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The Consequences of the Global Financial CrisisThe Rhetoric of Reform and Regulation$

Wyn Grant and Graham K. Wilson

Print publication date: 2012

Print ISBN-13: 9780199641987

Published to Oxford Scholarship Online: September 2012

DOI: 10.1093/acprof:oso/9780199641987.001.0001

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Introduction

Introduction

Chapter:
(p.1) 1 Introduction
Source:
The Consequences of the Global Financial Crisis
Author(s):

Graham K. Wilson

Wyn Grant

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780199641987.003.0001

Abstract and Keywords

In its early stages, the Global Financial Crisis (GFC) seemed to offer the prospect for a major shift in policy paradigms. One of the central issues in political science is when and under what conditions does policy change, when a punctuation occurs in the equilibrium that usually characterizes most policy areas. Long periods of relative stability are followed by very significant changes. At the onset of the GFC, it seemed reasonable to suppose that there would be widespread reconsideration of neoliberalism and some of the initial responses suggested this might be the case. However, social democratic parties of the center-left have been unable to develop a convincing response to the crisis. That reconsideration may have occurred in academic circles particularly among those always critical of it. It is the enduring strength of neoliberalism that is now impressive. The possibility of a second phase of the crisis triggered by sovereign debt is a very real one, but there is no sign of new thinking to respond to it.

Keywords:   Global Financial Crisis, paradigm shift, neoliberalism, social democracy, sovereign debt

The Global Financial Crisis (GFC) has been the most severe international economic crisis since the Great Depression. Bringing an era of increasing prosperity and growth to an abrupt halt, the GFC has resulted in a recession that has led to stubbornly high levels of unemployment in the United States and most European countries. The economic cost of the GFC is staggering. Ultimately, this translates into enormous human costs resulting from unemployment, homelessness, and the social ills that result. While there had been financial crises and scandals previously such as the savings and loan fiasco and Enron in the United States or the collapse of Barings in the United Kingdom, not since the Great Depression has there been a situation in which those supposedly in the best position to know (central bankers, Treasury officials, CEOs of financial institutions) thought that the entire international financial system might collapse. Previous financial disasters had largely been limited to particular firms or sectors of the financial industry such as savings and loans in the United States in the 1980s or the (then much smaller) secondary banking sector in the United Kingdom in the 1970s. The GFC was a much broader and more dangerous crisis; it popularized the phrase “systemic risk” to acknowledge the potential impact of the collapse of some firms on the entire economic system.

This book explores the consequences of the GFC that began in 2008 and whose effects are still being felt. It does not seek to explain the origins of the crisis although several of the contributions have implicit or explicit explanations embedded in them. Instead, we seek to examine the impact of the GFC on nation-states and their policies and international financial arrangements. The impact of the GFC can be studied from a variety of perspectives. Economists could assess the impact in terms of lost employment, production, and in terms of the differential hardships, while sociologists could explore the extent and distribution of the hardships that individuals have suffered in consequence. (p.2) Our focus as political scientists is primarily on the policy and political consequences of the GFC. We ask how governments responded to the challenge and what the political consequences of the combination of the GFC itself and policy responses to it have been.

The GFC, as noted at outset, has been a sufficiently important event to merit attention in its own right. However, the policy reactions to it and their political consequences also have important theoretical implications. The GFC inflicted a shock on almost all of the major economies of the world. Of course, the shock was not equal in magnitude or nature in every country. Countries such as the United States and the United Kingdom in which the financial sector is a particularly large sector of the total economy faced a very different challenge from those in which finance is less central to the economy as a whole. In the extreme case of Iceland, the financial sector dwarfed the national economy and its failure was potentially catastrophic. Nonetheless, the GFC was of such magnitude that the emerging countries such as China as well as mature economies such as the United States experienced a common shock. In contrast, political scientists building on the pioneering work of Shonfield now half-a-century old have analyzed and categorized the important differences that exist between advanced economies. Political scientists have distinguished neocorporatist countries with high degrees of organized collaboration between business, labor, and government from more pluralist systems. Others have emphasized the distinctive leadership role of the state in countries such as Japan, South Korea, France, and China and have contrasted this with the less directive role of the state in the United States and the United Kingdom.

