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"...public opinion deserves to be respected as well as despised" G.W.F. Hegel, 'Philosophy of Right'

neo-liberal bankruptcy? « Previous | |Next »
September 18, 2008

The current financial crisis has its roots in deregulation (i.e. "globalisation") in the 2000s which allowed capital to flow free and untrammelled around the world.The international financial architecture ("globalisation") was so structured as to enable the United States to "hoover up" money from the rest of the world, and use these resources to live beyond its means and go on a spending binge.

Seumas Miller in a comment in The Guardian puts his finger on the core issue arising from the global financial crisis.

Miller says:

What is certain is that the dominance of the free-market model of capitalism, which has held sway across the world for more than two decades, is rapidly coming to an end. When its high priests in Washington are forced to carry out the largest nationalisations ever undertaken outside the communist world, while intervening on an unprecedented scale across markets that were supposed to be self-regulating in order to keep the system afloat, the neoliberal order is transparently falling apart.

The free marketeers are saying that the unfolding of the banking crisis showed that capitalism and markets were working as they should however "brutal and unforgiving" the level of creative destruction. It's government that is the problem not the efficient market. The government should get out of the way and let the market efficiently allocate resources by eliminating excess.

I read that argument somewhere yesterday. The Wall Street Journal? Regulators ought to have some humility in the face of the corrective actions of the markets.The deeper the downturn the quicker the recovery. The financial system is now purging itself of years of excess and it will result in larger, better-capitalized financial institutions.

The key arguments these economists make are this. First the fundamentals of the market are strong so there is no need for government intervention. Secondly, the current crisis has been caused by the low interest-rate monetary policy Greenspan presided over after 2001. This case permits a twofold diversion - for it pins the blame for the crisis on interest rates (not deregulation of credit-creation) and on central bankers (not the private-finance sector). The policy implications of this focus neatly avoid proposals for what is clearly and urgently required: re-regulation of the finance sector. It is a defence of raw capitalism and markets being left to their own devices.

Raw capitalism is dead. Even US Treasury Secretary Henry Paulson, who has spent years attacking government intervention and regulation of financial capitalism, concedes that. He's now into the nationalisation business big time. The US government is now in the position of owning parts of the financial system and providing regulation of it.

| Posted by Gary Sauer-Thompson at 7:59 AM | | Comments (22)


They have a point: all or nothing, boom-bust, rise-correction. It's a value judgement. If it didn't mean massive suffering for those who usually suffer the most anyway, I would be dead set against the 'largest socialisation ever undertaken...'

Ideally societies should make a choice to either follow this philosphy or a much more comprehensively regulated and, if you like, 'austere' approach. Trouble is, of course, when the populace is so severly dumbed down by ever decresing educational standards and the banality they are fed through the mass media, thus totally disengaged from reasoned public debate then what choice do they really have to exercise?

sure capitalism is unstable--boom bust etc. But there is a need to stablize the instability through counter cyclical measures. That means the state has to step on.

I agree with you think the economies you speak of are more conducive to better lifestyles (isn't that what it's all about in the end?). there is also evidence that, averaged over decades, economic growth in more 'socialised' economies is higher than a laissez-faire philosophy produces (see Vicente Navarro's work).

Devil's advocate would say that the boom-bust approach is required to drive innovation and, hence, technological advances that make out lives 'better'... the sort of stuff that Ayn Rand devotees such as Janet Albrechtsen spout...

Nouriel Roubini says it well in The Guardian. The

Bush hypocrites [have] spewed for years the glory of unfettered Wild West laissez-faire jungle capitalism allowed the biggest debt bubble ever to fester without any control, and have caused the biggest financial crisis since the Great Depression.

They are are now forced to perform the biggest government intervention and nationalisations in the recent history of humanity, all for the benefit of the rich and the well connected.

These laissez faire voodoo-economics zealots in charge of the USA have now caused the biggest financial crisis since the Great Depression and the nastiest economic crisis in decades.

The response to the Devils advocate is this editorial from The Guardian:

The financial markets have been exposed as a vortex of artifice, a land of mirrors in which nothing was real and now everything is shattered. Government stands between citizens and disaster.

It goes on to say that
The aim must be to rebalance the relationship between the City and society, not out of revenge or a disavowal of all markets, but to protect people, which is surely the basic duty of the state. There is a near unity of opinion that rules must be changed; that regulation has been weak; that the supposed masters of the universe in New York and London have been exposed as enfeebled spivs.

Those who live by the market should die by the market.

Peter, I was chatting to a born and bred Conservative / Liberal friend yesterday who, in the same breath, lamented his net worth having been slashed by the turmoil on the markets yet was cheered by the Liberal election victory in WA. I pointed out to him the dissonance of his position: the values he supports politically are the same ones underpinning the fiancial catastrophy pricking his super. Long silence ....

i'm often jokingly called a communist. I'd be lying if I said that I'm not enjoying the delicious irony of the current situation....

The Guardian editorial is brilliant - thanks Gary/Peter. What we have is finally, at long last, some evidence to refute "the dogmatic delusion that the invisible hand of the market reliably transforms private greed into public good". BTW, is it just me or has The Australian been merely reporting the facts and keeping quiet about its past claims?

The Australian's editorials are standing firmly behind the free market position despite all the problems caused by credit-default swaps. Thus this one on Saturday says:

The crisis has exposed a need for transparency. The anti-free-marketeers can barely contain their glee. But sage-like predictions of a lurch towards more socialist-style economic models in light of the financial crisis are wide of the mark. What the volatility has highlighted is the need not for more regulation, but more relevant regulation.

As policy makers and central bankers grapple with investment practices, what is not needed is a system based on the erroneous notion that governments know better than free, well-informed markets in which millions of people invest their own money. What is needed is transparency and disclosure to avoid the chaos of recent years in which many investors did not have a clue about the quality of some of the assets they held.

