It’s the politics, stupid
The turmoil in the financial markets has become a real economic downturn because of the fearful and incoherent response of the political elite.
Last night, at a packed venue in central London, spiked, in association with Clarke Mulder Purdie, asked a panel of experts, ‘Are we talking ourselves into a recession?’ The following is an edited transcript of Phil Mullan’s opening speech.
Over recent months, the question ‘Are we talking ourselves into a recession?’ has been posed by a number of economics commentators. Recent events have answered that question for us in the affirmative. We should expect an economic slowdown of some description, either a shallow recession, or a period of very minimal growth. In other words, the recent turmoil in the financial services sector is going to have an impact on the real economy.
This real economic effect was not inevitable. It’s not just that we didn’t anticipate things going wrong, that politicians lacked the foresight. It’s that the responses of politicians and the financial authorities have actually helped bring this about. By that, I don’t just mean the doom mongering, gloomy apocalyptic talk we’ve had to listen to. It is the way in which the general climate of fear and anxiety has influenced the way a lot of people have responded to the problems in the financial sector. It is this reaction, amongst the elite, which has permeated and protracted what has happened.
There are lots of good illustrations of the way in which different actors, different policy makers have responded. To take just one: banks have stopped lending to each other. This has, effectively, dragged the financial problems out over a period of time. Basically, inter-bank lending is a normal and necessary part of the banking system, but it has fallen away. Things have gone up and down for the past 14 months, but overall, the banking system has not been working. And that to me is not a normal reaction. That is, rather, the precautionary principle in practice.
Despite what some people seem to believe, bankers are not rocket scientists. But there are some quite clever and experienced people working in the big banks and it strikes me as very strange that over the course of the past year or so, they have not been able to figure out which institutions are holding bad debt and which are creditworthy. In the past, where such crises have occured, certain institutions would be blackballed; that is, they would not be lent to. The rest of the system could then begin to regenerate itself. That hasn’t happened because of a fearful paralysis which only exacerbates matters and increases the impact on the real economy. So, in a very real sense, we have brought this upon ourselves, in words and in deeds.
So, where are we today? I would say things are both better and worse than the current commentary suggests. I think we’re in a better situation than those who’ve been jumping on the anti-market bandwagon. And it’s worse than the dwindling band of capitalist fans are claiming – though, admittedly, there aren’t many ardent free market champions around anymore.
It’s better in that, quantitatively, the comparisons with previous downturns in the 1990s, the 1980s, the 1970s, and even the 1930s, are absurd. Even the most pessimistic forecasts, in terms of growth and unemployment, are simply not comparable with those past recessions. For all the misery that there will be if, as expected, unemployment rises by 300,000, this is still nothing compared to those earlier periods.
Comparisons between the current situation and those earlier periods do not apply in a qualitative sense either. The dynamic of a traditional recession begins within the industrial sector, with a breakdown in activity within the productive part of the economy. This stagnation in the industrial sector – business closures, rising unemployment, people thrown onto the dole queues and so on – then has repercussions in the financial sector. This time, it has been completely the opposite. There has been a crisis in the financial services sector which has then had repercussions in the real economy. That does not have the same qualitative dynamic as the sort of recessions that people are trying to compare it to.
Things are worse in both an economic and a political sense. Economically, things have changed. We’re living in a different era. In America and the UK, financial services are central to the economy. But in both cases, that dominance of financial activity has another side to it. For what it reflects is that the productive side to the economy – the industrial part – is now much weaker. There’s been a hollowing out – in America, Britain and in many other Western economies – of the productive, value-creating part of the economy. The domination of finance capital has not caused this hollowing out; it is more of a consequence, a way in which these economies try to cope with the demise and the decline of their manufacturing base.
What is the implication of that? Although we have a much shallower productive sector in most Western countries now, that will not lead inevitably to some sort of capitalist crisis. Capitalism has been a very resilient system and is capable, as it has shown for the past 150 years, of dealing with its crises, whether they are in the industrial, production, or finance spheres.
That resilience is not inevitable, however. In some ways, over the past 15 years, what we’ve seen is the limited ability of capitalism to be able to cope with a weaker productive base. A crucial aspect of capitalist adaptability lies in the area of politics. What it needs is a bit of leadership. And it’s in the political sphere in which capitalism is having its worst problems today.
The capacity to adapt and respond to economic problems is hampered by the weakness and vacillation of the political elite. Policy makers, on both sides of the Atlantic, have not acquitted themselves well recently. American policy makers appear to have been very decisive over the past two weeks. But if you look at their actions over the past 14 months, they have been no more proactive than their counterparts in Britain. They’ve alternated between dithering inaction, giving no leadership whatsoever, and then switching to panicky fire fighting. Denial one day, fearful gloom the next. To say their attitude changes from one day to the next isn’t really much of an exaggeration. Two weeks ago, John McCain, possibly the next president of the United States, was saying that the fundamentals of the American economy are fine. Now, he’s saying that we’re facing the worst crisis since the 1930s. The same people who deny anything is wrong suddenly switch to propagating doom.
It’s the weakness of the political elite which not only brought about this crisis, but which will now prolong it. They are not, in their decrepit moral state, able to help capitalism be more resilient in the economic straits it’s in. The real question now is whether the weakness and incoherence of the elites in Western countries could make the real economy effects of the financial crisis a lot more protracted and a lot deeper. That would be to all our disadvantage.
Phil Mullan is the author of The Imaginary Time Bomb: Why an Ageing Population Is Not a Social Problem. (Buy this book from Amazon (UK) or Amazon (USA)). He is speaking at the Battle of Ideas festival at the Royal College of Art, London on 1&2 November.
This article is based on Phil Mullan’s speech to the spiked/Clarke Mulder Purdie seminar ‘Are we talking ourselves into a recession?’ which took place in London last night.
Rob Lyons said the current financial crisis shows up the dangers of risk-aversion. Daniel Ben-Ami dispelled five myths about the Wall Street crisis. Elsewhere, he looked at Alistair Darling’s split personality, and described how even free marketeers have lost faith in capitalism. Mick Hume argued that risk-aversion rather than reckless neo-liberalism lies behind the financial crisis, and that the real depression is in political outlook. Or read more at spiked issue Economy.