The perspective on differences between capitalist systems that has had the most impact in recent decades has been the Varieties of Capitalism (VoC) school that distinguished between liberal market economies in which economic coordination is achieved through market forces and coordinated market systems in which organizational linkages between employers and governments are also crucial. The VoC perspective has been heavily criticized, for example, by Schmidt who argues that it compresses into too few categories the varied capitalist systems. However, it has been very influential and whatever its failings states clearly an argument that there are major differences in the ways that capitalist systems are organized and therefore how they will behave. The VoC school would therefore predict that we would see substantial and systematic differences in how countries experienced and responded to the GFC. One of the motivations for this book was to explore whether or not these expectations have been borne out. At least in the early stages of the GFC, some countries behaved in ways that much of the political science literature would not have predicted; the nationalization by the US government of the insurance giant AIG and the largest American automobile manufacturer, General Motors, is a case in point.

(p.3) Against this backdrop, in its early stages the GFC seemed to offer the prospect for a major shift in policy paradigms. One of the central issues in political science is when and under what conditions does policy change, when a punctuation occurs in the equilibrium that usually characterizes most policy areas. Long periods of relative stability are followed by very significant changes (Baumgartner and Jones, 1993; Hall, 1993). Using different research approaches, a common conclusion of these scholars is that the discrediting of an established approach, a conspicuous failure to deal with pressing problems, clears the way for major changes in policy approaches and dominant paradigms.

Economic crises have provided examples of such changes. Most famously, the Great Depression created the setting for the development of Keynesian economics and the spread of the welfare state. The Keynesian welfare state (KWS) dominated policy discourse for three decades. At the heart of the KWS was a pledge to secure full employment, but this in turn made possible the provision of a range of welfare benefits which would have been too expensive to sustain in the absence of high levels of employment. Governments were expected to manage the economy achieving steady growth and low unemployment through adroit use of fiscal policy to boost demand when recession threatened and reducing demand when inflation was a danger. Simultaneously, citizens were to be protected by a social safety net reducing the costs to them of illness, old age, and unemployment. Countries developed more or less complete and generous versions of the KWS but there was little doubt that it was the prevailing international standard from which deviations (the United States, Japan) would need to be explained and to some extent justified. The United States was viewed as a laggard that would one day catch up with the other advanced democracies completing untidily and incrementally its own version of the KWS. Trends in both economic and social policy supported expectations of convergence on the KWS model. Although resisted by some conservative politicians, Keynesianism became dominant in the United States. Almost all major economics departments in the United States taught Keynesian macroeconomics by the 1960s and the dominant textbook (Samuelson) certainly took a Keynesian approach. In political terms, however, “Opposition to Keynesianism in the United States stemmed not only from its identification from planning but also from the fear that Keynesianism would lead to extensions of the welfare state” (Weir, 1989: 77). The distinction between “freshwater” (Chicago) and “saltwater” (east and west coast ones) economists identified by Waldmann (Waldmann 2011) remained significant in the United States and provided the basis for an intellectual counterattack against the prescriptions of Keynes (Skidelsky, 2009). Nevertheless, in 1970, the Republican President Nixon said, “I am now a Keynesian in economics.” Similarly, the US welfare state, incomplete and dependent on private though government subsidized provision of benefits such as health insurance, could (p.4) be thought of as gradually catching up with the KWS paradigm. The creation of Medicare and Medicaid in the 1960s was (wrongly) thought by many to lead inexorably to universal health insurance. Thus, even countries such as the United States, most resistant to the KWS model, seemed to be converging on it. What was distinctive about the US case was that public expenditure expanded to levels that in some respects resembled a European model but that revenue raising lagged behind, creating a chronic budget deficit.

The crisis of “stagflation” and governance in the 1970s also resulted in major change in policy thinking and the emergence of a different, internationally dominant policy paradigm. Whether Keynesianism failed in some objectively verifiable manner may be questioned. However, the combination of inflation and economic stagnation made it seem as though it had failed. Keynesianism was accused of being not only unable to supply answers to stagflation but also of being one of its causes. Keynesian economic policies in practice, even if not in theory, tended to produce ever-increasing inflation as politicians were willing to stimulate demand by raising taxes or expenditures but not to raise taxes or cut expenditures in good times.

