Bill Totten's Weblog

Wednesday, April 16, 2008

This free-market farce ...

... proves the state is crucial

by Ulrich Beck

Guardian (April 10 2008)

The Play. Act one: Chernobyl. Act two: the threat of climate change. Act three: 9/11. Now the curtain is rising on Act four: Global Financial Crises. For a backdrop, see yesterday's headlines: IMF slashes world growth forecast; Credit crisis could cost $1 trillion. Dramatis personae are the Hardcore Neoliberals, who in the face of the danger have overnight converted from the market faith to the state faith. Now they're praying, begging, pleading for the mercy of the state interventions and multi-billion pound handouts of tax payers' money - the sort of thing they condemned for as long as the profits were pouring in. What a priceless convert's comedy is being performed on the world stage. If only it weren't tinged with the bitter taste of reality.

Here's John Lipsky, a senior official and economist of the International Monetary Fund and longstanding market fundamentalist, who in a dramatic appeal is suddenly urging the governments of the fund's member states to sign up to the antithesis of everything he has previously preached: prevent a world economic crash with massive rescue spending. When even John Lipsky is urging politicians to "think the unthinkable", the gravity of the crisis is plain.

The spectre of the "unthinkable", which is now being raised everywhere, is of course supposed to awaken memories of the world economic crises of the last century - and save the banks from disaster. Next Joseph Ackermann of Deutsche Bank appears and admits that he, too, no longer believes in the self-healing powers of the markets. Before you know it, there he is retracting his retraction and insisting that he has no doubts about the stability of the financial system. That sounds reassuring. Or does it? If the respected banker were being frank then he would have to concede two things. First, that the history of the present crisis is a history of market failure, and second, that perplexity, or indeed sheer ignorance, dominates on all sides.

The market has failed, because the incalculable risks of mortgages and other loans were deliberately concealed in the expectation that the distribution and concealment of the risks would minimise them. Now, however, it is evident that this minimisation strategy has turned into its opposite: a maximisation and dissemination strategy of incalculable risks. Suddenly the risk virus is everywhere, at least in anticipation. It's clear that things can't go on without the state's guiding hand. At the same time, it is unclear whether things will be any better with the injection of billions of pounds, euros or dollars of taxpayers' money.

Of course, economic risks and crises are as old as the markets themselves. And as the Great Crash of 1929 testifies, financial collapse can bring down political systems - for example the Weimar Republic in Germany. It is all the more surprising then, that since the 1970s the financial institutions of the Bretton-Woods system, established after the second world war, which were intended as global-political responses to global economic risks, have been systematically dismantled and replaced by a succession of ad hoc solutions. Thus we face a kind of paradox: while markets have never been more liberalised and global, the global institutions that monitor their activities have been forced to accept drastic reductions in power. This new, unlimited nature of markets means we cannot exclude the possibility of a world financial crisis on the scale of 1929.

Unlike environmental and technological risks, whose physical consequences initially become socially relevant "from outside", financial risks also directly affect a social structure. Hence financial risks can be more easily "individualised" and "nationalised", giving rise to major differences in perceptions of risks. In other words, even when there are catastrophic breakdowns, it is individuals, usually the weakest, who suffer, in their millions. Accordingly global financial risks - not least when it comes to the perception of causes - are attributed as national risks to individual countries or regions.

As the "Asian crisis", the "Russian crisis", the "Argentinean crisis" - and now the first signs of the "American crisis" - demonstrate, it is the middle classes who are worst hit. Waves of bankruptcies and job losses shake the respective regions. Yet almost invariably, western investors and commentators view the crises exclusively from the perspective of the threat posed to financial markets. Global financial risks, like global ecological crises, cannot be confined to the economic subsystem. They mutate into social upheavals triggering political threats and breakdowns. In the case of the Asian crisis, such a chain reaction destabilised states and simultaneously led to outbreaks of violence against minorities, who were cast as scapegoats.

What would have seemed inconceivable only a few years ago is now emerging as a real possibility; even advocates of a global free market now detect that, after the collapse of communism, only one opponent of the free market remains, namely the unbridled free market itself. The market has shrugged off any responsibility for democracy and society in the exclusive pursuit of short-term profit maximisation.

There are surprising parallels between the Chernobyl reactor disaster, the Asian financial crisis and the threat of the collapse of the international financial system today. The traditional methods of management and control are proving unreliable and ineffective in the face of global risks. The millions of unemployed and poor cannot be financially compensated; it makes no sense to insure against the consequences of global recession. At the same time the social and political explosive force of global market risks is becoming palpable. Governments are overthrown, civil wars become a threat. As the public begins to recognise the risks, the question of responsibility is increasingly raised. This dynamic leads to a reversal of neoliberal policy - not the economisation of politics, but the politicisation of the economy. Not even the most liberal national economy functions without macroeconomic coordinates. It's with a certain degree of bewilderment that one asks oneself: how could anyone in his right mind assume that the world economy is any different?

Ulrich Beck is professor of sociology at Munich’s Ludwig-Maximilian University and the London School of Economics, and author of Power in the Global Age (Polity, 2006).

The global financial system is in a fix. How did we get here, how bad could it get, and how can the worst be avoided? All week commentators are assessing the damage on Comment is free. Read more on the global financial plight here:

Bill Totten


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