Financial institutions in nearly every Western economy are on the brink of collapse, said The Observer in an editorial yesterday. Excerpts:
Such is the disorientation created by the earthquake in global finance that some US Republicans last week accused President George Bush of “socialism” for bailing out the country’s financial system. Seismic activity can alter the landscape, but it cannot turn right into left. Bush has not embraced Marxism. He simply recognized that leaving the market free to demolish banks would lead to economic catastrophe.
That realization came more naturally in Europe. French President Nicolas Sarkozy declared that “the all-powerful market is finished”. Peer Steinbrück, the German finance minister, predicted that the US will lose its role as a “financial superpower”. His Italian counterpart, Giulio Tremonti, pointed out that he had written a book on the ills of globalization, and was now vindicated. But none of their respective countries is in a position to lead the construction of a new global financial order.
The current market turbulence does not distinguish between brands of capitalism. Last week Britain, Germany, France, Belgium, Greece, Ireland and the Netherlands all took emergency measures to rescue failing banks. In some cases, reaction appeared motivated by blind panic. Irish and Greek offers of unlimited guarantees for bank deposits were not just unilateral, they jeopardized any prospect of euro zone solidarity. Last night’s call for a global summit by EU leaders, who have been meeting in Paris, is encouraging, suggesting a real effort by member states to overcome instinctive divisions over how to run an economy. Of the union’s largest economies, Britain has favored the “Anglo-Saxon” model of maximum liberalization while France and Germany have no qualms about state intervention. It is testimony to an historic failure of political will that Europe’s leaders only began to negotiate past those ideological barriers when faced with a crisis of this magnitude.
Even with the EU mobilised and the US bailout approved, the road ahead is desperately uncertain. Emergency liquidity funds might help douse the flames in the financial markets, but the discussion about what should be built in the smouldering remains has barely even begun.
Both candidates in the US presidential election campaign backed the bailout, but neither explained how their own plans for government might be redrawn to fit the new economic landscape.
In Britain, market convulsions forced the Tories to rewrite their conference agenda last week. David Cameron declared his readiness to take ‘difficult’ and ‘unpopular’ decisions. But that was simply a euphemism for raising taxes and cutting services to balance the government books. He also said there would be ‘a day of reckoning’ for profligate bankers, but in the next breath he deferred that day indefinitely.
The more remarkable political gyration last week was performed by Gordon Brown. Just over a year ago, he promised to ‘renew’ the party and heal the divisions of the Blair era. On Friday, he appointed Peter Mandelson, Tony Blair’s grey cardinal, to the same cabinet post he held in 1998. Brown now appears to recognise that events of this magnitude mean government has to think in fundamentally different ways about the economy, beyond the fine-tuning of fiscal and monetary policy, and instead deal with a world of food and energy shortages, as well as a credit drought.
The Bank of England last week quietly increased the amount of emergency credit available to banks to levels equivalent in scale to the US bailout. Neither Labour nor the Tories, for all their claims, has yet spelled out what regulations should be demanded of the City as quid pro quo. No politician in Britain, the rest of Europe or the US has an answer to one basic question: how will the financial services be overhauled so they are, in future, the servant, not the master, of the global economy? We wait to see if Brown’s new cabinet will offer a lead.
The old ideological distinctions between different forms of capitalism may be melting away in the banking crisis. But for the moment, it is still the politicians, not the bankers, who look humbled by its scale.