The school of thought with the readiest answers to the problems of the 1970s was the monetarists, most notably Milton Friedman. Their prescription of switching to monetary policy also conveniently addressed another prominent concern of the 1970s, the governance crisis sometime referred to as overload. Governments, it was said, were expected to do more and more but in practice were able to do less (Brittan 1975; King 1975). Switching to monetarism eased the governance crisis by placing economic policy in the hands of unelected, often autonomous central bankers rather than in the hands of elected politicians. Part of the intellectual background to this was the rules versus discretion debate in economics with the premise being that it was better to leave decision-making to technocrats guided by supposedly impartial rules rather than allow politicians to make discretionary decisions based on short-term political calculations. The counterpart of this in political science was the debate on depoliticization, which, although advanced as an analytical concept, led to different normative conclusions from those implied by economic analysis (Hay, 2007). Attempts to operate KWSs at high levels of employment without inflation had incurred high political costs. In particular, these efforts frequently resulted in attempts to control wage increases, which in turn meant KWS governments were frequently dependent on a significant measure of partnership with trade unions, a phenomenon often referred to as neo-corporatism. These efforts worked well for a while in smaller European countries such as Austria and Sweden and even for a while in the then West Germany under the banner of “concerted action.” However, at times, as in the United Kingdom in the 1970s, it seemed as though this partnership made trade union leaders people of enormous power in governance. Monetarism (p.5) ended this dependence; the consent of union leaders was not necessary to changes in the money supply or interest rates.

The triumph of the monetarists encouraged skeptical analysis of many of the key policies of the KWS. Welfare policies (like all government policies) had unintended and unwelcome consequences such as dependence and extended unemployment. Well-intentioned government policies intended to produce benefits such as a better environment often resulted in costly, intrusive, and ineffective regulations. Government-owned enterprises and industrial policies tended to reward the politically influential rather than producing economically efficient outcomes. These shifts in policy thinking were also accompanied by apparent shifts in the attitudes of ordinary citizens. Voters in a variety of countries, Denmark as well as the United Kingdom and the United States, for example, were attracted to anti-tax politicians. Arguably a variety of factors such as class decomposition, globalization, and increasing racial diversity were weakening social solidarity and therefore voters “willingness to pay for a generous welfare state.” Politicians notably Margaret Thatcher and Ronald Reagan developed packages of policies that capitalized on this shift in attitudes and embodied much of the critical thinking about KWS policies. While their policies were never as coherent as academic theorists might suggest, politicians such as Reagan and Thatcher pushed public policy away from the KWS paradigm. Keynesianism itself was abandoned along with a commitment to maintain full employment. Governments around the world comprising different political parties, Labour/Social Democratic as well as Conservative, moved toward a new paradigm, this one based on policies of lower taxes, central bank autonomy, privatization, reductions in welfare benefits, and deregulation. Markets were wiser than governments, less prone to inefficient misallocation of resources, and, in the efficient markets theory, believed to be self-correcting and stable.

Subsequently, this policy approach was codified and extended into packages that commanded support from social democratic governments as well as conservatives, from international bodies such as the IMF and World Bank as well as political parties. These packages included deregulation, lower tax rates, and reliance on monetary economics, privatization, and welfare reform. Policies known as the Washington consensus or the neoliberal paradigm were propagated by international organizations such as the OECD, IMF, and World Bank, and were required for countries seeking loans and encouraged as best practice for others. The policy packages had important political consequences. They provided conservative politicians such as Reagan and Thatcher with the means to make appeals to the aspiring, skilled working class. They reduced the power of labor unions whose collaboration had been ever more necessary to operate the KWS at full employment. They changed the thinking of the center-left as well as the right. And these policies were (p.6) internationally dominant when the GFC hit. As Morgan notes in his chapter, the degree of profitability of the financial sector in the years between 2002 and 2007 created a coalition of insiders to the industry, supporters of free markets inside the economics profession and the regulatory bodies, and governments content with the tax taken from these rich institutions and individuals.

