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Rudd on the global financial crisis « Previous | |Next »
February 3, 2009

An extract of Kevin Rudd article in The Monthly on the global financial crisis is online. He rightly sees it as an event of seismic significance, an event that marks a turning point between one epoch and the next, when one orthodoxy is overthrown and another takes its place. The Prime Minister of Australia says:

In the space of just 18 months, this crisis has become one of the greatest assaults on global economic stability to have occurred in three-quarters of a century. As others have written, it "reflects the greatest regulatory failure in modern history". It is not simply a crisis facing the world's largest private financial institutions - systemically serious as that is in its own right. It is more than a crisis in credit markets, debt markets, derivatives markets, property markets and equity markets - notwithstanding the importance of each of these.

The PM is right to suggest that a turning point between one epoch and the next is taking place, when economic and political governance is up for grabs. He continues:
This is a crisis spreading across a broad front: it is a financial crisis which has become a general economic crisis; which is becoming an employment crisis; and which has in many countries produced a social crisis and in turn a political crisis. Indeed, accounts are already beginning to emerge of the long-term geo-political implications of the implosion on Wall Street - its impact on the future strategic leverage of the West in general and the United States in particular.

Rudd positions his government in the classical tradition of social democrats acting to save capitalism from itself; use the state to reconstitute properly regulated markets and to rebuild domestic and global demand whilst avoiding protectionism; and developing a practical policy response to the crisis that rebuilds shattered economic growth while also devising a new regulatory regime for the financial markets of the future.

It's hard to disagree with that account.

Rudd then asks: How was this allowed to happen? What ideology, what policy, what abuses made this possible? Were there any warnings? And if so, why were they ignored? Judging from the online extract, which ends there, the answers is in terms of neo-liberalism, which he understands as free-market fundamentalism. His concern is with the ideology of the Chicago school economic liberal, and their narrative of the retreat of the state and a greater role for markets in allocating resources.

The argument in the online extract does have an affinity with the account by Dean Baker at American Prospect:

The most infuriating aspect of this disaster is that it was completely preventable. The basics of the housing bubble were straightforward. House prices began soaring in the mid-1990s, hugely outpacing the overall rate of inflation. This followed a 100-year-long trend in which nationwide house prices had just kept even with the rate of inflation......Not only did Federal Reserve Board Chairman Alan Greenspan and the other leading lights of the economic profession fail to see the $8 trillion housing bubble, they somehow failed to recognize the explosion of risky mortgages and the highly leveraged chain of finances built on top of these mortgages.

Baker adds that it it is difficult to believe that top US economists could be so incompetent, but among economic policy makers, blindly following the conventional wisdom seems to be a job requirement. Even if this policy leads to yet another disaster, those responsible are unlikely to face any serious consequences. The taxpayers, homeowners, and job losers are the ones who pay the price of the economists' mistakes.

Update
For an account that steps behind ideology and the blindness of economists to an explanation try this speech that argues that proposals for regulatory change are grounded in analysis of what happened – why this crisis occurred. It is an account that argues in terms of the dynamics of the global financial/economic system:

At the core of the crisis was an interplay between macroeconomic imbalances [large surpluses and deficits] which have become particularly prevalent over the last 10-15 years, and financial market developments which have been going on for 30 years but which accelerated over the last ten under the influence of the macro imbalances....A cycle therefore of irrational boom and then bust; and therefore in some ways no different from other cycles which we have seen in markets in the past: in equities, in property, in South Sea project participations, in tulips. But what makes this one different – and potentially more economically destructive to the real economy – is that it is the first major global boom and bust of securitised credit instruments. Because at the core of this story is the development of a new model for delivering credit intermediation – the originate and distribute model of securitised credit.

It is argued that the far big failure – shared by bankers, regulators, central banks, finance ministers and academics across the world – was the failure to identify that the whole system was fraught with market-wide, systemic risk. They failed to piece together the jigsaw puzzle of a large current account deficit, rapid credit extension and house price rises, the purchase of mortgage-backed securities by institutions in the US performing a new form of maturity transformation, and the potential for irrational exuberance in the market price of credit. They failed to realize that there was an increase in total system risk to which financial regulators overall – authorities, central banks and fiscal authorities – needed to respond.

| Posted by Gary Sauer-Thompson at 5:39 AM | | Comments (15)
Comments

Comments

The American Prospect Roundtable is useful. Josh Bevis says:

The upshot is that the economic policy-making elite seemed ready and willing, on the basis of thin evidence as to its actual danger to the economy, to savagely attack inflation. But they also actively denied the very existence of something that was clearly a present danger to the American economy. What gives? It's becoming harder and harder for me to avoid an awfully reductionist conclusion: A problem is only a problem when rich people may get hurt, and solutions are only viable when rich people are not inconvenienced by them.

The Republicans bail out Wall Street and ignore Main Street. Obama in contrast, is concerned about the pain and suffering on Main Street.

yes, in Australia the story was one of ' this time, the bubble isn't a bubble. This time, there will be no pop, no pain. The mining boom is eternal. It will go on for ever.' The same commentators are now talking in terms of the inevitable upturn.

