The death of capitalism? Both the right and the left are to blame
The great crash of 2008 witnessed banks on both sides of the Atlantic either collapsing or having to be bailed out by their respective governments. Now, in the summer of 2011 and nearly three years later we are still amidst the worst economic climate since the 1930’s in which the major economies of the Western world are struggling with their debt mountains. There are two political-economic ideologies responsible for causing this financial meltdown. Those on the left and far left are trying to use this economic storm to suggest capitalism has finally been proved wanting and the reforms of the 1980s have led us to disaster. However those on the right are using this as an opportunity to suggest that socialist government spending policies have crippled capitalism. It is a mix of both of these that has brought us to where we are now and the lessons we are witnessing right now are all too obvious.
It is now too obvious to see the flaws in the neoliberal economic system. People forgot about sound financial practice. By the start of the millenium, companies’ balance sheets featured heavily with debt. Businesses, people and governments all made the mistake of loading themselves up with debt, each having the same erroneous excuse: low interest rates would prevent too high a debt. Consequently, banks started to lend to anyone, confident they would get their money back and the interest they charged. The extent of this stupidity was when banks in the USA and Europe invested in the ‘sub prime mortgage’ market of the USA. Through one way or another bank balance sheets all got caught up in this, directly or indirectly. When interest rates started to go up not by a large amount but, remember they in effect doubled still. From around 2-3 percent at the start of the decade to 5 percent come 2007-08, those people with a ‘sub prime mortgage’ were struggling to pay it leading to substantial losses by the banks. On top of this, banks were lending money to other banks in other countries. Subsequently major banks in the West have been found to have toxic debts and leverages in countries who were weighing heavily in debt including Iceland, Ireland, Greece and Portugal. The system collapsed with all these toxic debts and rightfully so.
Deregulating credit markets in principle was good, making it easier to get credit. However, we have seen a large share – too large a share at that – of debt percolate throughout economies of the West. Was everyone stupid when they were lending money, and were people stupid when they thought they would take on so much debt? Debt is not good. A system that allows large amounts of debt to pile up on the assumption that one day it will be paid off is a system that is fragile and opposite to common financial sense of thrift not spending money you do not have. This process has taken neoliberalism to its limits. So on one side of the coin is that the new right is to blame.
But let’s move on to the flip side of that coin: what we have witnessed in the past few weeks, as opposed to the apocalyptic days of 2008, is a problem with government debt. Ireland, Portugal and Greece have already been forced to be bailed out. Italy and Spain are precariously placed to be next. In the USA, an 11th hour deal to prevent it from defaulting on its debt was reached. Here creeps in the problem with socialism. The new centre left parties throughout Europe came to power in the 1990s, claiming to have modernised. However, what we have seen is just an updated version of the ideology. In the UK, for example, the Labour government after 2001 decided to open the public purse and spend. There were massive increases in spending across the board. This created a debt in the UK before the Treasury had to bail out the banks. In Europe too, people in Greece were retiring before the age of 60! Governments in Italy, Spain, Greece, Ireland and Portugal all spent large amounts of money that they did not have. Now they are realising they cannot pay back their debt, forcing them to painfully readjust by making spending cuts and tax rises – in order to pay back millions thanks to generous government policies earlier in the decade.
That is the reason why we are hearing the news that we are hearing this summer. Governments have followed leftist spending policies throughout Europe for the past ten years, embarking on spending so much that their treasuries are now straining under the weight of the debt they have collected. So whilst the left may blame the bankers and the neo-liberal economic paradigm of capitalism for the mess the western economy is in, they must also remember they too are to blame. Gone is the left of public ownership of the commanding heights of the economy and the unions. What has emerged is a left that has sought to make the state bigger to create jobs, spend lavishly (and unnecessarily) on welfare and universal benefits, and preside over early retirement ages and generous public sector pensions. We cannot afford to spend lavishly as we no longer have the money, and the countries in Europe will spend years paying back the debt from the days of extravagant spending from left-of-centre governments.
Europe and the United States are looking at economic collapse through their own making. Socialist spending policies and the new rights preference for easy unregulated credit has resulted in huge government debt mountains, as well as household debt and corporate debt. As a result the two have combined to create the worst economic scenario in 80 years.
Article by Harry Gilham.
Edited by Marc Geddes.