Storm, The (20 page)

Russia cannot be blamed for the breakdown in the World Trade Organization – it is not a member and shows no great ambition
to become one – but the newly assertive economic nationalism of Russia reflects a sense that national identity can be rekindled
through economic success and aggrandisement, much as it was in Germany and Japan many decades ago. The war in Georgia and
pressure on Ukraine reflect a brutal use of economic levers – oil and gas supplies – to influence foreign policy. A collapsing
oil price deflated Mr Putin’s pretentions for a while, but the authoritarian, nationalistic capitalism he represents is a
challenging alternative model which will appeal to many in the big emerging-market economies. China’s approach to its trading
and investment partners has been altogether more subtle and less confrontational. Its state-controlled banks and sovereign
wealth funds have been impeccably non-political and correct. But, in a few years’ time, the flush of relative economic success
combined with a reaction of defensive hostility in the USA and EU may make China appear more like Putin’s Russia – and altogether
more formidable with it. India, Brazil, Mexico and other emerging
economies are not authoritarian, but their democratic capitalism has a strongly nationalistic edge.

The dilemma that is emerging is this. The free movement of goods, services, capital and, to a degree, people, has brought,
and will bring, great economic benefits. The problems of globalization require cooperative solutions – over trade, environmental
damage, pandemics and mass migration. Yet the strains on co -operation that are already apparent could become unsupportable
in conditions of economic crisis. The Western world is increasingly looking inwards, and the new economic powers, which were
never part of the multilateral order and therefore have no significant stake in it, are nurturing a nationalism of their own.
The tension between globalization and rising nationalism is becoming extreme, and the outcome is not predictable.

The economic crisis has provoked a questioning not just of international integration – globalization – but of the whole private-enterprise
system. The cry has gone up: ‘self-regulation is finished’, ‘laissez-faire is dead’, or ‘the end of Thatcherism’. But the
slogans mean different things to different people. The radical extremes of the ‘green’ movement or the ‘anti-globalization’
left, and some of the religious and ethical critics, never had any faith in the private-enterprise system and want to see
it ripped down (though the nature of their alternative is usually unclear or deeply unappealing). Some of the more eloquent
critics, like Larry Elliott and Dan Atkinson, make it clear that their alternative to a world run by the ‘New Olympians’ –
the bankers and the intergovernmental organizations, the WTO, IMF and World Bank – is the restoration of post-war controls,
together with a strong welfare state.

The current debate is often characterized by the use of the word Keynesianism. Keynes is often invoked; but, like many other
great men, he said a lot of different things. He was, however, unambiguously a liberal (and Liberal), who wanted to save capitalism
from itself. He wanted the market economy to work, and was dismissive of Marxist or highly interventionist ideas such as are
being advanced by some of those now using his name. He was concerned primarily with what we now call macroeconomics, and with
the necessity for the active use of monetary and fiscal policy to prevent downturns in the business cycle from spiralling
further down – by pumping money into the economy through, for example, public works.

There is, in fact, little resistance to Keynesianism, in this narrow sense, today. The very prompt response to the current
crisis by the US and UK authorities in particular reflected an essentially Keynesian view that in an emergency every lever
has to be pulled – deep cuts in interest rates, fiscal stimulus, buying up ‘bad assets’ or recapitalizing banks – in order
to maintain economic activity. There has been remarkably little dissent, though the rejection by the British Conservatives
and (in rhetoric if not in reality) the German government of a fiscal stimulus reminds us that there is an alternative view.

The big debate that is taking place is on a somewhat different plane. On the one hand there are what I call the ‘New Interventionists’,
who see the current disaster in financial markets – and thence in the wider economy – as essentially a product of excessively
permissive, weak regulation: the Washington consensus of deregulation and privatization. On the other side are those who,
for the most part, accept that there have been serious market failures but insist nonetheless that the present crisis owes
more to bad or failed regulation than to markets, that the good markets do outweigh the bad, and that the costs of government
failure often outweigh the costs of market failure. Let us call them the ‘Old Liberals’. Within this dichotomy, there is a
middle position – broadly that of the author – which acknowledges that financial markets are subject to repeated bubbles,
panics and crashes, and maintains that they should not be confused with markets in goods and services within and between countries.
The worry some of us have is that legitimate arguments
for re-regulating financial markets will become confused with a generalized movement towards dirigisme and state control of
economic activity.

At least in financial markets, the New Interventionists have a formidable charge sheet. Banks indulged in huge risks which
took no account of entirely plausible scenarios of economic slowdown or contraction. Dangerously risky behaviour was reinforced
through the bonus system; executives were rewarded with vast payments for running their banks into the ground. There appeared
to be no regulatory control over massive leverage within investment banks – as much as 1:50 in some cases – or in ‘shadow’
banking institutions such as hedge funds. Controls over mainstream banks engaging in riskier investment banking were relaxed.
The derivatives markets ran way ahead of any rules, and in the case of the $860 trillion credit default swaps market, without
proper exchanges for settlement.

