The Legacy of the Crash Read online

  The same largely holds true for the general public, indicated first by the political success of the Conservatives and Republicans in post-crisis elections. In terms of economic attitudes, an October 2010 Rasmussen poll found that 75 percent of Americans think free markets are better than government management of the economy, with only 14 percent thinking government control of the economy is better (Rasmussen Reports, 2010). The 2010 British Social Attitudes Survey showed a populace that was more economically conservative, less supportive of government spending and less supportive of policies of redistribution. Even among Labour supporters, only 49 percent still supported redistribution (Guardian (online edition), 26 January 2010). A clear majority (59 percent) supported the coalition’s budget-cutting plans after they were first elected, although that support dropped to 48 percent a year later as cuts began in earnest (Ipsos MORI, 2011). It can only be suggested rather than substantiated here, but it appears that the liberal movement established an intellectual hegemony that, while shaken by the crisis, remains intact.

  In policy terms the main hindrance to structural change is the parlous state of public finances. Having started the decade in excellent fiscal shape, the US and UK were overdrawn before the crisis broke. A high percentage of current deficits, moreover, are structural rather than cyclical and can only be tackled through reviewing basic spending commitments. A 2010 Congressional Budget Office report raised the alarm in rather stark terms (CBO, 2010b) and Moody’s hinted at downgrading the US credit rating if the debt ceiling was not raised (New York Times (online edition), 2 June 2011) – a real economic danger given the number of Treasury bonds held in foreign hands. Economic policy in both states turns on finding ways to balance the books without squashing growth, a challenge at the forefront of British political debate. Even if expediency prevents them from making all of the cuts outlined, the Cameron government seems determined to stay the course on spending, a position reinforced – despite flat growth and rising inflation – by a supportive IMF report in June 2011. Riding the wave of midterm election success, the Republicans have the political initiative in the US, pushing the debate to how quickly, not whether, to cut spending. Even if the British and American governments had the means to expand their role, they lack the inclination. Despite the bailouts and nationalizations, the thrust of policies since then has been to disengage as expediently as possible. The majority of the bank bailout under TARP has been repaid. GM and Chrysler have restructured to the point of offering shares publicly and seeking to buy back shares held by the Treasury. By mid 2011 the Coalition government was actively seeking a private buyer for Northern Rock. Barring further systemic shocks, fiscal realities present substantial impediments to renewed state interventions for some time. In practice there has not been a broad shift in the economic management of either state.

  At root crises of capitalism are political events and this crisis most assuredly impacted politics in both countries. Lehman collapsed just weeks before the 2008 presidential election, turning Obama’s lead into a landslide. With solid majorities in both houses of Congress, Obama seemed poised for a Roosevelt-like first term. In terms of legislation, he was able to pass major initiatives: stimulus, health care, financial regulations. Yet the Obama administration made the political calculation that the stimulus package passed in their first weeks would induce recovery and turned their attention to health care, devoting an inordinate amount of time and political capital to that bill. The end product was a complicated mélange which lost popular support. Economic recovery meanwhile faltered, providing an opening for the Republicans. The result was one of the biggest midterm elections gains by an opposition party in American history, with the Republicans retaking the House. Both in Congress and on the presidential campaign trail, Republicans have coalesced again around the need to shrink the size of government. Regardless of what might happen in the 2012 elections, it is clear that the reformist moment of Obama’s first term is over.

  Gordon Brown portrayed himself a ‘serious man for serious times’, but his Labour Party governed during the collapse, ensuring a Labour defeat if not quite a Conservative victory in the 2010 general election. The electorate abandoned the party of socialism (itself having long abandoned socialism) in favor of the party of free markets (having shifted to the political center) – but not quite, forcing a coalition with the Liberal Democrats (themselves divided between liberal and social democratic wings). One year in, the coalition has held together, although not without fights, especially in regards to university tuition fees and the NHS. Cameron’s ideas for a ‘Big Society’ present some intriguing possibilities for a social renovation, but they have yet to crystallize into coherent policies. Nor would they mean the abandonment of liberal economics. Labour for its part opted for the more left-wing leadership of Ed Miliband over his older and more Blairite brother David, but the younger Miliband has yet to make any significant inroads into the Conservatives’ support.

