Meltdown

As the world economy threatens meltdown, Alan Greenspan – who, as Chairman of the Federal Reserve Bank, had presided over its fortunes from 1987 to 2006 – expressed himself as being taken aback by what he described as a once-in-a-century crisis. We were all invited, by implication, to join in his bewilderment at the apparently unheralded disaster that has suddenly struck us. If even Alan Greenspan had not seen it coming, we could all be excused for a similar failing, couldn’t we?

Well, no. This is a crisis that has been thirty years in the making. Its approaching outline has been visible for a very long time. Only those who did not want to see (and that includes almost all the so-called expert commentators and actors in the drama) could have failed to register the warning signs.

The first little alarm bell might have rung when, at the end of the 1970s and early in the 1980s, much of the world – following the lead provided by Margaret Thatcher and Ronald Reagan – removed exchange controls and allowed capital to move freely around the world. The result was a huge increase in capital flows as multinational investors roamed the globe, looking for the most favourable long-term, and often short-term, investment opportunities.

In one bound, the controllers of that capital had decisively changed the balance of power between capital and governments, whether elected or otherwise. It was now the international investors who could face down governments, threatening to move their investment elsewhere if they did not get their way. The capital flows they controlled were sufficient to dwarf the resources of all but the biggest national authorities. The political agenda had been transformed; the democratic process, which was supposed to protect ordinary people from the predations of capitalism, had been disabled.

This is not, of course, how it was portrayed at the time. On the contrary, it was represented as a dismantling of unnecessary and damaging controls. The way was now clear to establish a single global market which, by definition, excluded governments, since any government intervention in that market would mean that market conditions would vary from one part of it to another and it would no longer be a single market.

As the external environment changed, so too did domestic conditions. The fashion was now for monetarism – the mechanistic application of supposedly simple rules for controlling the money supply and therefore inflation – a process which could safely be entrusted to officials and market operations and removed from the unreliable attentions of democratically elected politicians.

Again, these developments were almost universally applauded as an overdue expression of the “free” market, not least by those who – it might have been thought – would most resist them. Yet, even then, they were not satisfied that they had done enough to shunt off democratic processes to the margins. They determined to ensure that governments were definitively excluded from economic policy by proclaiming that there was only one goal of that policy – the control of inflation – and that that task should be removed from those elected to undertake it and handed over to an unaccountable central bank. The principal decisions in economic policy were thereby virtually insulated against public debate and discussion.

This, too, was greeted enthusiastically around the world as an inspired piece of Solomon-like wisdom. And, as the inevitable consequences began to take shape, as those who now controlled huge financial assets worldwide and could manipulate them for their own benefit without any fear of interference began to cream off a higher and higher “return” and to pay themselves more and more outrageous salaries, bonuses, commissions, and “perks” of all kinds, while at the same time making decisions not only exclusively in their own interests but without regard for the consequences for millions of people around the world whose lives and livelihoods simply no longer mattered, the politicians of the day joined in the celebrations. Typical was the New Labour government which, we were told, was “intensely relaxed about people getting filthy rich.”

And, as the banks and financial institutions focused on making as much money as possible through manipulating assets and irresponsible lending, they could relax in the knowledge that the central bank was not only too busy with the task it had been given of shaping economic policy to bother about prudential regulation, but also that it would be too solicitous of the interests of its fellow banks to do anything about it anyway.

So, the whole de-regulated international money-go-round whirled ever faster, the music played louder, the champagne flowed faster, and the world economy lurched from one crisis to another. But there was always another tranche of credit, or another clever idea for securitising debt, or another mega-merger, to keep the bubble floating.

And then, in slow motion, the souffle began to collapse. As always, it is the victims of the excesses who now have to pay the biggest price for correcting them. It is all those who will lose their homes and their jobs and their living standards and their sense of self-worth who will bear the heaviest burden.

In the meantime, poor Alan Greenspan! He couldn’t see it coming. Nor could all those bankers, politicians, commentators, financial experts and multinational potentates who so enthusiastically drove it all forward and were so dazzled by their good fortune that they could not recognise reality.

But some of us saw it coming. You bet we did.

Bryan Gould
17 September 2008

This article was published in the online Guardian on 20 September