Has the bubble finally burst for capitalism? What may lie ahead?

The Sunday Times
April 12, 2009

Has the bubble finally burst for capitalism?

Global capitalism has been rescued from the brink of collapse by huge state bailouts.

Newsnight’s economics editor looks at what may lie ahead

Paul Mason

Hyman Minsky was an economics professor at Washington University, St Louis, who died in 1996. He was ignored by the political establishment and treated as crazy. Once you understand his theory, you can see why. He warned: “The normal functioning of our economy leads to financial trauma and crises, inflation, currency depreciations, unemployment and poverty in the middle of what could be virtually universal affluence – in short . . . financially complex capitalism is inherently flawed.”

Minsky showed that speculative bubbles, and the financial collapses that follow them, are an integral part of modern capitalism. That is, they are not the result of accidents or poor decision-making, but a fundamental and recurrent feature of economic life once you deregulate the financial system.

He pointed out that, given sustained economic growth, there was a tendency for the finance system to move from a situation where everything is under control, to a speculative situation, which is precarious.

Minsky’s proposed solution to financial crisis was state intervention on two fronts:
the government should run a big budget deficit and
the central bank should pump money into the economy.

It will be noted, despite Minsky’s pariah status in economics, that his remedy is exactly what has been adopted – in America, Britain, the eurozone and much of the developed world. The problem is, it has not so far worked. Trillions of dollars of ready money, tax cuts and state spending were shovelled into the world economy to stop the credit crunch producing another Great Depression. Yet all these trillions are up against a collapse in the real economy.

Fortunately, Minsky had spent his time musing on a more permanent solution: the socialisation of the banking system. This he conceived not as an anticapitalist measure, but as the only possible form of a high-consumption, stable capitalism in the future. Minsky argued: “As socialisation of the towering heights is fully compatible with a large, growing and prosperous private sector, this high-consumption synthesis might well be conducive to greater freedom for entrepreneurial ability and daring than is our present structure.”

Minsky never spelled out the details of how it might be done. But there is no need to do so now. Stumbling through the underground passageways of Downing Street on the morning of October 8, 2008, I saw it happen. Tetchy and bleary-eyed, fuelled by stale coffee and take-away food, British civil servants had designed and executed it in the space of 48 hours. Within 10 days, much of the western world’s banking system had been stabilised by massive injections of state credit and state capital.

The state takeover of large parts of the banking sector was seen – like the tax cuts and liquidity injections – as a way of speeding the return to the “normality” of the past decade. It is also clear, on the basis of conversations with senior UK policymakers, that the consensus by the time of the Washington G20 summit last November was that the recession would be a blur, a sharp V-shape, over by mid 2009.

In reality, the world is facing a much more strategic problem: its growth model is in crisis, and the banking business model is in crisis.

“A VORACIOUS APPETITE for economic growth lies at the heart of the boom that has now gone bust,” wrote Morgan Stanley economist Stephen Roach on the eve of the meltdown. It is worth reiterating just how spectacular that growth has been, and how spectacularly uneven. In 2007 global GDP growth was 5% – well above its historic trend – for the fourth year in a row. Growth in the developing world averaged 8%; and in Asia it was 10%. Across the G7 countries it was 2.6% – slightly below the average for the 1990s. Roach summed up the problem: “An income-short US economy rejected a slower pace of domestic demand. It turned, instead, to an asset-and debt-financed growth binge . . . For the developing world, rapid growth was a powerful antidote to a legacy of wrenching poverty. And the hyper-growth that was realised in regions like developing Asia became the end that justified all means – including . . . inflation, pollution, environmental degradation, widening income disparities, and periodic asset bubbles. The world’s body politic wanted – and still wants – growth at all costs.”

He concluded: “This crisis is a strong signal that these strategies are not sustainable.” But if the old growth model has reached a dead end, what can follow it?

