The 2008 Credit Crunch and 2009 Recession

Since the 1980s it had been fashionable to suggest that there was little that individual countries could do in the face of global economic forces, and any attempt to pursue independent policies would be doomed to failure. ‘Even China’, it was often said, was embracing the global free market. The idea that developing countries, such as India, could promote their own developmental interests by sheltering behind exchange controls or national planning had been swept away along with the Berlin Wall. In the globalized economy of the 21st century, it was argued, national governments had to go with the flow of global markets.

When the 2008 credit crunch broke, the global strategy firm Oxford Analytica held one of their usual daily analysis sessions, but open to those attending their annual conference. The chair briefly summarised the unfolding global crisis, and then went round the table asking the various national experts to report. Despite the consensus referred to in the previous paragraph above, the reports did not paint a picture of a uniform globalized market to which each country related in the same way. The US and UK had been referred to in the opening statement, being very much at the centre of whatever it was that had caused the worst economic crisis since the 1930s. But when the expert on Brazil was called, he reported that actually the socialist President Lula had kept their financial sector rather independent of the global markets. Next India, and here too it was reported that they actually hadn’t opened themselves up to the global market quite as much as might have been thought. Then China, where, it was reported, the Communist Party had actually maintained rather a firm grip.

Of course, no-one can escape a world economic crisis, and Brazil, India and China suffered along with the rest. But it was clear that those countries had actually a rather different relation to the global market economy than did the US and the UK. Brazil, India and China had not caused the crisis, and to some extent at least their own economic strategies and policies did enable them to survive the global recession in better shape than if they had actually joined in the orgy of free market globalization that the UK and US had been championing through the 1980s and 1990s

Does the recession sound the death nell for laissez-faire capitalism

Straw man argument

Reading the Oxford University Debate Linda Yueh come very close to saying this is a strawman argument that assumes that we have been implementing laissez-faire capitalism for the past thirty years. It is true that the Conservative Governments of 1980’s and 1990’s abolished Exchange Rate Controls and deregulated the City of London and this was continued by Labor when they gave independence to the Bank of England . These liberalizations of the market enabled Britain to build one of the largest financial markets in the world that financed through tax receipts the large in increase in welfare spending in the UK in the early 2000’s But to argue that this was laissez-faire capitalism is to forget the effective oversight bodies such as Competition Commission, Office of Fair Trading and the Financial Service Authority that operate in the UK and the Security and Exchange Commission and the more rooted general legal and regulatory framework that exists in the US.

Would Governments do any better?

What is the alternative? Jonathan Michie rightly criticizes the banks for making one way bets. The banks were so large that on the upside they made all the profits and on the downside the taxpayers took all the risk. But remember when Governments took big bets such as Concorde or British Leyland. It was still the taxpayer who financed the losses. He criticizes (rightly) the ‘greed is good’ culture that promotes self-interest and speculation ahead of any real long term benefit to the economy yet he implicitly suggests that government planning would put economic planning above political interference. How many unreformed industries would still be being subsidized by the taxpayer and protected merely to help re-election? If there was an altruistic context to the government’s economic planning during the 1930’s surely no one believes that to be the case today. Where they have had the opportunity to develop long-term planning arguably they have failed. Western governments have had a generation to find a solution for the looming insolvency of pensions and social security yet it took an economic crisis before the UK to seriously tackle the problem with France and the US even further behind.

A middle way?

Linda Yueh makes the argument that you should not throw ‘the (free-market) baby out with the (credit crunch) bath water’. Governments should only get involved where the market is the wrong mechanism. Investing in public transport is one example or a ‘Tobin Tax’ levy on foreign exchange transactions could finance development in poorer nations. Or provide incentives to build new green technologies and industries; as Jonathan recommends. If anything good can come out of the global recession it is that it can provide an excuse to correct the chronic under investment in public infrastructure while letting an effective regulated market operate freely in a global economy.