Commentary | Budget, Taxes, and Public Investment

Is the financial crisis leading to a new global order?

The forum asks the sensible question. “As a result of the current financial crisis, are there signals that we are moving toward an international order of fair rules, control over risk and early warning systems?”

Good question. As the Chinese say, in addition to danger, crisis means opportunity. And we do not want to lose the opportunity for change that his crisis has brought.

It is quite clear by now that the system that we call “Neoliberalism” has failed on its own terms. That is, its claim to provide the world with steady growth and economic stability. Unfortunately so far, this failure is not producing the changes that a new order requires.

We should begin by distinguishing among objectives.  One minimal goal involves making financial markets more stable, avoiding the great price oscillations that have been so destructive to the global economy.  I think that we are actually making some limited progress here. We will see somewhat stronger national regulation. And we can expect more cross-border cooperation among central banks and other public agencies in exchanging information and coordinating reserve policies and the treatment of exotic securities and excessive financial leveraging. Some, progress, but in my view insufficient to ensure future financial stability.

In any event, effective management of global capitalism requires more. Just as national capitalisms require national central banks, public budgets, agencies to ensure competition, etc. global capitalism requires global institutions to maintaining macroeconomic and sectoral balance.

We have plenty of ideas. For example, among others, Nobel prize economist Joe Stiglitz has recently proposed a financial monitoring agency within the United Nations to coordinate – not impose — national monetary and fiscal policies.

The proposal is really quite modest. But despite the recent demonstration that some type of global coordinating mechanism is necessary, there is little interest among the leaders of the largest and most important national economies.

There is even less interest in returning the current financial system back to its traditional proper function. That is, of being the provider of credit to the sectors that produce the goods and services needed for economic development and widely shared improvement in living standards. Not, as it is today, a sector that produces credit for itself in order to finance speculation in its own debt.  

If the system that produced the crisis is not changed, one does not have to be a great economist to forecast that we will repeat the crisis again. In fact, as we meet, the great international banks and financial institutions are creating new types of exotic derivatives. Instead of betting on the default rates of subprime mortgages, they are betting on death rates of people with life insurance policies.

When my country’s financial markets collapsed a year ago, officials expressed surprise, as if it was an accident. “who could have known?” they asked. Now we know that those in charge of the regulatory agencies had sufficient early warning, years before the market crash.  Of course, they did not know exactly when the disaster would occur. But they knew that it would happen. And they knew that the bigger the bubble became, the greater would be the damage from its bursting. So the crisis was not caused by forecasting error or economic ignorance of the way the economy works. It was a very preventable accident.

But why did they not act sooner and deflate the credit bubble? The basic cause was the political pressure from the great banks and investment companies who were making enormous profits from the bubble. In effect, the regulatory agencies were captives of the powerful institutions who were supposed to regulate them. This experience is not limited to the United States.

Every market has a politics. Its politics sets the rules, which in turn determine the market’s incentives and the distribution of its benefits. For three decades, the politics of the integrating global financial market has been dominated by the economic interests that benefit from the rules that caused this latest disaster. In a sense, the politics of the global market reflect a one-party system. I call it The Party of Davos. It is composed principally of the multinational financial corporations – and the politicians, professionals, academics and others who rationalize, defend and promote their interests.

Today, Neoliberalism is discredited among the world’s people. But the Neoliberals -The Party of Davos – are still in control. They are of course weaker, and so must accept some marginal change. They understand, like the Prince in the great Italian novel, The Leopard: “If we want things to remain the same, we have to change.” As little as possible.

I am a supporter of Barack Obama. But I did not come all the way to Santiago to mislead you. So far, his administration has not been able to make the reforms necessary to reduce the size and influence of the financial class. The great moment of opportunity came this past winter when the bankers needed to be bailed out by the government. At that point, a government serious about change would have demanded that the banks agree to reform. But the US government – with the support of both George Bush in his last days as President and Barack Obama – provided rescue without reform. Today, their financial – and therefore political power – regained, the bankers and stockbrokers  are in full opposition to serious reform. Again, this is not just an American phenomenon; despite the rhetoric, there is not much real enthusiasm for a fairer, more efficient and safer financial system among the leaders of the other major economies.

But the story is not over. The conditions of the world economy have changed permanently. We are not going to return to the world as it was in economic, political or ideological terms.

In economic terms, the effects of the global recession will be felt by the majority of the world’s people for years to come. In the United States, many economists are predicting that the unemployment rate will not return to last year’s levels until 2014 or later. Many banks still have large amounts of “toxic assets” on their books. Thus, it will be a long time before investors regain the confidence they had in the future before last year’s crash.

