Is the market system broken? If so, the state should intervene much more. Or will the system bounce back after a few minor adjustments?by Robin Blackburn / November 23, 2008 / Leave a comment
YES Robin Blackburn
NO Anatole Kaletsky
Dear Anatole 7th October 2008
Is this the big one? The long-foretold crisis of capitalism? It is, in any case, the 42nd major financial crisis since Nixon pulled the rug from underneath the Bretton Woods system in 1972. But the size and scope of the crash is already bigger than anything that went before, and that will also be true of the consequences.
Groups of leftists used to spend their time devising scenarios to discredit capitalism and to allow them plausibly to demand nationalisation of the banks. In a world where socialists have become an endangered species, the strategists of capitalism have done the subversives’ work for them, by endorsing reckless experiments in “financial innovation” and priming the western banks for socialisation.
At its core, the crisis has been caused by politicians who believed in the magic of markets. They did what the consultants and special interest lobbies told them made business sense. Tame regulators were found who contemplated great mountains of debt with equanimity, and who found nothing amiss in “self-cert” mortgages, buy-to-let bubbles, CDO pyramids, and an entire, off-balance-sheet, shadow banking system. The Fed and the SEC and the FSA only needed a subscription to the FT and WSJ to know what was going on. What was lacking was the desire or will to take away the punch bowl and sober up the revellers.
Huge global imbalances should have dictated a return to Bretton Woods, this time taking seriously Keynes’s insistence on mechanisms for dealing with excessive and persistent deficits and surpluses. Instead it led to absurdly low interest rates, 120 per cent mortgages, a shower of gold cards and a proliferation of structured finance products. US households became the world’s “customer of last resort” but went deep into debt in the process. Investment banks were no longer barred from retail finance and the pressure to financialise became ubiquitous. We were encouraged to see ourselves as two-legged profit and loss centres. Households were meant to behave like businesses, businesses to behave like banks, and banks to behave like hedge funds.
The derivatives revolution that took off in the 1990s made poor people’s debt the caviar of the finance houses. Sub-prime mortgages could be sold on to institutional investors which were themselves the repositories of the savings of those on middle or…