Friday, 17 October 2008

Liboration Day ?

It's been an "exciting" time since I last posted. The global financial crisis of 2008 has intensified with wild swings and huge volatility on all the leading stock market indices.

There's little doubt in my mind that ten days ago, the global financial system was on the edge of the cliff and staring over the abyss. The attempts by Henry Paulson in the US and Alastair Darling in the UK to restore market confidence and especially inter-bank lending had failed and the market was in almost freefall. One or two major financial institutions appeared to be on the cusp of disaster with all the accompanying social, political and economic fallout.

Something had to be done...

Thirty years of free enterprise doctrine and ideology were torn up as Governments across Europe and North America intervened massively in the banking system. In Britain, the main struggling banks were part nationalised or, more accurately, the Government took preferential stock in the banks as part of a process of re-capitalisation. The amounts involved are staggering - I have seen a figure of $2 TRILLION as the total amount invested by Governments.

The main tenet of this intervention was to free up the money market by insuring all inter-bank lending. This lending is governed by the LIBOR rate but this rate has remained stubbornly high and although London stocks are above their lows of last week the losses have continued on Wall Street and the London market rally has only risen some 250 points.

While most leading politicians welcomed the Government intention, there have been voices of dissent, notably, but not exclusively, from Thatcherite free-marketeers. They recognise the bailout as the death knell for a way of economic and political life and dislike it. In America, the bailout has been condemned as a step on the road to socialism.

The free marketeers have a point of course. The scale of the Government bailouts will blight the public finances for years to come - a point not lost on Conservative Shadow Chancellor George Osborne, who has now seen hopes of early tax cuts under a future Conservative Government go up in smoke. The "alternative" to Government intervention would have been to let the market take its course with the weaker banks failing and being asset-stripped by the stronger institutions. This neo-Darwinian behaviour is fair enough but it doesn't work in 21st-century societies.

Imagine the social, political and economic consequences of a major bank failure in Britain. Television pictures of queues of frightened and angry investors would probably lead to further panic and resulting social disorder and financial dislocation. No one in Government is prepared to allow thousands of individuals to be ruined by financial failure. The bailout, backed by the guarantee on deposits up to £50,000 is less an economic measure than a social and political one aimed at ensuring the maintenance of public order and at least a degree of confidence in the banking system.

To what extent do the events of the last fortnight represent a sea change in the political, social and economic culture of the West ? It's clear that the triumphalist free marketeers are silenced but no one is saying capitalism is dead. In the crisis of the mid 1970s, what died was the post-war political and economic concensus generally known in Britain as Butskellism - the high spending, high taxation, corporatist, welfarist model brought in after 1945 was discredited. There was a replacement ideology on hand in the form of monetarism which swiftly became the economic and political credo of Governments of all persuasions from the late 1970s onwards.

Privatisation, a reduced role for the State and tax cuts were the culture of the next thirty years and this was predicated on the notion that as the very rich got richer, their prosperity would "trickle down" to the poorest. While income inequality has grown, social mobility has declined and there's plenty of evidence that a small but significant minority have been notably less well off in the past thirty years.

For politicians and bloggers struggling to come to terms with events, the ideological and philosophical path is far from clear. It's odd to hear Conservatives preaching the virtues of Keynesian demand management but the free market rearguard continues to snipe from the sidelines. What is clear is that the excessive behaviour of bankers and financiers will be much less tolerated in the future and the extremely wealthy will need to be seen to be sensitive to the approaching economic storm.

The "new capitalism" of the 2010s is going to be a different beast from what we've seen in the past thirty years. There will undoubtedly be a shift toward greater personal financial responsibility characterised by individual thrift and social austerity - this may be no bad thing.

The other side of the coin has been the Government intervention. Banks and institutions which would otherwise have been allowed to fail have been rescued. Those who might otherwise have lost everything will be saved, at least at that level. For smaller businesses and those individuals owning them the prospects are nowhere near so rosy. We have already seen companies in construction going under with their owners forced into bankruptcy.

The future may well be one in which people are more risk averse but a dynamic economy requires individuals prepared to take risks. It is to be hoped that out of this will come a new, more responsible, banking system, supportive of individuals and businesses yet more cautious in its overall lending.

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