  In sum, the political sands in Britain and American have not shifted a great deal and, to the extent that they have, they have shifted more toward those parties and interests most likely to want to reduce the role of the state and revive the free market model.

  A zombie named TINA

  Many presumed that the 2008 financial crisis dealt a fatal blow to the Anglo-Saxon model capitalism. As the above analysis shows, however, neoliberalism is not dead yet. Popular culture presents us with a useful image of that deemed dead yet still animated: a zombie.7 To paraphrase Karl Marx, there is a zombie haunting the Anglo-Saxon economies: a zombie named TINA. TINA, of course, is the acronym made famous by Mrs Thatcher to justify her policies: There Is No Alternative. The neoliberal model lives on, despite manifold declarations of death, primarily because there are no alternatives. Certainly there are calls for reforms and logical alternatives modes of economic organization. Nevertheless, no politically powerful forces have rallied behind a clearly articulated set of alternatives to free market capitalism in either Britain or America. More than anything else, liberal capitalism will revive in these states because the left has no coherent alternative growth model to offer that has any traction among the broader voting public. Some economists, especially Paul Krugman and Joseph Stiglitz, have pushed for an aggressive Keynesian response to the downturn. Yet Keynesianism is problematic in open economies (‘leaky Keynesianism’, as James puts it (2009, p. 216)), politically back-ward-looking, and, when applied post-crisis, has done little to revive growth. Calls for even greater stimulus have the air of a Great War general demanding just one more big push to achieve victory. A green growth model is certainly the most original option for progressive forces. This was, indeed, the first point listed in a letter sent to Chancellor Osborne by a group of left-leaning academic economist urging him to change course (Guardian (online edition), 6 June 2011). Fundamentally the purpose of green development, however, is to solve environmental problems not economic problems. The promise of a future full of green development and material prosperity – economies that are both clean and growing as rapidly as before – still seems a long way off, if it is even viable. Without being able to deliver policies without material trade-offs, green growth alternatives continue to offer a limited electoral appeal. This crisis of capitalism, in short, has yet to produce a counter-liberal coalition in either Britain or America, let alone one that has maneuvered to a position of electoral success. Mrs Thatcher’s axiom still rings true, at least for now.

  Notes

  1. Economist John Taylor’s ‘rule’ predicts the optimal short-term interest rate based on levels of inflation and output.

  2. A loan is deemed subprime because, for whatever reason, it is a greater credit risk. For example, if a standard (prime) loan requires a 20 percent down payment (hence a ‘loan to value’ (LTV) ratio of 80 percent), mortgages requiring 10, 5 or 0 percent down would be considered subprime. By 2000, Fannie and Freddie were buying mortgages with 100 percent LTV ratios (Wallison, 2009a, p. 370).

  3. Standing for ‘Alternativ
e A-paper’, a mortgage whose risk is between prime and subprime.

  4. A bank would thus have to maintain $8 in capital for every $100 of commercial loans, $4 for every $100 in mortgages, and $0 capital reserves for government bonds. With their 20 percent risk weight, mortgage-backed securities required $1.60 in capital for every $100 put into MBSs.

  5. Both sides largely ignored the recommendations of the bipartisan debt commission headed by Republican Alan Simpson and Democrat Erskine Bowles calling for a mix of spending cuts, tax increases, and moderate entitlement reform (for example, increasing the Social Security retirement age).

  6. Controversy erupted with the appointment of Elizabeth Warren to head of the new CFPB as a ‘special adviser’ to the president rather than as the formal head, skirting the constitutional necessity of submitting her to nomination hearings or requiring her to report directly to Congress.

  7. Zombies have broken out of the horror genre, invading popular comedies like Shaun of the Dead and Zombieland, as well as reworking classic literature, most notably Seth Grahame-Smith’s Pride, Prejudice and Zombies. Even scholars have gotten into the act, with books like Zombie Economics (Quiggin, 2010) and Zombie Capitalism (Harman, 2010), Daniel Drezner’s ‘Night of the Living Wonks’ in the July/August 2010 Foreign Policy explained how different international relations theories would handle a zombie apocalypse.

  References

  Acharya, Viral V., and Matthew Richardson (2009) ‘Causes of the Financial Crisis’ Critical Review, 21(2–3), 195–210.