There are three rational options for the developed world. The first is to revive the high-debt / low-wage model under more controlled conditions; the second is to abandon high growth as an objective altogether; the third is to find a radically different basis for high growth, with a return to higher wages, redistribution and a highly regulated finance system.

The first course of action is implicit in the approach agreed last November at the Washington G20 summit. In the summit communiqué, globalised markets and free trade are treated as hallowed principles, as is the national basis of regulation. Regulation would be more coordinated, there would be more information sharing, governments would commit to do better next time – but the only concrete measures to reregulate the system remained disputed. Even within the EU there was strong resistance to a single banking regulator, as London, Frankfurt and Milan vied with each other to become global banking centres on the basis of different regulatory systems.

The second solution embraces the end of a high-growth, high-consumption economy: if it can’t be driven by wages, debt or public spending, then it can’t exist. And if it can’t exist in the West, then Asia’s model of high exports and high savings does not work either. In previous eras, any proposal to revert to a low-growth economy would have been regarded as barbarism and regression. Yet there is a strong sentiment among the antiglobalisation and green movements in favour of this solution. And it has found echoes in mass consciousness as the world has come to understand the dangers of global warming. The problem is that it is only an option for the developed world: every slum-dweller and roadside migrant labourer I have ever met south of the equator had electricity and a flush toilet high on their wish list, which will need high growth for at least another couple of decades – possibly half a century.

As for the third option – a high-growth economy that transcends the limitations of both Keynesian and neoliberal models– it was Minsky who spelled out how it could be achieved: nationalise the banking and insurance system; place strict limits on speculative finance; change the tax structure to decrease inequality so that the bottom half of the income scale benefits from growth, and growth itself sustains consumer demand rather than debt. Finally, limit the power of huge companies so that you create permanently benign conditions for entrepreneurs.

This, it should be stressed, was Minsky’s prescription to rescue capitalism, not to destroy it, though the outcome would seem highly “anticapitalist” to anybody who defines capitalism as being essentially about free markets.

Surreally, as this book goes to press, large parts of the Western financial system are either semi-nationalised or on life-support with taxpayers’ money. New laws to limit speculation are being formulated. A blunt form of the Minsky solution has been improvised as a crisis measure, but it leaves many questions unanswered.

It is uncharted territory for the bankers, but actually we have long experience of what happens when companies cannot make money, form a monopoly through mergers and acquisitions, and are essential to the functioning of the rest of business. They are called utilities. Many believe banking is now about to become just like a utility: heavily regulated, low-profit, orientated by law to achieve a social aim rather thana financial one. This prospect has already got some in the banking industry so depressed that they are predicting the mass departure of the teams engaged in the high-risk parts of the banking business into the hedge-fund and consultancy businesses.

With low-profit, utility-style commercial banking, the question then arises: if banks are being asked to meet social objectives, like avoiding home repossessions or continued lending to small businesses, and are already supported by vast quantities of state finance, would it not be more efficient for the state to own key parts of the banking sector? One senior figure in the industry told me: “Once they become low-profit utilities, I don’t really care whether they stay in the private sector or are nationalised – they’re just doing the same thing.”

In short, reality is pushing the banking industry towards a utility-style solution. The result could be some form of “mixed economy” in banking, with a base layer provided by a state-owned lender, large utility banks on top, and then a big gap between this world and a slimmed-down speculative sector.

As the crisis worsens, it is becoming common for pundits to observe that, although capitalism is collapsing, nobody has thought of an alternative. This is not true. The Minsky alternative – a socialised banking system plus wealth redistribution – is, I believe, the ground on which the most radical of the capitalist reregulators will coalesce with social-justice activists. And it may even go mainstream if the only alternative is low growth, decades of debt-imposed stagnation, or another rerun of this crisis a few years down the line.

© Paul Mason 2009 Extracted from Meltdown: The End of the Age of Greed, to be published by Verso on April 27 at £7.99. Available from The Sunday Times Books First at £7.59 (including postage and packaging) on 0845 271 2135 or at timesonline.co.uk/booksfirst

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