In mid September the former Chairman of the US Federal Reserve, Alan Greenspan, told an American news network that the developing crisis was “by far” the first he had seen in his entire career. He went on to call it “probably [a] once-in a century type of event” (1).  This blunt statement of the severity of the crisis was all the more pronounced given that Greenspan himself, through his stewardship of the US Federal Reserve from 1987 to 2006, had been a key policy maker throughout the period when, most commentators agree, the crisis began to develop. The Nobel Prize winner and former chief economist of the World Trade Organization (WTO) Joseph Stiglitz argues that “key regulators like Alan Greenspan didn’t really believe in regulation” and played a crucial role in calling for ’self-regulation’ rather than state-intervention to preserve the integrity of financial markets (2). It was assumed that any risks inherent in free-markets would be inevitably be outweighed by the wealth that would be created through freeing corporations from regulatory constraint. There was seen to be no need or right for the state to intervene in financial markets.

Even earlier on this year, as the Credit Crunch began to develop, Greenspan was still using his public role to make this case. He told the Financial Times earlier this year that he hoped “one of the causalities [of the current crisis] will not be reliance on counterparty surveillance, and more generally financial self-regulation, as the fundamental balance mechanism for global finance”(3). Once again it is demanded that financial markets be left alone and for financial institutions to police themselves. Yet all around us, evidence suggests the necessity of regulating financial markets mounts up, as corporate failure after corporate failure leaves those who were previously so vocal in decrying government intervention instead demanding that government’s bail them out. As the argument goes: these institutions are simply too big and too important to be allowed to fail, to let them do so would be a dereliction of the government’s duty towards all those who would be affected by the failure.

Certainly it’s true that the impact of these corporate failures would have serious social consequences given their size and the extent of their business dealings. Even so, bailing them out violates one of the basic principles of market economics: as an Economist article on the crisis put it “capitalism requires people to pay for their mistakes”(4) but not, of course, on this occasion. Since the fall of the USSR, political and economic elites have engaged in a theoretically specious triumphalism about the victory of global capitalism that has simply refused to accept that social considerations may justify market interventions. Yet throughout that time they’ve forcefully campaigned for government intervention when their own risk-adverse behaviour, with the American sub-prime mortgages scandal being the most recent of many examples, places their futures in jeopardy. Essentially, it’s being asked that the risks resulting from the anarchic financial markets that have developed over the past two decades be absorbed by the public while the (vast) profits resulting from them are rightfully private. The fact that these bailouts have largely been unconditional, allowing the corporations involved to simply resume business as usual,  has only compounded the problem.

Economics refers to it as ‘moral hazard’: the tendency of parties insulated from risk to act differently from how they would were they full exposed to it. Such moral hazards are endemic in the Anglo-American financial sector and, even with the mounting crisis around us, prominent opinion formers are still decrying the attempt to tackle them. As the MIT Economist Ricardo Caballero argues on his Financial Times blog, letting corporations fail “simultaneously hampers the private sector’s ability to solve the crisis and exacerbates the likelihood of further panics” because the ensuing conception of a climate unamenable to business leaves corporations unwilling to take risks (5). Yet given that it’s the non risk-adverse behaviour of corporations, particularly within the financial sector, that has led to the current crisis, the notion that private risk-taking is a long-term route to macroeconomic stability carries little weight. Rather than trying to prop up a failing system, we should be critically scrutinizing the assumptions that underlie the arrangement of Anglo-American capitalism over the last two decades. It’s impossible to ignore the immense growth of wealth within the UK and America over that time but it’s important to look at how that wealth is created and how it is distributed. With the decline in British industry, the growing financial services sector has come to be a crucially important sector of the British economy, currently representing 9.4% of UK GDP (6).

However much of this growth has come about as a result of an unparalleled program of financial deregulation instituted by the Thatcher government and known as the ‘big bang’ (7). The sudden freeing of finance capitalism from long-standing regulatory constraints is at the root of much of the irresponsible business practice that has led to the current crisis. Likewise, at the start of Margaret Thatcher’s government, the richest fifth of the population accounted for 43 per cent of all earned income, and the poorest fifth 2.4 per cent. In 1996, the last year of the Conservative government, the figures were 50 per cent and 2.6 per cent respectively. In 1996, the last year of the Conservative government, the figures were 50 per cent and 2.6 per cent respectively. As the Cambridge political scientist Noreena Hertz puts it, “the poor are getting a smaller slice of a much bigger pie”(8). Moreover, it’s getting more difficult for the disadvantaged to get a bigger slice of the pie. A recent LSE study found social mobility in Britain to be lower than all the western democracies other than the America. As the authors put it, “while the gap in opportunities between the rich and poor is similar in Britain and the US, in the US it is at least static, while in Britain it is getting wider”(9).

The last twenty years of Anglo-American capitalism has led to greater wealth but greater inequality and greater insecurity. Politicians and opinion-formers are reluctantly confronting the issue but new regulation has thus far been designed to smooth the current crisis rather than to confront the problems underlying it. Genuine national debate on these issues has for too long been obscured by fuzzy ideological fault lines of capitalism/socialism yet in a world of declining western power we have a new opportunity to reconsider the economic life of the nation. After all, the Great Depression led to the New Deal in America, as the massive social harm caused by excessive corporate power led to a profound reorientation of American economic life. Does the current crisis not present us with a similar opportunity?

1 http://money.ninemsn.com.au/article.aspx?id=631251
2 http://www.cnn.com/2008/POLITICS/09/17/stiglitz.crisis/
3 http://www.ft.com/cms/s/0/edbdbcf6-f360-11dc-b6bc-0000779fd2ac.html?nclick_check=1
4 http://www.economist.com/opinion/displayStory.cfm?Story_ID=12263158
5 http://blogs.ft.com/wolfforum/2008/07/moral-hazard-misconception/
6 http://www.bba.org.uk/bba/jsp/polopoly.jsp?d=145&a=12022
7 http://en.wikipedia.org/wiki/Big_Bang_(financial_markets)
8 Hertz, N (2002) The Silent Takeover p. 59
9http://www.lse.ac.uk/collections/pressAndInformationOffice/newsAndEvents/archives/2005/LSE_SuttonTrust_report.htm