  Coates, David (2010) ‘Separating Sense from Nonsense in the US Debate on the Financial Meltdown’, Political Studies Review, 8(1), 15–26.

  Congressional Budget Office (2010) Federal Debt and the Risk of a Fiscal Crisis, 27 July (Washington, DC: CBO).

  The Economist (2010) ‘Not All on the Same Page’, 3 July, pp. 65–7.

  Friedman, Jeffrey (2009) ‘A Crisis of Politics, Not Economics: Complexity, Ignorance, and Policy Failure’, Critical Review, 21(2–3), 127–83.

  Gamble, Andrew (2009a) The Spectre at the Feast: Capitalist Crisis and the Politics of Recession (Basingstoke: Palgrave Macmillan).

  Gamble, Andrew (2009b) ‘British Politics and the Financial Crisis’, British Politics, 4(4), 450–62.

  Gjerstad, Steven, and Vernon L. Smith (2009) ‘Monetary Policy, Credit Extension, and Housing Bubbles: 2008 and 1929’, Critical Review, 21(2–3), 269–300.

  Greenspan, Alan (1997) ‘Fostering Financial Innovation: The Role of Government’, in James Dorn (ed.), The Future of Money in the Information Age (Washington, DC: Cato Institute), pp. 45–51.

  Grunwald, Michael (2010) ‘How the Stimulus is Changing America’, Time (online edition), 26 August, accessed 26 August 2010.

  Hall, Peter A., and David Soskice (eds) (2001) Varieties of Capitalism: The Institutional Foundations of Comparative Advantage (New York: Oxford University Press).

  Haldane, Andrew (2010) ‘The Contribution of the Financial Sector: Miracle or Mirage?’ ‘Speech given at the ‘Future of Finance’ Conference, 14 July.

  Harman, Chris (2010) Zombie Capitalism: Global Crisis and the Relevance of Marx (Chicago: Haymarket Books).

  HM Treasury (2010a) A New Approach to Financial Regulation: Judgment, Focus and Stability. Cm7874 (London: The Stationery Office).

  HM Treasury (2010b) Public Sector Finances Databank, 21 July, www.hm-treasury.gov.uk/psf_statistics.htm, accessed 22 August 2010.

  Hoban, Mark (2010) Speech by the Financial Secretary to the Treasury at the London Stock Exchange, 26 July.

  Independent Commission on Banking (Vickers Commission) (2011) Interim Report, April.

  Ipsos Mori (2011) ‘The Budget 2011’ www.ipsos-mori.com/Assets/Docs/Polls/Budget2011briefing.PDF, accessed 3 June 2011.

  Jablecki, Juliusz, and Mateusz Machaj (2009) ‘The Regulated Meltdown of 2008’, Critical Review, 21(2–3), 301–28.

  James, Harold (2009) The Creation and Destruction of Value: The Globalization Cycle (Cambridge, MA: Harvard University Press).

  McKinsey Global Institute (2010) Debt and Deleveraging: The Global Credit Bubble and its Economic Consequences (McKinsey).

  Moran, Michael (2009) Business, Politics, and Society: An Anglo-American Comparison (Oxford: Oxford University Press).

  OECD (2011) Economic Outlook 89 (Paris: OECD).

  Office of National Statistics (2011) Public Sector Finances (Statistical Bulletin), April (London: ONS).

  Posner, Richard (2009) A Failure of Capitalism: The Crisis of ’08 and the Descent into Depression (Cambridge, MA: Harvard University Press).

  Quiggin, John (2010) Zombie Economics: How Dead Ideas Still Walk Among Us (Princeton: Princeton University Press).

  Reinhart, Carmen M., and Kenneth S. Rogoff (2009) This Time is Different: Eight Centuries of Financial Folly (Princeton: Princeton University Press).

  Ryan, Paul (2011) The Path to Prosperity: Restoring America’s Promise, House Committee on the Budget, Fiscal Year 2012 Budget Resolution (Washington, DC: GPO).

  Slovik, Patrick, and Boris Cournède (2011) ‘Macroeconomic Impact of Basel III’, OECD Economics Department Working Papers, No. 844 (Paris: OECD).

  Taylor, John B. (2009) Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis (Stanford, CA: Hoover Institution Press).