The Old Liberals have some good counter-arguments, though in the current political context they are perhaps too embarrassed
to make them. They would argue that failures occurred as much in more-regulated markets, such as New York, as in those that
were more permissive, like London. The crisis started and spread from the highly regulated US mortgage market – based on two
state-created and regulated bodies, Fannie Mae and Freddie Mac – and arrived much later in the unregulated hedge funds (a
large number of which have gone down without creating systemic damage or asking for a taxpayer bail-out). Recent financial
crises have been most extreme in highly regulated, rule-bound systems, such as Japan. Much of the current crisis can be traced
back to failures of the state, like the failure to use interest rates to ‘prick’ the property bubble; or to the unintended
consequences of well-intentioned regulation, such as the Basle rules on bank capital adequacy, which prompted the growth of
securitized markets, shadow banking and complex derivatives as means of avoiding them. Some of the more fatalistic Old Liberals,
like Alan Greenspan, argue that whatever regulations are put in place, they
will always be circumvented by market players who are more highly motivated than regulators. Other liberals, like Martin Wolf,
argue that this is a ‘counsel of despair’. This mainstream liberal view is not for laissez-faire but for better regulation,
accepting that, in financial and other markets, success or failure must be rewarded or punished financially, and that, for
all its flaws, no other system can work better. The liberal view is that there should be some regulation, but not regulatory
overkill.

At present, this enormously important debate is largely hidden in subtle nuances rather than fundamental differences, since
the reconstruction of the regulatory system is some way off. Few are disputing the need in the current panic for the state
to take over ownership and control of banks; but a big difference will gradually emerge between those who see the takeover
as a permanent mechanism for wielding state control, and those who see it as a transitional mechanism before (some form of)
private ownership and financial markets are restored. Almost all are agreed that the state should rescue institutions that
create problems of systemic risk, protect bank depositors, and help households faced with the threat of repossession. But
there are big, underlying concerns among liberals that these interventions should be designed in such a way that they do not
generate moral hazard: in other words, they should not encourage bankers, depositors or borrowers to repeat foolish and dangerous
behaviour in the future, knowing that the state will always be there to cover for their mistakes.

Except on the marginalized fringes, there are few fundamentalists. No one seriously believes that the world would be a better
place with Soviet-style, North Korean planning controls, and no one now seriously argues for market laissez-faire in financial
or other markets. But it is clear that the balance has shifted within the mainstream debate. When the state has had to rescue
the financial sector and the heroes of financial capitalism have been exposed as greedy fools, democratic politics is bound
to reflect the shift in mood.

The issue for the future is that this change in mood could play out in different directions. One possibility is that the underlying
commitment to liberal markets will remain, but with more attention to effective regulation of financial markets and more sensitivity
to the casualties of change and to widening in equalities: what could be broadly described as a Scandinavian or Canadian response
to the crisis. The early indications are that the Obama administration wishes to move in this direction. It is also the approach
of the author, as will be clear from the concluding chapters.

The other response is one in which the state will retain a powerful controlling influence in the capitalist economy, in microeconomic
as well as macroeconomic affairs, often acting in the name of ‘economic security’. The succession of recent crises – from
the energy and food price shocks to the financial crisis – increases the likelihood that there will be a move towards ‘state
capitalism’ of the kind espoused in France and Italy, but potentially elevated to a European level. The emergence of what
I called the ‘new interventionism’ reinforces the narrative that politicians and bureaucrats may not be perfectly qualified
to manage economies, but they cannot do worse than the current malfunctioning markets and greedy, foolish financiers. Moreover,
they will have an electoral mandate to act in the ‘national interest’. By exercising effective control of finance, energy
and agriculture in the interests of ‘security’, the state would thereby acquire a major role in the new commanding heights
of the economy (and the collapse of advertising revenue supporting independent media might provide an unintended push in the
same direction, strengthening the relative importance of state broadcasters, including our own BBC). Further legitimacy would
be given to this state capitalism by the decline of socialism as a practical, popular ideology. Instead, the future could
lie with businessmen who are able to align their interests with those of the state. Silvio Berlusconi is an extreme example.

The danger of an emerging state capitalism in Europe (it is
less plausible in the USA and the smaller Anglo-Saxon countries) is that it is congruent with emerging economic structures
in China, Russia and, in varying degrees, the other emerging economies, the oil-rich states and established Asian powers like
Japan. Government-run energy companies from Saudi Arabia, Iran, Venezuela, Russia, China, India and Brazil control 80 per
cent of world reserves of oil and gas. Russian and Chinese government entities look poised to dominate aluminium and iron
ore. The typical financial institution is a state-owned bank or sovereign wealth fund, or a private body owned by a politically
favoured prince or oligarch. The alignment of private and state interests promises all the worst features of capitalist economies
– unfettered greed, corruption, and inequalities of wealth and power – without the benefits of competitive markets. State
capitalism also dovetails neatly with an ideology of economic nationalism, which leads in turn to conflict over markets and
resources, and makes impossible the cooperative solutions that are needed to deal with problems such as global warming. Fear
and anger trump cooperation in a crisis. The inter-war world provides an awful warning as to the likely outcome when nationalism
is the dominant ideology and state capitalism is the dominant economic structure.

There is, therefore, a major challenge to those who subscribe to a liberal view of economics, to work with those whose instincts
are more social democratic and who wish to see better systems of regulation and strong social safety nets, albeit within a
market economy and a framework of global rules. The new US administration clearly aspires to such a world and there are, still,
influential allies in Europe and Japan, in the democratic emerging economies such as India and Brazil, and even among the
more thoughtful elements of the Chinese bureaucratic elite. In the concluding chapter, I sketch out an agenda.