global crises more likely. Millions of people face the prospect of falling back into the poverty they have only recently escaped.

What started as a storm in America’s subprime mortgage crisis last year, has unleashed a global tsunami that is devastating far-off financial shores. All over the world, banks are faltering; several big ones have already collapsed. The stock market is in turmoil. Currencies are tumbling, growth rates slowing, commodity prices plunging. The expectation that Europe, the Asian trade giants and the developing world might escape unscathed has proved illusory. Globalization, we learn, works both ways: upwards and downwards. Nobody can “decouple” from a major slump.

During the first phase of the crisis, only the U.S. housing market was affected. In the second phase, the global banking world was shaken up. Since the beginning of the year, some $25 trillion worth of shares and assets have vanished. Stock markets are down 40 to 50 percent. China has suffered a 66 percent market loss; exports are dropping; factories are closing by the thousands; the slump is fast spreading to car and steel makers. In Russia, the 25 richest oligarchs have lost $250 billion; even energy giant Gazprom is feeling the pinch.

In the third phase, the crisis is seeping from the virtual world of casino capitalism into the real economy. In Germany, growth next year is expected to plummet to 0.2 percent. The world economy is unlikely to grow more than 1.2 percent. Massive capital injections for ailing banks – close to €4 trillion ($5.6 trillion) all told – are throwing state budgets out of kilter and boosting deficits to unprecedented heights.

Now the crisis is entering its fourth phase. It is rocking states: near-bankrupt Iceland turned to Russia for help; insolvent Pakistan to China; Hungary, Ukraine and Belarus to the International Monetary Fund (IMF); Denmark – not a euro-zone member – to the European Central Bank. Greece, Spain, Belgium, the Baltic republics, Bulgaria and Romania are under severe pressure. Not even the oil-rich Gulf countries and the Central Asian petro-states are impervious to the storm.

This is the worst economic crisis the world has experienced since the Great Depression of the early 1930s. It is a deep crisis of capitalism. It is not terminal – the system will survive – but the reckless turbo-capitalism of the past quarter century is doomed. Laissez-faire is finished, financial self-regulation dead. High-handed Wall Street bankers and their followers around the globe will have to mend their ways.

It has always been clear to me: Just as only the communists were able to bring down communism, only the capitalists could ruin capitalism. The gamblers and speculators in the banking world almost did but luckily the state was still around.

What went wrong? What are the lessons to be learned? And what is to be done now?

The root of the problem was the market fundamentalism shared by the Bush administration, leading American economists and most business leaders. It banked on short-termism, neglecting the longer perspective. Closing their eyes to the imperfections of the market they propounded the view that the business of business is business, and denied any obligation to consider society’s needs. By dismantling the regulatory framework, they leveled the dikes protecting us from Wall Street’s excesses.

The U.S. government, like Main Street, lived happily on debt and overconsumption, while America’s money wizards boosted their bonuses to previously unseen levels. Between them, the top managers of the big international banks drew an annual remuneration of around $95 billion. The losses they caused, according to the IMF, are more than $1 trillion.

With a plethora of derivatives, structured credits and other dubious financial instruments, banking degenerated into what in sterner times used to be called kite-flying. As the business volume of the finance industry ballooned to almost a hundred times the volume of world trade, no one cared to remember a basic truth: that there is no end to boom and bust in the economic cycle. At some point, every bubble bursts.

Now it has happened and the carnage is not over yet. The light flickering at the end of the tunnel could still be the headlight of an oncoming train. But we can already draw three lessons from the current crisis.

First: The state is back. Silvio Berlusconi’s statement may have been self-serving but it reflects a widespread sentiment: “Until recently, everything was forbidden. State intervention was regarded as a mortal sin. Now it has become a categorical imperative.” Untrammeled markets, as George Soros has remarked, can allocate resources among competing private needs and consumers’ desires. But they cannot take care of collective needs, such as maintaining peace and order, protecting the environment or ensuring social justice. They do not recognize the need for the strong to look after the weak. In fact, market forces cannot even vouch for the stability and competitiveness of their own arena. For that, you need the state. Only government can save the market from its inadequacies and excesses, frame the functioning of the market in socially beneficial ways and deliver the social goods citizens rightly expect from the state – security and equity for all.

But there are two caveats. Firstly, the state should not play a direct role in managing the economy; that is not its forte. But if it takes temporary nationalization to salvage the free market, so be it. Secondly, in the age of globalization even the most powerful nation has little clout when operating alone. It takes international cooperation. Finance has gone global, now governance must follow suit.

Second: Europe has risen to the challenge. Over the past two years, only the European Union’s endless constitutional squabbles and its economic shortcomings made headlines. Now, a few weeks after taking the lead in defusing the Georgian time-bomb, the EU has again risen to the challenge.

It took the Europeans some time to get their act together but after some initial cacophony, the Euro group – plus, surprisingly Britain – came up with an unified response: an €1.8 trillion rescue scheme financed and disbursed nationally, but according to agreed standards and objectives, to shore up tottering banks, underwrite lending, guarantee deposits and provide market liquidity.

European policy-makers raced ahead of Washington. Originally, the U.S. Treasury had only proposed buying $700 billion worth of toxic debt but it quickly adopted the European plan to provide banks with new capital in return for partial ownership. The Europeans also pushed for the emergency summit due to be held in Washington on Nov. 15 – not a one-time thing but the beginning, hopefully, of a determined joint effort to revamp the international financial system. A new Bretton Woods will not only have to give important developing countries a seat at the top table; it will also have to come up with new rules and regulations to offer protection against predatory turbo-capitalism.

Adequate capital reserves, a ban on short-selling, caps on bonuses and executive pay, accounting and leverage principles, more transparent financial institutions and instruments with more transparency, a crackdown on tax havens – there is no shortage of topics. These can’t be dealt with during a one-day meeting in the sunset hours of an outgoing U.S. president whose policies were in large measure the cause of our present calamities.

Third: The “Rhenish model” of capitalism – what Germans call the social market economy – has been gloriously vindicated. It was ridiculed and scorned by the neoliberals, who held up Iceland and Ireland as models. They faulted an economy that still cherishes its industrial base instead of plunging blindly into the service society. They denigrated those who clung to the old-fashioned idea that markets need morality and a social conscience – not just an invisible hand but also a visible heart. Now the gurus of greed have fallen silent. All we hear are embarrassed mumblings to the effect: “Savior State is welcome – but who will save us from the savior?”

For believers in the social market economy, salvaging the banks – as someone said, the public rewarding overpaid fools – can only be the first step. Squabbles over minimum wages of €7.50, pension raises of 1 percent or tuition fees are ludicrous in comparison to the mind-boggling sums being funneled into the banking system. The next step must be a resolute effort to revive growth, if necessary by supporting the ailing manufacturing sector. As Richard Sennett has said: “Full employment is more important to our societies than efficient profitability.”

He is quite right. Democracy is always endangered when the economic framework bars too many citizens from sharing in prosperity. Nobody should be surprised to see the financial policies of European governments moving leftward. Some observers even predict that future U.S. economic policies will also take on a more European hue.

Franklin D. Roosevelt led the United States out of the Great Depression. We should all pay heed to his dictum on the morality of the market. In 1937 he said: “We have always known that insensitive egotism is morally bad; now we know that it is economically bad.” The world should keep that in mind as it heads toward a global New Deal.

by Theo Sommer
The German Times

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