Global Financial Crisis

Come the next catastrophe, we will rue governments’ cowardice in failing to reform the banks

Talk of economic recovery is in the air. The FTSE has been steadily climbing over recent days. The banks are once more recruiting and paying fat bonuses. The sense of impending financial catastrophe which stalked the western world last autumn now seems a long time ago. But the mood of cautious optimism that is tangible in some circles is profoundly misplaced.

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The business and political elite are flying blind. This is the mother of all economic crises. It has barely started and remains completely out of control

We are living through a crisis which, from the collapse of Northern Rock and the first intimations of the credit crunch, nobody has been able to understand, let alone grasp its potential ramifications. Each attempt to deal with the crisis has rapidly been consumed by an irresistible and ever-worsening reality. So it was with Northern Rock. So it was with the attempt to recapitalise the banks. And so it will be with the latest gamut of measures. The British government – like every other government – is perpetually on the back foot, constantly running to catch up. There are two reasons. First, the underlying scale of the crisis is so great and so unfamiliar – and, furthermore, often concealed within the balance sheets of the banks and other financial institutions. Second, the crisis has undermined all the ideological assumptions that have underpinned government policy and political discourse over the past 30 years. As a result, the political and business elite are flying blind. This is the mother of all postwar crises, which has barely started and remains out of control. Its end – the timing and the complexion – is unknown.

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This is no blip. The global economic crisis will burst the bubble of free-market doctrine and force states to take a more active role

The world is holding its breath, still trying to grasp the potential enormity of what is unfolding. Economic downturns and stock market crashes are hardly unfamiliar, of course, even if a decade or so seems a long time ago for western consumers habituated to rising house prices and non-stop shopping. But this crisis threatens to be rather different, a Big One. Already it has forced the government to engage in what has been a heresy for almost three decades: nationalisation. Major crises such as the Northern Rock debacle are not matters of punctuation or pauses for reflection, but defining historical moments, marking the end of one era and the beginning of another. The 1970s was a classic case, as huge oil price hikes fed an inflationary spiral that brought both the long boom and the postwar welfare consensus to an end, and led to the rise of neoliberalism and deregulation.

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China will be the next superpower: already it’s in competition with the US for the hearts and minds of the developing world

At the time of 9/11 and the invasion of Iraq, the US stood supreme with barely a challenge visible on any meaningful time horizon. Almost five years on, we can clearly see both the inadequacies in the then-prevailing common sense, and the fallacies intrinsic to the neoconservative view of the world. There are, of course, always limits to power, even if they are not visible. The last five years have made the limits of American power plainly visible.

It is Iraq that has exposed those limits. The idea of US omnipotence always depended on its overwhelming military power, and the neoconservatives saw the latter as the key to a new era of American ascendancy. Iraq has demonstrated the limits of military power when it comes to subduing and governing a society. This failure has curbed the desire to intervene elsewhere: even if military action is contemplated in Iran, which now seems less likely, there will be no Iraq-style invasion and occupation. The idea that Iraq would be a precursor to a new kind of American empire – as advocated by Niall Ferguson, for example, in his book The Colossus – is dead in the water.

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