The ‘credit crunch’ and the crisis of meaning
The key problem today is not so much the banking meltdown, as our inability to understand the threat as a prelude to managing it.
When I first heard the term ‘credit crunch’, it sounded like the brand name for a new product. I was half expecting a voiceover to announce that it is chocolaty on the outside and crunchy on the inside. That was then – now, as we head towards one of the world economy’s greatest upheavals, there is still great confusion about the language we should use to describe the meltdown of the banking system and its destructive impact on what is cheerfully called the ‘real economy’.
It is not always clear how linguistic experts can distinguish between the real and unreal economy. Take a country like Iceland, which has transformed itself into a sub-sub-sub-prime hedge fund. Iceland is dominated by the unreal economy to the point where the banking sector’s assets are nine times Iceland’s annual GDP of £6.8billion. Is it any surprise that this country’s current interest rate is 15 per cent and the rate of inflation lies at 14 per cent? In Iceland, the question is not whether a bank will default, but whether the entire nation will become bankrupt. Iceland may be exceptional in its pathological addiction to credit and debt, but its current predicament exposes the falsity of the idea that the real and the unreal economies inhabit two different worlds. Whatever the challenge facing Iceland, it is no longer confined to the banking and financial sectors.
But why worry about a tiny economy like Iceland’s? Because historical experience shows that a chain reaction can be unleashed from the most unexpected places. Back in 1931, it was the failure of Austria’s largest bank, the Creditanstalt, that precipitated a panic that would eventually envelop the European banking system.
In the UK, where manufacturing now accounts for little more than 11 per cent of GDP, it is far from evident where to draw the line between the real and the unreal. Consider the case of housing. Over the past decade, the housing boom, based on the speculative expansion of credit, has been a critical driver of economic expansion. Both the service and manufacturing sectors have relied on speculation in the housing market for their prosperity. Recently, French president Nicolas Sarkozy spoke of the need to uphold what he called ‘entrepreneurial capitalism’ as opposed to ‘financial capitalism’. However, his desire to separate the good from the bad evades confronting today’s reality, where the different sectors of economic life are more intertwined than ever before.
In the first instance, the current deliberations on the global financial crisis demonstrate a failure of language and a failure of the imagination. Let’s deal first with the imagination deficit. Understandably, analysts draw on the experience of the past to make sense of the present. However, the ceaseless attempts to compare and contrast today’s global disequilibrium with the Great Depression is not a little overdone. The Great Depression serves as a powerful cultural marker for economic failure. This devastating historical episode symbolises an economic system so out of control that people’s everyday lives are turned upside down. It is useful to remind ourselves how bad things can get, but the questions we should be asking and answering ought to emerge from the current experience of global economic dislocation.
The term ‘depression’ is used to describe a severe economic downturn that lasts for many years. A depression is not simply the bust side of an economic boom-and-bust cycle. It represents, not only market failures, but more fundamental problems to do with production and the prevailing political institutions that manage and regulate economic life. Traditionally, economic depressions have also had an important geopolitical dimension. Geopolitical rivalries were intensified through the disequilibrium between capitalist powers with conflicting national interests. Both domestic political conflict and national rivalries have served to complicate the management of economic crises through turning problems to do with the market into irreconcilable differences.
Today, the world economy is also confronted with a loss of its equilibrium. Yesterday’s creditor nation, the US, has turned into a debtor – and a not-entirely developed power, China, has emerged as an industrial giant and the banker of the world. Matters are made more complicated by the fact that, in economic terms, we live in a multi-polar world. The US may be the only global power with serious military and political clout, but it can no longer play the role of guarantor of global economic stability. The European Union is itself facing deep internal divisions on the issue of economic policy, as its member states scramble to secure their own individual advantage. At best, the EU is one player amongst many. China, Russia, India and the oil-rich Gulf states are all significant economic powers, yet we are fast moving into a leaderless world where for some time to come there may not even be a primus inter pares.
