Bella Caledonia published a shortish piece of mine on the political economy of a currency union with Scotland, post-independence. I argued that disputes here reflected both the overwhelming strength of finance inside the UK economy, and the hidden weakness of its current account position. This provoked some debate; my reply is as below.
Posts Tagged ‘finance’
This from the FT:
The Bank for International Settlements will gather top central bankers and financiers for a meeting in Basel this weekend amid rising concern about a resurgence of the “excessive risk-taking” that sparked the financial crisis.
In its invitation, the BIS cited concerns that “financial firms are returning to the aggressive behaviour that prevailed during the pre-crisis period”.
This should surprise precisely no-one. To all intents and purposes, the bankers got away with it: they’ve been bailed out, and if the bonuses symbolise one thing – other, I suppose, than a breathtaking indifference to public hatred – it’s a return to normality. The status quo ante has been restored, at great expense.
The finance industry won’t learn any lessons from any of this; worse yet, the incentives to take exactly the same ‘excessive risks’ that forced the crisis last time have all been reinforced: like the proverbial spoiled brat, if you think your doting parents will clean up after your mess, why would you do anything other than make yourself thoroughly obnoxious? Why not behave even more outrageously? The bankers can, and they probably will.
Well, it isn’t.
First, the numbers don’t support it. Behind a certain amount of excitable flapping and squawking over a few decentish headline stock prices, much of the underlying data is grim: unemployment here continuing to rise, foreclosures in the US and late UK mortgage payments still rising, and wage settlements grinding to a halt.
All these matter hugely for both economies, since – with credit lines still jammed – they’ll directly affect consumption. And with consumption spending driving 80 per cent of US demand growth during the boom years[*], that’s a big blow to growth across the whole economy.
Coupled with the immense pressure now being exerted on government spending as a result of the bailouts, and it should be clear that future prospects for capitalism in its neoliberal heartlands remain somewhat shaky. The trillions now sloshing around the financial institutions may, eventually, trickle into the rest of the economy, stimulating a boom. But the underlying weaknesses remain.
That’s the real story here. The numbers are only part of it – and, really, only a fairly small part. The truth of the last 18 months or so is that the entire existing economic order, “neoliberalism”, the economic rules of the game we’ve lived under for twenty or more years now, suffered a massive seizure. But instead of changing that order, even in capital’s own terms, rejigging the institutions, rewriting the rules, doing everything just a little bit differently – we’ve placed the sickly patient on a drip.
That’s the meaning of the bank profits and the bonuses. Zombie neoliberalism is still with us, lumbering on as if nothing had happened. Yet it is far weaker than previously: without a purge of the banks and the financial institutions, killing off the insolvent and the incompetent, there is no reason whatsoever for any of them to reform. And without reforms, they will expose capitalism to the same illnesses it contracted last time: contagion, the spread of financial plague from economy to economy, and systemic risk.
But of course, the banks and the institutions couldn’t be allowed to collapse, whatever Mervyn King may have wished. They were peering into the abyss after Lehman Brothers collapsed. The grim prospect of an almighty domino effect loomed, with the ties between collapsing banks pulling more and more of the economy down behind them.
So the bailouts. The patient is hardly cured; more drugged to the eyeballs, and weakened.
[*] figure from Glynn (2004), Capitalism Unleashed, p.53