A special EU-Digest report on the financial crisesA chance to change Capitalism - by **Will Hutton
"This is a crisis that has been 30 years in the making - a Gordian knot of libertarian free-market fundamentalism, unregulated globalism, the collapse of social and political forces committed to fairness, the explosive impact of financial innovations such as 'secularization', and sheer greed. In the United States this first manifested itself in Newt Gingrich's 'Contract with America', that gave free license to the anti-tax, anti-government, pro-deregulation instincts of an increasingly fervent Republican party. That wasn't all. The financial markets were exploiting the new freedoms to insist that governments did Republican things. The Bush presidency sealed the market fundamentalists' victory.
In the early Nineties came a breakthrough that would transform the financial landscape. Goldman Sachs took the concept hitherto used by mortgage companies of packaging up mortgage payments and selling them as a financial security and applied it to an Arizona trailer park. The site pledged its income to a new company, specially set up, which then issued securities - backed by Goldman. The market bought them. 'Secularization' took off: there are more than $8 trillion of securities backed by a weird and wonderful range of income streams. America, followed rapidly by Britain, did not have to worry that it did not save enough cash to support its borrowing ambitions; it could sell these securities to all bidders from all over the world - especially in Asia and to China's central bank - to finance ambitions to borrow. Each has contributed to the fiasco - and all now need to be unraveled if the economy is to have a sustained recovery.
What we are witnessing now is a system failure that requires a systemic response – the creation of a new system that sponsors a fairer, more productive capitalism in its place, while maintaining high flows of credit and debt. Banks issued bonds allowing huge takeovers. Hedge funds and private equity companies blossomed. Money flowed into residential housing. New York and London were in an unseemly race to regulate less. And if regulators raised an eyebrow they were told not to worry. The securitized bonds - this packaged income - could always be sold to raise cash; and on top of that banks took out insurance against the risk of default. Nor should regulators worry if banks directed the investment funds under their management to buy any unsold bonds which might look like a fraudulent conflict of interest; one day they would rise in value. So confident did bank directors become that they authorized their managers to run hidden portfolios of securitzsed assets offshore in secret tax havens; thus would profits be boosted at no risk. Bonuses also grew larger and larger, residential and property prices kept rising, fees from ever-bigger deals became juicier and juicier. And when there were setbacks, such as the dot.com bubble bursting, the then chairman of the Federal Reserve Alan Greenspan was on hand to flood the markets with cheap money. The free-market fundamentalists seemed to be right. Markets never did make mistakes, financial business kept booming, leverage became astronomical. The ever more extravagant school fees were easily paid and Britain's Home Counties - like New York and the Hamptons - became home to parties of astounding luxury and lifestyles of grotesque opulence. Gentlemanly capitalism became super-gentlemanly capitalism. The Financial Times' How to Spend it magazine is studded with dresses that cost up to euro 40.000. Private submarines, jets and yachts became the rage. Some hedge fund managers even considered themselves underpaid at euro 150 million for one year's work.
The left's critique of capitalism - that markets delivered instability, booms and busts, monopoly and gross inequity that paradoxically undermined the values of integrity and trust that bind markets together - was proven wrong. There should not even be a mixed economy between private and public sectors. The job was to enlarge the role of markets. There was no effective opposition. The left and organized labor collapsed as intellectual, social and political forces; there was no conviction that any alternative to this shareholder value-driven, financial, 'securitised' capitalism existed, or any political muscle to support it, even if there were. Mainstream culture moved away from public purpose and fairness; the new priorities were individual self-fulfilling, personal experience and loyalty to self. The past 20 years also saw an unparalleled boom in the money markets. As the free market blossomed, so too did cheap debt, huge bonuses and ostentatious wealth.
Now, as the world financial system lies on the brink of collapse, it is time to build a new one, based on fairness instead of naked greed, and with long-term commitment to building businesses and supporting investment. This is a terrifying moment; but it is also our generation's once- in-a-lifetime chance to change world capitalism.
**Will Hutton was the former editor-in-chief for The Observer in London and is currently the Chief Executive of The Work Foundation (formerly the Industrial Society). The analysis in his books is characterized by a support for the European Union and its potential, alongside a disdain for what he calls American conservatism. He is a governor of London School of Economics, a visiting professor at the University of Manchester Business School and Bristol University, a visiting fellow at Mansfield College Oxford, a trustee of the Scott Trust that owns the Guardian Media Group, rapporteur of the Kok Group and a member of the Design Council's Millennium Commission.[2] . Hutton's most recent book The Writing On The Wall' was released in the UK in January 2007. The book examines Western concerns and responses to the rise of China and the emerging global division of labor, and argues that the Chinese economy is running up against a set of increasingly unsustainable contradictions that could have a damaging universal fallout. On February 18, 2007, Hutton was a featured guest in BBC's “Have Your Say program” discussing the implications of China's growth.
Labels: Capitalism, EU, Europe, The US economic meltdown, World Economy