The imbalances in the global sphere can only undermine the effectiveness of the numerous international institutions established since the signing of the Bretton Woods agreement in 1944. All of these institutions were based on the belief that the US would continue to play the role of guarantor of global economic relations. Steeped in the legacy of the past, these organisations – the International Monetary Fund, the World Bank, the G8 – now lack the ability to respond effectively to the current situation. These are supra-national bodies that are too lacking in imagination or institutional flexibility to yield to new experiences.
If the current trends towards economic decline accelerate and turn into a full-blown depression – as seems to be the likely scenario at the moment – it will be because of the absence of institutions that can implement measures to stabilise the financial system and encourage the flow of capital into productive investment. These same problems are also evident in the sphere of domestic politics. Many of these institutions evolved by adopting practices that were consistent with the demands of so-called ‘liberalisation’: deregulation, privatisation; measures of the 1980s. They lack the capacity to tackle the fundamental and structural problems of global capitalism. Their menu of options – raise or lower interest rates, nationalise or recapitalise failed banking institutions – indicate that their ambition is simply to carry out an unimaginative form of reactive fire-fighting.
The present cohort of government officials, politicians and economic and financial experts are too steeped in the traditions of the good times of the past two decades to be able to take any really difficult decisions. That is why none of them is prepared to spell out the difficult challenges facing Western economies, which must involve a severe reduction of existing forms of state expenditure and the overseeing of a potentially very painful process of ‘shaking out’ the industrial and service sectors. Instead, they talk about council tax rates or push forward moralistic campaigns to convince people to live on less and ‘make do and mend’.
Institutional stasis reflects a manifest lack of imagination, which in turn is most eloquently expressed through the failure of language. The language of economics appears to have been displaced by that of psychology. How many times have you heard that ‘fear grips markets’ or ‘fear grips investors’? Apparently, the emotion of fear is the result of another feeling: a loss of confidence. And once fear grips people, they panic and adopt a ‘pack mentality’ as they give way to their ‘herd instincts’. Turning the world upside down, this diagnosis of mass psychological disorientation confuses the response to the crisis with its cause. Of course, it may well be that a handful of bankers and traders suffer from psychological deficits. But how people respond to uncertainty, whether or not they have confidence in existing arrangements, is far from a psychological issue: it is shaped by the meaning that they are able to give to the experience. If there is meaning, then there is the potential to gain a measure of control over rapidly unfolding events; without meaning, individuals face an existential crisis – the source of the many dysfunctional psychological responses that the media label as ‘panic’.
Language is important because it communicates the ideas with which society attempts to make sense of its current predicament. Every crisis puts to test society’s intellectual resources and its system of meaning. A crisis forces communities to account for the unexpected and to develop answers in accordance with their ideas and beliefs. A crisis can become destructive when society responds to it with readymade analogies with the past or with psychobabble about people’s mental deficits. Such a response demonstrates the absence of language and concepts that are necessary to give meaning to what is potentially a destructive experience. So the key problem is not so much the meltdown of the banking system as our inability to understand this threat as a prelude to managing it. Without a measure of clarity about the meaning of the global turmoil, a crisis will swiftly mutate into a far more ominous threat.
At the moment, the failure of language is fostering a mood of passivity and fatalism. For the first time since the nineteenth century, there are no competing counter-crisis alternatives. Indeed there is little to ‘counter’ to. The disappearance of a meaningful language with which we can comprehend the unravelling of the global system of credit is itself proof of the gravity of the crisis facing humanity. Western culture is far better at constructing a vocabulary of fear around apocalyptic scenarios to do with millennium bugs, climate change, avian flu and other imagined catastrophes than dealing with one that is genuinely unravelling in front of our eyes. Credit crunch, anyone?
Against austerity, by Brendan O’Neill
There Is (still) No Alternative, by Mick Hume
Congress bales out, by Brendan O’Neill
Scapegoating the spivs, by Tim Black
It’s the politics, stupid, by Phil Mullan
Lehman Brothers: when confidence runs out, by Rob Lyons
Five myths about the Wall Street crisis, by Daniel Ben-Ami
From the politics to the economics of fear, by Mick Hume
Fannie, Freddie and the ‘economics of fear’, by Sean Collins
The truth about the ‘credit crunch’, by Phil Mullan
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