Free markets? The editorialist doesn't seem to have realized that Paulson and Bernanke, those resolute defenders of free market capitalism, have been forced by the weight of circumstances to nationalise large chunks of the financial system to prevent it from collapsing. They just keeping changing the rules as things happen. Hence the moves on short selling.

The editorial, which remains beguiled by the idea of a self-regulating market, finishes thus:

Suggestions on the ABC's Q&A by academics Robert Manne and Waleed Aly that the crisis is "a body blow to market thinking" and signals a shift in the "centre of gravity" towards the Left are utterly fanciful. Light, effective regulation must ensure a level playing field so that the smallest investor can have confidence they have the same access to information as the biggest trader. Such an approach will make markets stronger, not weaker.

The reality is big government not free open markets. The Australian continues to live in a fictional world whilst the investment bankers are mugged by reality.

In another editorial---Not the death of capitalism --- the Australian says:

But the sky is not falling in. Market professionals have seen large pullbacks and periods of financial instability and volatility before. And each occasion has been triggered by different events that few pundits have correctly predicted.

What we will see now is a period where the speculative projects are culled, the financial engineers are under pressure sell assets or merge at distressed prices, and everyone else sits on their hands. The end of the world has been falsely proclaimed for thousands of years, but capitalism isn't dead yet. This is actually capitalism at work, and it's worth remembering that no bear market ever ends until the majority of participants conclude that the future looks terrible. We're getting closer to that moment every day.

Not one word about the intervention that resulted in the nationalisation of large chunks of the financial system, or the global provision of liquidity to keep that system from freezing from banks refusing to lend to one another.

The Federal Reserve has run out of money as a result of furnishing close to $500 billion to prevent liquidity and it is now borrowing from the US Treasury. The latter was forced to injected $100 billion of capital to bolster the Reserves damaged balance sheet. The Australian is living in cloud cuckoo land.

Ah, yes the usual circular nonsense - I love the tautological contortions, a sure sign that they're evangelical beliefs have been destabilised: "...the need not for more regulation, but more relevant regulation" sooo - regulation, right? UNBELIEVABE.

the trouble the Australian faces is that capitalism just isn't working as advertised in its editorials.

The Australian misses the point completely. Government's have to intervene because the private sector has been unable to step and provide the capital needed. This happened in 2007 when the credit crunch was handled through sovereign funds from the Middle East and China stepped and recapitalized the debt of the US and Europen institutions.

They refused in 2008 with Lehman Brothers, even though they took a look but what they saw was pouring money down the drain. So the debt ladened American state had to intervene.

Naomi Kelin makes a good pointabout free market ideology in an op-ed in The Guardian. She says:

Free market ideology has always been a servant to the interests of capital, and its presence ebbs and flows depending on its usefulness to those interests. During boom times, it's profitable to preach laissez faire, because an absentee government allows speculative bubbles to inflate. When those bubbles burst, the ideology becomes a hindrance, and it goes dormant while big government rides to the rescue. But rest assured: the ideology will come roaring back when the bailouts are done. The massive debts the public is accumulating to bail out the speculators will then become part of a global budget crisis that will be the rationalisation for deep cuts to social programmes, and for a renewed push to privatise what is left of the public sector. We will also be told that our hopes for a green future are, sadly, too costly.

The Australian represents the interests of capital.


Once more, what you might mean by "neoliberalism" and what it has to do with the meltdown is a mystery. Are you sure the real word you are searching for is not "capitalism."

if you had actually read the post the post with that question in mind you would have seen the neo-liberal capitalism was equated with free market capitalism advocated by Wall Street.

That means we are talking about forms of capitalism not capitalism per se.

Do you actually read or do you deliberately pose as a troll parading ignorance?

Oh dear. I like this definition: neoliberalism is a doctrine where market exchange is an ethic in itself, capable of acting as a guide for all human action.

I like to call it the bastard child of the enlightenment.

What strikes me about this whole kerfuffle is the ease with which folks have allowed the “end of neoliberalism” narrative to run. “Neoliberalism” was only ever a discourse of Leftists; a propagandist creation with little, if any, relation to the real world of investment, production, and consumption. So, of course, only the same fantasists like Luvvie Quiggin could declare the fake discourse over. And whatever happened to “economic rationalism?”

Riddle me this. How is that a government is able to slap down $1 trillion - without batting an eyelid - of taxpayers money, that was earnt from capitalist wealth creation institutions, and yet Leftists can crow this somehow a victory for socialism? If it were socialist wealth creation institutions being relied on to pony up, the US would have the living standards of Pyongyang.

I suggest you start reading the financial press---eg., the Financial Times and The Wall Street Journal. You are shooting rubber bands at the moon.

Your argument is circular. Besides, some communities in the US DO have similar living standards to Pyong Yang - they just neglect to show that part on TV.


I have lived in the US and UK and worked in both the City and Wall Street, so I do not need to rely on TV for my views. I am not sure which journos you are relying on to contradict my post. You stick to rubber bands and Oprah, I'll stick to reality.

You can start with Janet Albrechtsen's op-ed in today's OZ, John.

The reality, mate, is market failure. sorry

Jonathan Guthrie in the Financial Times, who is a pro-business free marketer,says:

Leveraged investment banking, the test bed of not-very-fettered capitalism, had just imploded. ....The arguments that business has used when engaging with government and society are as badly damaged as the business models of many financial institutions. It is hard to call for light regulation when that has failed spectacularly in an industry important to prosperity. It is difficult to maintain that the markets set clearing prices efficiently when they steadfastly refuse to do so for credit.

That's pretty much the consensus in the financial press.