From the politics to the economics of fear
The financial crisis and the reactions to it show that capitalism today is risk-averse and state-nursed rather than recklessly ‘neo-liberal’.
On 24 September, in central London, spiked is hosting a public debate titled ‘Are we talking ourselves into a recession?’ Here, Mick Hume argues that economic policy is now driven by fear and uncertainty rather than a belief in free markets. Buy your tickets for the spiked debate below.
In our age of TINA (There Is No Alternative), it has become accepted that, for better or worse, the markets rule. The capitalist economy is widely viewed as an unknowable entity that works in mysterious ways its wonders to perform, largely immune to human intervention. Some still celebrate the triumph of the market. Many others now decry the ‘neo-liberalism’ of unregulated capitalism that is blamed for bringing about the current financial troubles.
Yet recent events should make it clear that, while there is always a powerful spontaneous element in the operation of the markets, the management of the economy is strongly influenced by the politics and culture of the times. In particular, the run-up to any coming recession and the response to the crisis have been shaped by the contemporary culture of fear, making matters worse at every turn.
In recent years spiked writers – most prominently Frank Furedi – have developed an analysis of the culture of fear that now pervades politics and society. Perhaps its defining characteristic is a loss of nerve emanating from the top of our uncertain society downwards. As a consequence, the culture of fear has given rise to powerful and damaging trends: a deep-seated risk aversion and precautionary attitudes, fear of real change and the future, an exaggerated sense of doom-mongering, miserabilism and fatalism. All of these have helped to create and exacerbate problems by hampering bold action, lowering expectations of what we can achieve, and seeking to trap the pioneering spirit of experimentation in a concrete-lined bunker.
We have seen for some time how the loss of nerve has given rise to the politics of fear. Now we are also experiencing the effects of the economics of fear.
Take, for instance, the damaging ‘credit crunch’ that has apparently frozen large parts of the financial system. This is often described as the consequence of a wild, reckless lending and spending spree indulged in by Western societies in recent years. In fact it is also possible to see it in an opposite sense, as a by-product of the risk-averse society.
The prosperity of the US and UK in recent years was largely fuelled by a credit and financial system that exploited capital values produced elsewhere, often in the dynamic economies of the East. This allowed the inflation of paper assets such as property and share prices and floated entire economies. There would be no big boom, but hopefully no bust either. The credit economy was a softer short-term option for Western capitalism than facing up to hard investment decisions about the future.
Things started to unravel last year with the exposure of the crisis in the sub-prime mortgage sector in America. It became clear not only that a lot of dubious loans had been extended on property, but that these debts had then been packaged up, ‘sliced and diced’, and sold on to financial institutions around the world. Again, this was condemned as a sign of financial recklessness. But it was really capitalist risk-aversion in action. No big bank or money house wanted to take the risk of, or responsibility for, its own business decisions. So they all passed the dodgy loans on to one another, disguised as sophisticated financial instruments, and pretended it was nobody’s business. As a consequence, the difficulties in one low sector of the US housing market became everybody’s problem.
Reactions to the credit crunch have also been shaped by the economics of fear. The first thing that many international financial institutions did was effectively to shut up shop, refusing to lend to anybody – including other banks such as Northern Rock – and instead hoarding their ample assets under the mattress like village idiots. This response ensured that the unexpected events in America would turn into a full-blown financial crisis.
Meanwhile, the economists and experts weighed in like the soothsayers of old, predicting certain doom and depression long before any recession had begun. A sort of contest began to see who could find the most startling historical equivalent to current trends – is it as bad as the downturn of the 1980s, the recession of the 1970s, or even the Great Depression of the 1930s?
As I have argued before on spiked, these comparisons make little sense. Of course, many people are suffering the consequences of the financial crisis. However, even if economies such as the UK slip into a technical recession, as now expected, this soft consumer-led ‘correction’ seems a far cry from the industrial shake-outs, raging inflation and mass unemployment of past economic crises. These downbeat analyses reveal rather more about the depression in political outlook today than events in the real economy (see The real depression is in political outlook, by Mick Hume). But they have had an important impact, particularly in Western economies that rest on financial systems where the ethereal value of investor and consumer ‘confidence’ counts for so much. When a top Wall Street investment manager talks about how, without US treasury support, the credit problems ‘can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami’, we appear to be entering the realm of self-fulfilling scaremongering.
Then, just when you might have thought it could not get any worse, along came Alistair Darling, chancellor of the UK exchequer, to put in a bid for the job of doommonger-in-chief by declaring that we now face the worst economic crisis for 60 years. It used to be the role of the old radical left to make wildly exaggerated predictions of capitalist collapse, in the forlorn hope that this would profit them (the magazine I edited back then, Living Marxism, never subscribed to that school of moronic economics). But who needs the Old Trots when the head of the Treasury will do it for you? Such everything-is-worse-than-ever attitudes would normally be associated with frightened old biddies rather than senior members of Her Majesty’s government.
Even when the authorities have been praised for taking positive action, the politics and economics of fear are never far from the surface. The US government’s takeover of Fannie Mae and Freddie Mac, the struggling mortgage-finance companies, thus guaranteeing trillions of dollars of loans and bonds, has been hailed as the bold initiative that could turn things around. But it arguably has more to do with an aversion to risk than any old-style American boldness.
Such a huge act of effective nationalisation reveals for all to see that, far from living in an era of wild west ‘neo-liberalism’, ours is an age when the markets need massive state support to function. As Sean Collins pointed out on spiked in July, the takeover of Fannie Mae and Freddie Mac, following the rescue of the investment bank Bear Stearns, suggests that the US is creating a new regulatory system: ‘Bailouts’R’Us’. It as if a new form of welfare state is emerging to support capitalism in the manner in which it has become accustomed and not risk any dramatic changes (see Fannie, Freddie, and the economics of fear, by Sean Collins).
The bailouts of Northern Rock and (the far bigger rescue of) Fannie and Freddie also reveal that the authorities’ ambitions today, even when such unimaginable sums of money are involved, are limited to fearful, passive fire-fighting. There is a sense of waiting around with your fingers crossed to see which bank or financial institution might crumble next, then stepping in to contain the damage. They cannot let them fail, in the way that a traditional free-market approach demands, for fear that the consequences might spread out of control. So the authorities will commit billions and trillions to hold up the staggering financial institutions, and hope for the best.
Like the politics of fear, the economics of fear dictates that the authorities should simply try to hold the line and not risk anything that might rock the boat too much. Thus we have a bizarre situation where both the worried British and American governments are now taking major steps to try to shore up property prices. When did that become an aim of creating the Good Society? In another time, governments might have seen it as their role to take positive steps to provide people with actual housing. In the risk-averse finance-dominated economy of today, however, that appears to have been turned into a commitment to keep the housing market as inflated-but-stable as possible.
The economics of fear helped to bring the financial crisis about, and have ensured that the response to it has often verged on self-destructive panic. However bad the situation gets, one thing that seems certain is that the loss of nerve has been the most damaging loss of all.
Mick Hume is editor-at-large of spiked.
Buy your tickets now for the spiked debate ‘Are we talking ourselves into a recession?’ in London on 24 September. Click here.
Daniel Ben-Ami looked at Alistair Darling’s split personality, and described how even free marketeers have lost faith in capitalism. Neil Davenport attacked the green recession-mongers. Sean Collins explained how discussion of recession is based on the economics of fear. Mick Hume showed how the real depression in political outlook and the dangers of inflating the importance of house prices. Or read more at spiked issue Economy.
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