One should always be suspicious of unanimity. While debate rages about the right fiscal policy (tax and spending) governments should adopt in the post-crisis world (the austerians versus the Keynesians, George Osborne versus Jeremy Corbyn and most economists), when it comes to monetary policy (interest rates, the price of borrowing money, whether the money supply should be increased through quantitative easing), eerie silence reigns. No-one, the odd Conservative ex-Prime Minister aside, is calling for interest rates to be raised significantly. The US Federal Reserve, which recently pondered raising interest rates ever so slightly, couldn’t bring itself to actually do it.
The trouble is ‘markets’, those capricious, unelected arbiters of our future who cling to ultra-low interest rates for dear life, have finally determined that they don’t actually work. Investors have decided that the “world’s problems can’t be solved by low interest rates alone” said an article in the New Statesman after August’s Chinese stock market turmoil. The Bank of International Settlements, which is owned by the world’s central banks, warned earlier this month that it was dangerous to expect that monetary policy could cure all the global economy’s ills.
Broken beyond repair
There is a growing realisation that neoliberalism is fatally wounded. After the flashing warning lights of the 2008 crisis, the heart attack victim has gone back to smoking 40 a day and consuming fry-ups. Global debt has risen by 40% since the crisis to $199 trillion (three times what it was in 1990) and privatisation, trade liberalisation (see TTIP) and wage repression have intensified, buoyed by $12 trillion worldwide in invented money (quantitative easing). All hail free markets.
“At some point you have to take your bitter medicine”, says the Bank of International Settlements, a recognition that markets are overdue a “correction”, or in layman’s terms, another financial crisis. The problem is that no-one, leftists included, want to administer the dose.
The official reluctance is in plain sight. See the Federal Reserve’s prevarication over interest rates. In the UK, Bank of England monetary policy committee member, Andy Haldane, claims that, far from rising, interest rates may have to fall further and may, following the example of Japan in the 1990s, turn negative.
But this instinct to preserve, even if what you are preserving is broken and hurts millions of people, is not limited to official policymakers. Earlier this year, the leftist Keynesians of Syriza in Greece, faced with the chance of rejecting austerity and exiting the Eurozone, caved in and opted for heightened austerity and a massive programme of privatisation carried out by a foreign country. They looked down the barrel of precipitating another financial crisis in Europe and bringing down the wrath of the world’s entire financial establishment on their own country, and capitulated.
A Titanic minus the lifeboats
Even if you don’t agree with them, you can understand the reluctance. Another financial crisis would very likely be devastating. The chief economist of HSBC warned in May that world economy was like an ocean liner without lifeboats. If another recession hits, it could be a “truly titanic struggle for policymakers”, he wrote in a note to clients. This is because, in response to all downturns since the 1970s, governments and central banks, have cut interest rates. Their capacity to do that again is extremely limited because they are so low already. More bailouts would doubtless be attempted, and austerity can be understood as creating a ‘fiscal space’ to enable this, but the ability of states to save insolvent institutions is likely to be dwarfed by the size of the task.
Stephen King, the HSBC economist, apparently didn’t speculate what a renewed financial crisis would look like “in the absence of adequate policy tools”. But let’s speculate (every else is). Pension funds are identified by King as “high risk”. There are $50 trillion in pension and insurance funds invested in stock markets in OECD countries, much more than their combined GDP. Then there are mortgages, a debt owned primarily by banks, but as 2008 showed, by many other investors as well. Mortgage payments in the UK, says the Economist magazine, are the lowest they have ever been in peacetime. But were ultra- low rates to rise quickly, as they would in a financial crisis, “things could start looking very troubling”, says the magazine.
Then, there is the fact that consumers are, as Paul Mason says in his book, Postcapitalism, “direct participants in the financial markets” through credit cards, student loans, car loans, mobile phone contracts, gym memberships and household energy. An unchecked financial crisis could turn all these investments and the services they deliver, into dust. And this is besides the geo-political effects in an already hugely unstable world. The refugee crisis Europe is experiencing now would be merely a foretaste.
