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After the gold rush

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After the gold rush
John Gray

The spree is over, the global economy is in ruins and our political masters are in disarray. Make no mistake, writes John Gray, the neoliberal era is over – but at what cost?

Meltdown: the End of the
Age of Greed
Paul Mason
Verso, 208pp, £7.99

One of the more entertaining ironies of the global financial crisis is the United States government demanding that the rest of the world follow its lead in implementing radical Keynes­ian policies. It is not just that after the36of the past months few people take American pretensions to financial leadership seriously any longer. More to the point, no Keynesian policies of any kind had a place in the economic orthodoxy – the deservedly forgotten “Washington consensus” – that US officials preached to the world, and imposed on various countries through the IMF and the World Bank, during the decades that preceded the outbreak of the crisis. Then, sound money and balanced budgets were the touchstones of economic virtue – not, of course, for the US, which has always displayed a fine disregard for these neoliberal dogmas in its own case, but for everyone else, and most particularly for the world’s poor countries.

Now, the United States is promoting cheap money and deficit financing as global panaceas while doing nothing to change the neoliberal policies that it did embrace, such as the deregu­lation of banking by the Clinton administration. In a parody of the government-controlled crony capitalism that Washington has relentlessly criticised in emerging economies, the Obama administration is doling out vast sums to chosen banks while allowing them to continue to act as hedge funds. The result is that the US has itself become a kind of hedge fund, and of the more highly leveraged and less well-managed variety that has fared so badly recently.

In these uncertain times it is easy to lose sight of the larger picture and longer view; most reportage and commentary is fixated on ephemera. What people need is a reliable guide to the financial crisis as a historical process, showing how collapsing banks and steeply rising unemployment are part of a large-scale shift in36and ideas. Paul Mason’s Meltdown is the book they are looking for. The economics editor of BBC2’s Newsnight, Mason presents a richly detailed narrative of the36of the past year while setting the story firmly in the context of the flaws in the type of capitalism that was let loose over the past 20 years.

Writing in January this year as he finished the book, he spelled out the future course of the crisis in terms of two possible scenarios, predicting “either a hard and effective nationalisation of the banks or a long, life-changing global slump. There is a slim chance that we will escape with a short, sharp recession – but it looks slimmer by the day. Either way, the neoliberal era is over.”

It is a characteristically astute assessment. As even mainstream economists have recognised, the creeping extension of government ownership is highly unsatisfactory. Partial bank nationalisation leaves the locus of decision-making and accountability unclear, while the scale of toxic debt in the system as a whole remains unknown. Moreover, despite promises about financial regulation at the G20 meeting, it seems unlikely that anything will be done to counter the merging of casino-like investment banking with ordinary deposit-taking that was a cause of the crisis.

Nationalising the banking system on a different and better model would be a useful move, and may even have been necessary if the crisis was to be contained effectively. As Mason points out, Hyman Minsky – one of the few economists whose work is helpful in understanding the crisis – advocated socialised banking as a condition of sustainable market capitalism. However, if there was ever a time when banking could be subjected to root-and-branch reform, it has probably passed. Gordon Brown can legitimately claim to have prevented the imminent collapse of the British banking system (even if, as Mason notes, the detailed work was done by civil servants working into the small hours over takeaway meals and stale coffee).

But there was never much chance that the government would grasp the nettle of nationalisation. The entire New Labour project has been shaped around embracing the City and letting finance capitalism rip; and entrenched habits of mind have dictated that extending state ownership – even where it might stabilise market capitalism – could not be seriously envisioned. Instead, the British state has taken over the unknown liabilities of insolvent banks; as a result, it faces a future of uncertain solvency.

The situation is worse in America, where the political system has been captured by the financial institutions. Given the line-up of Clintonite has-beens who are in charge – figures such as Larry Summers, an important player in the 1999 repeal of the Depression-era Glass-Steagall Act, which limited speculation by banks – it is hardly surprising that radical banking reform is not on the agenda. Even so, the Obama administration’s inept handling of the bailout can only have damaged America’s image further. The fusion of the political and economic processes, against which successive White House administrations have railed in their incessant homilies on the proper regulation of emerging economies, is nowhere more evident than it is in Washington. The details are cloaked in secrecy, but it is clear there is a huge ongoing redistribution of wealth from taxpayers to financial institutions.

With decision-making in the hands of an inward-looking and not very competent oligarchy, America now bears more than a passing resemblance to an emerging economy. The US has opted to monetise its debts – in other words, to inflate them away. This is the reality behind the sudden revival of Keynes and the febrile hype about deflation. In one sense, there can be little doubt that the ultra-Keynesian mix of extremely low interest rates with fiscal stimulus and quantitative easing will work. There is no limit to the amount of money that can be created; inflation will eventually return, leading to real devaluation of debt. To that extent, the current crisis – at least the part of it arising from the build-up of debt – will be resolved.

But, as might have been pointed out by Keynes (a more realistic thinker than many of his latter-day disciples), these policies will not deliver stability. In countries that are heavily dependent on foreign capital they can easily be counterproductive. There must be a risk of another and larger run on the pound, and, further down the road, increasing pressure on the status of the dollar as the world’s reserve currency. Why should the world’s creditors continue to lend to countries bent on debauching their currencies and thereby devaluing the investments these countries have built up in them? They have no alternative, it will be argued, because they rely on US markets for their exports. China will have to put up with watching the value of its holdings of US government debt melting away. Again, how can China start pulling out its investments without triggering a run on the dollar, in which the value of those investments is further diminished?

Well, we shall see. China’s rulers may not have much choice in the matter. If the contraction of the global economy continues, they may be compelled to deploy national reserves to prop up the domestic economy and stave off civil unrest. In any case, China does not have to sell its existing holdings; it can simply stop replacing them, which would have the effect of raising interest rates and aborting any US recovery. Either way, it would be unwise to rely on the lopsided economic relationships of the past few decades surviving a once-in-a-century global upheaval.

The upshot of Mason’s analysis may be more unsettling than he realises. Now that the time for root-and-branch banking reform seems to have passed, the global economy seems to be heading for the “long, life-changing global slump” he identifies as one of the two scenarios facing the world. This will not be a rerun of the 1930s, if only because the US, along with other countries, has opted for inflation, but it will surely be life-changing. The collapse of the neoliberal project continues, and there is no sign of a successor.

A new edition of John Gray’s “False Dawn: the Delusions of Global Capitalism” will be published by Granta Books in the autumn