ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846
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Dangers of Unbounded Capitalism

Avinash Persaud ( is Emeritus Professor of Gresham College and is currently on secondment to the Prime Minister of Barbados as Special Envoy on Investment and Financial Services and Chairman of the Financial Services Commission of Barbados. 

One of the best books on the global financial crisis, Crashed by Adam Tooze slays the idea that the policy response was about the technical ability of brave officials and not bare political choices. This point, augmented with stories of deep financial integration between China, Europe and the United States, is a devastatingly insightful description but not a prescription. Although Tooze says that the story is a perennial one of instability of capitalism, he neglects history and the relatively successful way the world responded in Bretton Woods, when unstable capitalism last engulfed us in crisis.

Ten years on from the fall of the Lehman Brothers, there have been many books on the financial crisis that gripped the United States (US) and European economies after 2008. There are those by the insiders: Ben Bernanke, Mervyn King, Hank Paulson and Tim Geithner. It is hard for protagonists to tell a story that they are so connected to and so it is a relief that a few master storytellers have also come to the party like Michael Lewis with The Big Short and Charles Ferguson who wrote and directed Inside Job, one of the first films on the crisis. There is also a raft of books written for a wider audience by “public” economists like Alan Blinder, Paul Krugman, Raghuram Rajan, Nouriel Roubini, and Joseph Stiglitz. When Adam Tooze’s Crashed hit my desk, I wondered if there was room for another.

Time provides perspective. The books have generally got better. Tooze’s book is one of the last; and one of the best. It is entirely different than those that have gone before. It weaves an essentialist idea of a financial crash alongside deep private financial integration between China, Europe, and the US. He describes the financial crisis, its context, and causes with an acuity and comprehensiveness that is second to none and he writes in a style that is hospitable and exciting.

The memoirs of the insiders Bernanke, Paulson, Geithner, and King, strike the tone of the firefighter, initially struggling with a fire that spreads wildly until everything is alight. Then, our heroes steadily get on top of the blaze and put it out. In their own stories, our heroes have an enormous weight on their shoulders, made heavier by the absence of political leadership. Our heroic public servants have been involuntarily thrust into the centre. It is their judgment that influences whether the world economy slides into another Great Depression or lurches to political extremism.

The impression given is that the job is a matter of technical expertise, not of political choice. In these tales, economics is described in a way as if it has a naturalness to it, leaving little room for political agency. It is a version of—and for similar purposes—Margaret Thatcher’s famous dictum in the early 1980s as unemployment in the United Kingdom soared: “There is no alternative” (TINA). This time around, it is yet another politician that encapsulates the triumph of economic technocracy: Germany’s Wolfgang Schauble. Tooze reminds us of Yanis Varoufakis’ gripping account of the Eurogroup negotiations with Greece following the election of Syrizain Greece on 26 January 2015, when Schauble says, “Elections cannot be allowed to change economic policy.”

Tooze’s point of departure from the memoirs of the firefighters is that “[P]olitical choice, ideology, and agency are everywhere across this narrative.” Saving the banks was a political choice. Austerity was a political choice, as was the emergency asset purchase pro­­gra­m­m­­es of central banks in 2009 and later quantitative easing. Each of these decisions had distributional consequences. Each decision could have been different with different effects.

Tooze’s point, to paraphrase the 1992 Democrat presidential election slogan, “It’s the politics, stupid!” is well said and it is a challenge to the convenient consensus. But, it is not an original point. More original is his analysis of how ­coalitions are assembled to do essential but unpopular things and then dis­assembled by the electorate. Despite all the talk of a rethinking of economics, the crash changed politics more than economics. The old political order was swept away or drastically altered in Italy, France, Spain and Portugal. What odds would you have got for predicting at the beginning of the crisis that Donald Trump would be the 45th President of the US? Modi’s election in 2014 was not entirely disconnected from these currents.

Tooze does not ask directly why the change in politics did not lead to a more radical change in economics. This, especially given that the financial crisis and subsequent rescue slayed a couple of sacred cows of traditional economics. The most important being that you cannot print money. Through quantitative easing, we have effectively done so with no impact on inflation, and while we presume that there is a limit, we have not yet found it. Instead of trying to understand where the limits and conditions lie, we are pretending that it was an aberration which was best forgotten.

Tooze makes the interesting observation that for all of its dysfunction, it is the US political system that seems to have been best at forming an effective coalition to manage the banking crisis, in this case what Tooze describes as “elitist” Republicans and “centrist” Democrats. While China had a good crisis at the beginning, as it progressed, its “omnicompetence” was shaken. Between the beginning of 2014 and the end of 2015, the Chinese authorities appeared to lose control of the stock market or capital outflows.

Europe’s inability to easily form coalitions of the willing appears connected to its model of trying to place economic law above politics. The lebenslüge that held the European economic and political nexus together in the first half of the crisis was the idea that austerity would lead to growth. This was well illustrated by the Greek tragedy. By early 2010, the Greek debt was at an unsustainably high level. A default would have been the right thing to do, but German and French banks were heavily exposed and they lobbied their governments to make default a cardinal sin punishable by excommunication from the Euro area. There is no theoretical reason as to why a currency area could not have credit defaults. This was pure politics and the legitimacy of Europe has been shaken by it.

Tooze’s book is an artful description of events, not a prescient prescription. His get-out is to say that the questions the crisis poses are the perennial questions of an unstable capitalism. Yet, the enemy of financial stability is forgetfulness. We may have already answered the questions of unstable capitalism back in July 1944 at Mount Washington, Bretton Woods, New Hampshire. There, some 44 countries came together and designed a system, perhaps incomplete and certainly dated today, but one that provided almost 30 years of financial stability. In the 1990s, we did not have one full year of financial stability. We are so used to instability today that we may wonder whether it is inevitable—it is not.

Bretton Woods achieved stability by striking a balance. Markets operated within boundaries and segments-Un-­bounded capitalism like the type that existed prior to 1914 and before 2008 may just be too dangerous.

Not all stability is desirable. The period of market instability has coincided not only with a widening of inequality between the rich and poor within countries which Tooze studies, but also a substantial narrowing of the disparity between rich and developing countries, which Tooze does not. Since the early 1980s, while Brexit-voting and Trump-voting blue collar workers were experiencing stagnation, over 1 billion people were lifted out of poverty through global trade. One was linked to the other. Perhaps, the new balance is a liberal approach to trade, but real compensation for the losers, helping them to retrain and retool, with the policy space made possible by a return to segmentation of capital flows. We need a back-to-the future return to balance.

Updated On : 10th May, 2019


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