It’s my, maybe irrational, hunch that the world’s governments and monetary authorities would somehow find a way to arrest a future financial crisis, through a combination of negative interest rates, nationalisation, bailouts and expanded quantitative easing. But the mere fact that a crisis occurred would lead to the realisation that it will inevitably recur. The process cannot be arrested forever.
It is for these reasons that leftists are as conservative as anyone else when it comes to the financial system. They, understandably, combine an awareness of the system’s vast anti-social consequences with an aversion to systemic meltdown. “Europe’s crisis,” wrote former Syriza finance minister, Yanis Varoufakis, in February, “is far less likely to give birth to a better alternative to capitalism than it is to unleash dangerously regressive forces that have the capacity to cause a humanitarian bloodbath”. The implosion of a “repugnant capitalism”, “despite its many ills”, he said, “should be avoided at all costs.” To repeat, at all costs.
No appetite for destruction
Leftists now have no appetite for destruction. In fact, Mikhail Bakunin notwithstanding, the willingness to destroy was always more of a right-wing characteristic. The desire during the Great Depression “to purge the rottenness out of the system” by liquidating stocks, labour and farmers, emanated from a finance minister in a Republican US administration. Despite American Marxist Andrew Kliman’s assertion that since the Great Depression, policymakers have always responded to downturns with fiscal and monetary measures to avoid mass bankruptcy, conservatives since the 1930s have sometimes been happy to destroy business for political and economic reasons. The huge spikes in interest rates in Britain and America at the beginning of the 1980s, unthinkable now, were instituted by the conservative regimes of Thatcher and Reagan with the aim of humbling organised labour. In Britain, a quarter of manufacturing industry was destroyed as a result.
But if leftist governments now see their overriding aim as saving capitalism from collapse, that vastly limits their room for manoeuvre and puts them in a contradictory situation. Paul Mason in Postcapitalism, argues that neoliberalism is broken but imagines an “escape route” for capitalism. Governments agree to suppress financial mania by raising interest rates in response to all future bubbles (like this one) and removing the guarantee of bank bailouts. The opposite, in other words, to what they are doing now. But, simultaneously, he advocates ‘financial repression’ to pay off huge public and private debts, by holding interest rates below the rate of inflation for 10 to 15 years. I would suggest that doing both is impossible.
Any leftist government will naturally face sabotage from corporations and banks eager to turn it into an economic calamity, as a warning to others if nothing else. But a leftist government in current circumstances is especially constricted because it must always keep one eye on stopping the stock market from imploding. Will a Jeremy Corbyn government be able take rail franchises into public ownership when they expire? Probably. Will it be able to nationalise energy companies without sending the stock market in a tailspin? That’s more debatable. And such a government must play along with the pretence that companies’ share values represent their future profitability. Banning companies from buying back their shares thus inflating their value, as many currently do, will precipitate a mass stock market ‘correction’. So it won’t be done.
A day of reckoning
Of course, the fact that leftists won’t pull the plug on neoliberalism, doesn’t mean that the system won’t pull the plug on itself. Many believe a ‘great reckoning’ is approaching whatever governments and central banks do. In that eventuality, a Corbyn-led Labour party would be much better placed in opposition than in government. If it was elected to power following a huge, impossible to bailout crash, it would have far more freedom. Stock market pension schemes, for instance, would have to be replaced with taxpayer-funded, pay as you go schemes, currently portrayed as unaffordable. The house price bubble would be fatally pricked, and there would be no alternative to huge expansion of public or non-profit housing. Public ownership of natural monopolies would be impossible to resist. A basic income would come to the fore.
But as things currently stand, politics and economics resemble a giant game of Buckaroo in which no-one wants to be responsible for triggering the mayhem. And leftists, however unwillingly, have been drawn into the game.