Neither can the great imbalances in the world economy, which is characteristic of Neoliberalism, continue forever. As you know, the United States has been absorbing the world’s savings—the reversal of the economic logic that capital should flow from the more developed to the less developed countries. In part this is a result of the unique role of the dollar as the world’s reserve currency.

In fact, there were two credit bubbles. One, based on inflated prices of subprime mortgages in the US and a few other nations, has deflated. The other – based on the inflated price of the dollar – continues. But like the subprime mortgage bubble, it is not sustainable. As in the bursting of the first bubble, we can see it coming, but we are not prepared.

Clearly the world needs a substitute for, or addition to, the dollar as the foundation ofthe monetary system. But the transition is very difficult and has to be managed with care. There are few signs that the world’s leaders are moving in that direction. Unless they do, there will inevitably be a dollar crisis.

In ideological terms, the events of the last months have torn the mask from the face of Neoliberalism – the illusion that it represents a market free of state intervention. Neoliberalism’s central argument is that public regulation is unnecessary because the threat of failure provides sufficient discipline. This is also capitalism’s central justification for the lack of adequate protection fo
r workers and the poor. Indeed, it holds that the risks of failure are essential in order to promote efficiency.

But when the markets fell last October, the reaction of Neoliberal governments revealed that what applies to ordinary people does not apply to the rich and powerful. It is now clear to all that the question is not if the state should intervene in the market, but, in whose interests?  It will be not be easy to put the mask back on.

Still, the political problem remains. The Party of Davos is organized across borders to influence governments and their international institutions. Today, those who represent other interests are not.

That leaves us trapped in a Catch-22:

–To regulate the world market in order to assure social justice and development, we need global institutions.

–Global institutions will be dominated by private financial interests,

–Who oppose regulation in order to assure social justice and development.

In order to escape this trap we have to make the question of the international economic order part of our domestic politics.

I offer three observations on this great challenge.

First, we have to find a better language for the globalization debate. For example, as world markets for goods, services and capital become more integrated so to world markets for labor. But today, we talk as if the market for labor is still bounded by national borders. And so the conventional wisdom holds that while it is important to have international rules to protect capitalists, it is not important to protect workers.

In my country, we talk of competition with Mexico. But what we call the Mexican economy is dominated by Americans and Mexicans corporate investors who use that competition to maintain low wages in both labor markets. And what we call the American economy is dominated by corporations who no longer consider themselves American.

So it is a great mistake to think of this cross-border economic relationship simply as competition between the people of Mexico and the people of the United States. In the global marketplace the interests workers in Mexico and the US – and in Chile and the rest of the world —  have increasingly more in common with each other, and less in common with the managers of global corporations who share their nationality. That the people of our countries understand this point is essential for organizing a politics to support social justice in the global economy.

In addition to being a question of justice, it is a question of economic growth. If the workers of the world do not have sufficient buying power to buy the products that they make, economic growth will have to be sustained by consumers taking on more credit than they can pay back, which as we know is unsustainable.

Second, I cannot imagine that it is today possible to organize internationally an effective progressive movement for social justice in hugely complicated world of almost 7 billion people and more than 200 countries.

But I can imagine a political process that organizes regionally, step by step, around a series of models of regulation and development that have their roots in a politics closer and more accountable to ordinary citizens.

Europe, whatever its problems, is the region most advanced in this effort. But there are other regions also groping toward regional integration – South America, Southeast Asia, parts of Africa and the three nations of North America. I suggest that the task ahead is to infuse those efforts with a politics of social justice and market regulation.

This idea may appear utopian. But I believe it is less utopian that the idea that global Neoliberalism will reform itself. And there is some reason to believe that in this moment of truth about Neoliberalism, the people of the world may be ready to consider a wider vision of politics.

So, thirdly , I would like to end with a story that reflects the situation in which the people of the world find themselves:

A man is climbing a steep mountain. When he is almost to the top, he loses his balance and falls.

As he is falling, he catches on to a branch, and hangs there.

He shouts to the top of the mountain: “Is there anyone there?”

The voice of Neoliberalism answers: “We are here.”

“Then, help me,” the man shouts.

“First, answer” the voice responds. “Do you believe in us?”

“Yes,” says the man. “I believe in you.”

“Then,” says the voice. “Let go of the branch.”

The man thinks for a moment, and shouts: “Is there anyone else up there?”

 It may just be possible that after this crisis, the world will soon ask: “Is there anyone else up there?”

Thank you.