Authoritarian China is now an economic blueprint for Zuma and Maduro.
Ten years ago this week, it became clear that the dread event – a run on one bank that will create a malevolent impact on others – was under way. A US investment bank had a few weeks earlier summarily closed some of its property-based hedge funds to stop a cascade of sellers; now a French bank was doing the same, as a panic about overblown property values infected confidence.
The financial crisis of 2007/8 was the beginning of a chain of events that would ultimately threaten the viability of the west’s banking system – the landmark economic moment of this century, the consequences of which are still playing themselves out.
From the outset, people have been keen to blame their own ideological enemy: for free marketeers, the crisis was triggered by ill-considered regulation and state bungling; for almost everyone else, this was where excessive trust in the unfailing wisdom of markets would inevitably end up. Ten years on, it is clear that the anti-state ideologues were defending the indefensible. It was not just that a bad idea about how to organise capitalism has survived despite the evidence of its failure, it is that a cluster of western liberal values, closely and mistakenly interlinked with the rise of finance capitalism, got sucked into the general condemnation. Right to damn unregulated finance, wrong to damn liberal values.
The consequences have been epic, particularly in Britain. The de facto bankruptcy of two banks – RBS and HBOS – and the impact on the rest of the system was to begin a credit crunch that triggered the longest and deepest recession since the 1930s. The recovery has been the shallowest, notwithstanding record low interest rates. Rates of investment and innovation have been depressed, along with the rates at which companies grow. As a result, productivity is 20% below where it would have been had pre-crisis trends continued and average real wages have stagnated for the longest period in modern times.
The crisis was proof that an idea about how capitalist economies and societies should be organised was wrong. Since the elections of Thatcher and Reagan, the leitmotif of Anglo-American economic policy had been that markets do not make mistakes – only governments do that. Hence their dismantling of the mixed economy of public and private enterprise that had spearheaded the astonishing growth of the postwar years until the oil price shock of 1974.
The Thatcherite/Reaganite experiments were far too reliant on bountiful supplies of credit generated by deregulated finance, and accompanying property booms, to stimulate ephemeral growth. Yet the US and UK succeeded in internationalising this policy, notwithstanding its patchy success, into the so-called Washington consensus. Countries wanting the seal of approval from the IMF, World Bank and OECD had better privatise, deregulate and, above all, free their financial systems from controls.
So when the Berlin Wall fell, it was their brand of capitalism that had seemed to triumph over communism. The years 1989 to 2007 were the high-water mark of the world opening up to free market ideas and the pre-eminence of deregulated finance.
The trouble was that the advocacy of capitalism and liberal democracy went hand in hand. In Latin America, Asia and parts of Africa, the parallel commitment to the Washington consensus was a commitment to the rule of law, a free press and representative government. The numbers of democracies grew. True, both Latin America and Asia had suffered crises, courtesy of too much debt incurred by over-enthusiastic financial liberalisation, but in broad terms they accepted the case for democracy. It seemed that the US and Britain were keepers of the grail of the good economy, propelled by deregulated finance and good liberal democracy. The crash shook those propositions to the core. Although the British and American right launched a campaign of disinformation to blame government borrowing and bad regulation, international opinion observed two facts.
First, aggressive action by British and US states had saved the day – injecting government share stakes, underwriting risks that the market could and would not do and pumping in trillions in liquidity.
Second, although there was much Conservative talk of a global recession, it was, as Edward Luce observes in his illuminating book, The Retreat of Western Liberalism, largely an Atlantic recession. China grew at 10% in 2009, India at 8%. Countries such as China that had never embraced the Washington consensus – or, like much of Asia, rejected it after its own crisis – fared well.
It was obvious that UK and US government borrowing rose as a consequence of recession rather than being its cause; nor could governments be blamed for the vertiginous growth of private debt and bank balance sheets in the decade before the crisis. Those were decisions taken by richly incentivised executives. Thus it is no accident that, as Britain and America’s brand of capitalism has fallen into disrepute, alternative, illiberal forms of organising economy and society have grown in attractiveness. The number of electoral democracies peaked a year before the crisis, according to Freedom House, and has been falling ever since. Authoritarianism, Chinese-style, seems to deliver growth and prosperity, a proposition that impresses South Africa’s Jacob Zuma as much as Venezuela’s Nicolás Maduro, both careless of liberal constitutional constraints. Brexit and the election of Donald Trump are grist to the mill – British and US capitalism doesn’t even work for their electorates.
Western liberal values became too intertwined with a failed conservative version of a financially driven capitalism. The discrediting of one should not mean the discrediting of the other: I am with Luce in regarding western liberalism’s values – from respect for human rights to the protection of freedom by representative government – as of universal, paramount importance.
China will not develop the innovative economy it craves without them. Britain and the US’s love affair with deregulated finance has cost the world dear. It now falls to the derided European Union to carry the torch for best combining democracy with a productive capitalism that works for all. At this dark moment in the world’s affairs, Britain should be making common cause with Europe, not deepening its mistake. Time to rethink. Time for a change of capitalism, time for a recommitment to liberal values – and to Europe.