  US Department of the Treasury (2010) Troubled Asset Relief Program: Two Year Retrospective October (Washington: GPO).

  US Department of the Treasury (2011) Reforming America’s Housing Finance Market: A Report to Congress (Washington: GPO).

  Wallison, Peter J. (2009a) ‘Cause and Effect: Government Policies and the Financial Crisis’, Critical Review, 21(2–3), 365–76.

  Wallison, Peter J. (2009b) ‘Credit Default Swaps are Not to Blame’, Critical Review, 21(2–3), 377–87.

  Weale, Martin (2009) ‘Growth Prospects in the Financial Sector’, National Institute Economic Review, 207, January, 4–9.

  White, Lawrence J. (2009) ‘The Credit-Rating Agencies and the Sub-Prime Debacle’, Critical Review, 21(2–3), 389–99.

  4

  A Tale of Two Cities:1 Financial Meltdown and the Atlantic Divide

  David Coates and Kara Dickstein

  The 2008 financial meltdown was a genuinely global affair. By the time it was over, the global banking system had lost up to $4.1 trillion of its value, the world fiscal deficit had risen from 2 percent to over 10 percent, and economies worldwide had seen a spike in unemployment that totaled at least 50 million (Skidelsky, 2009, pp. 13–16). These enormous numbers stand comparison to those generated by the depression of the 1930s, and like that depression, the one which began in 2008 threw a long global shadow. But the shadow was not the same everywhere. It was deepest where the crisis originated and the meltdown first occurred – in the United States and the United Kingdom. And even where it was deepest, there we can still see significant variations of gray. The purpose of this chapter is to chart and explain both the shadow and the variation.

  US financial meltdown

  The credit crisis began in the US housing market in 2006 and 2007. After a decade in which house prices had effectively doubled and in which many homeowners had remortgaged their houses to sustain high levels of immediate consumption, two Bear Stearns hedge funds heavily engaged with subprime loans unexpectedly collapsed in July 2007. Concern then spread rapidly through the entire US financial system about the widespread sale of such loans to house buyers on low incomes, and about the associated danger of a foreclosure tsunami; and with good reason. In 2001 new subprime and home equity loans had totaled $330 billion, just 15 percent of all new residential mortgages. Five years later the equivalent figures were $1.4 trillion and 48 percent of all new residential mortgages. This would not have mattered – outside the housing sector at least – had not these mortgages also been securitized. But they had. Securities collateralized by mortgages increased in the US financial system from $18.5 billion in 1995 to $507.9 billion in 2005
. The two dates were divided by what the President’s Working Group on Financial Markets called ‘a dramatic weakening of underwriting standards for US subprime mortgages’ (Winant, 2008). That weakening was so dramatic that by November 2007 Merrill Lynch was obliged to write off $8 billion in losses on mortgage-backed securities, and by the end of 2008 one house in ten in the United States was either in or on the edge of foreclosure (Coates, 2010a, p. 231).

  This deepening foreclosure crisis spread rapidly through the entire US banking and insurance system, leaving key players unsure about their own viability and the viability of others, and bringing down a number of leading US financial institutions. 2008 witnessed first the January sale to Bank of America of Countrywide Financial (the main private provider of subprime loans) followed in September by the seizure by federal regulators of Washington Mutual, the nation’s largest Savings & Loan institution. The complete collapse of Bear Stearns followed in March 2008 and then, in a single terrifying week in September, the swallowing up of Merrill Lynch by Bank of America, the first of many Treasury bailouts of insurance giant AIG, and the allowed collapse of Lehman Brothers. The spreading financial crisis broke the confidence of banks in each other, and dried up the supply of credit from bank to bank, and from bank to consumer. What had begun as a financial problem in the housing market then rapidly became a credit-shortage problem for firms and households alike. The US gross domestic product (GDP) fell at an annualized rate of 6.2 percent in the last quarter of 2008, a year in which 2.6 million Americans lost their jobs. 2009 was worse – 6 million more jobs gone, including 1.2 million lost in the US manufacturing sector. The Federal Reserve cut interest rates effectively to zero in a vain attempt to blunt the recession, yet the US economy still moved into recession in December 2007 and stayed there throughout 2008 and the first half of 2009.