The politics of Rudd's Monthly piece is intriguing. Back when he published the first two it was a clear strategy to introduce himself to the intellectual class and stake out a position for the benefit of the commentariat. This is not so clear.

The small l liberals are shifting from disappointed to annoyed about his social conservatism, squibbing on the environment, filtering and pandering to the usual suspects. But I don't see this aimed at them this time.

For them, it's no longer about what he says but about what he does.

It might make sense retrospectively if he's about to beef up the social safety net anticipating an unemployment explosion. There's no indication he intends to do anything to restrain the kind of excess that caused this in the first place.

I think Lyn is right in saying "There's no indication he intends to do anything to restrain the kind of excess that caused this in the first place."

It is no point just to challenge capitalism, the success and failure of which depends on how we regulate it.

Not this bollocks again! I cannot believe our Prime Minister is writing this drivel. But if you read it closely, it has clearly been written by committee, but my god, what a thick committee.

This evil “Thatcherism” that they equate with “neoliberalism” is always hissed and booed, without the hissers and booers ever mentioning what the UK was like when The Lady came to power in 1979. Let’s revisit a few fun facts, shall we?

1. Like the Ottoman Empire in the 19th century, the UK was known as “the sick man of Europe”.

2. The country was run by PM Callaghan and an increasingly Socialist Labour Party.

3. Trade Unions ran the country

4. In 1976, they had to bailed out, seconds before bankruptcy, by the IMF. I mean, the IMF!!! That is where fourth world has to go to prevent mass starvation!

5. Inflation nearly hit 30%

6. Nevertheless, trade unions were striking for a 3 day week, culminating in the “Winter of Discontent” in 1978/9.

Basically, “social democracy” forced Britain into the 3rd world. Without Thatcher, they would’ve ended up a bankrupt 4th world society. So don’t blame some “ideology”. They had no choice!

And Reagan wasn’t a “neoliberal” he was a neoconservative, swept to power by Democrat neocons - Reagan Democrats - who did want detente with the Soviet Union; they wanted “the evil empire destroyed”. Reagan obliged by ramping up defence spending, knowing the Soviet Union would go bankrupt if it tried to keep parity, and that it would lose global credibility if it could not keep parity. It could not, the Soviet Union collapsed, Reagan was vindicated.

Lyn,
its about the tactics of political positioning of the looming recession. It is political positioning that is similar to Rudd's earlier claim that there was not a cigarette paper’s difference between his conservative economic policies and those of John Howard before the 2008 election.

John
Thatcher embodied the Hobbessian free-market ideology that has taken 2-3 decades to blow up in our face. I wouldn't use pre- and post-Thatcher Britatin as an example. There are plenty of exemplary social democracies around the world...an not just in Scandinavia

Davos Man continued to sing the old songs about open markets and international integration at his globalization festival. The new political reality is that whilst politicians are convinced of the need to keep markets open and trade and investment flowing, they are under increasing pressure to respond to voters who are angry, frightened and demanding protection.Some call it globalization in reverse.

Nan
Alan Kohler in Business Spectator agrees.

The current Reserve Bank strategy is to reduce existing levels of bank, business and household debt by slashing its cost to borrowers and trying to grow out of it over many years. By itself it will not not generate much additional borrowing or fresh spending.

Is it too early to call the Coalitions election slogan?

" We Fixed it before We can Fix it Again"

John,
the social democratic tradition Rudd is appealing to holds that crisis is inherent to financial capitalism and there is nothing more ordinary in the four century history of financial capitalism than a crisis.

Marx's scenario that the collapse of capitalism through the crises brought on by its internal contradictions is prevented by the state managing the "flaws" and helping capitalism to recover from its crises. So capitalism will recover, transform and endure though state intervention.

this way of looking at it is better than the talk about "a culture of greed", the political and economic ideology of extreme capitalism", and extreme free-market ideologues who influence much of the neo-liberal economic elite".That doesn't get us very far as you point out.

Les,
There is no miracle cure. Lower growth, lower incomes, lower consumption, lower debate is where we are going. "Fixing it" is cushioning the pain.

All of the ideology nonsense getting around at the moment looks like a red herring to me. A soccer ball for the commentariat to kick around while everyone else gets on with other things.

People are suddenly talking about Thatcher, Reagan, Whitlam again as if 1) they're relevant to what's happening now and 2) all of their action could be explained by ideology.

Nan rightly points out that voters don't base their choices on ideology, and neither do sensible politicians. It may influence some of their priorities when they can afford to indulge those, but this is not one of those times.

Notice that while Turnbull, Costello and the commentariat at the Australian are all waffling on about this stuff, Rudd is not. Instead of talking over people's heads he's selling his package to the 'working families' in swinging seats.

The constant reiteration of 'global [various] crisis' has sunk in, so localised ideologies don't amount to a hill of beans anyway.

Nan,
Have you been taking serious pills again?