The dominance of the neoliberal, Washington consensus policies at the onset of the GFC was not, in the view of many, mere coincidence but rather the GFC was a result of them. Inadequate regulation, fostered by the neoliberal critique, left financial institutions free to engage in risky practices with high systemic risks. The Washington consensus had promoted measures such as the abolition of capital controls that now allowed the financial crisis to spread around the world. In brief, the plausible explanations of the GFC as a consequence of the neoliberal approach to policy seemed to discredit that approach at least as thoroughly as the stagflation of the 1970s had apparently discredited Keynesianism. The consequent recession and associated hardships would surely drive the lesson home forcefully. We could also anticipate that just as the neoliberal policies were associated with changes in political coalitions, so the anticipated demise of neoliberalism would also result in political change. The strategies used by politicians promoting neoliberalism (Reagan, Thatcher) or coming to terms with its dominance (Clinton, Blair) would surely need revision.

We therefore expected to find that the GFC had resulted in major changes in policy thinking and political strategy. The immediate responses to the crisis encouraged this expectation. In 2008, suddenly everyone was a Keynesian; increased government expenditure and tax cuts to boost demand were back in favor; and the monetarist argument that governments should confine themselves to providing a steady, stable increase in the money supply consistent with long-term growth was abandoned. The faith in markets that had been so strong in preceding decades now seemed naïve. Those countries that had been more resistant to the policy fashions of monetarism and neoliberalism (notably Germany) seemed to be better placed than those, such as the United Kingdom, which had embraced them. Astonishingly, the United States acquired a substantial government-owned share of the economy as its leading automobile manufacturer (General Motors) and one of its largest insurance companies (AIG) were nationalized.

However, initial reactions to the GFC may have proved temporary. Countries such as the United States and the United Kingdom developed complicated measures to reform the financial sector but none of the proposals involved major changes, although the proposals of the Vickers Commission in the United Kingdom to “ring fence” retail and investment banking, although seen insufficiently radical by some, caused the banks discomfort. Dramatic proposals to break up banks that had been “too big to fail” or to return to the (p.7) post-New Deal separation of ownership of investment banking from ownership of retail banking quietly disappeared off the political agenda. The recently unpopular banks regained political strength particularly in the United States, winning votes in Congress and encouraging President Obama to sue for peace with a sector his reforms and rhetoric had offended. Neoliberalism also recovered its dominance. The extension of government ownership that resulted from the GFC was seen as an unfortunate, anomalous development that should be ended quickly rather than as a means through which governments could exert economic leadership or pursue other policy goals. There was, however, a call both within the press and academic literature for a return to industrial policy (Bianchi and Labory, 2011; Wighton, 2011), even though it had not been conspicuously successful in the past. Within three years of the onset of the GFC, politics in the United Kingdom and the United States was focused on cutting budget deficits largely through expenditure cuts even in the face of stubbornly high unemployment. British efforts won the support of international bodies such as the IMF, which, in partnership with the European Union (EU), sought to impose budget austerity on countries such as Greece and Portugal facing fiscal crises. As Wilson notes in the chapter on the United States, someone losing contact with events in January 2009 and regaining it in 2011 would have been astonished by the disappearance of critiques of markets, corporate behavior, and weak regulation, and the return of a discourse based on the premise that cutbacks in government spending and power were essential. As Schmidt notes, even in those countries such as France with a strong statist tradition, early moves to return to a more dirigiste approach soon petered out, partly because of the firm opposition of the Competition Directorate of the EU to any measures that discriminated in favor of a nation’s own firms or, by extension, workers. Thus, moves to concentrate cutbacks in employment in French-owned car companies in their plants in Eastern Europe were soon squashed by the EU. In contrast to events in the 1930s, the liberal global trading system was dented by developments particularly in China but not broken.

The debate about regulatory innovation in relation to financial services has often tended to focus on improving the resilience of individual banks or other financial intermediaries to shocks rather than concentrating on the stability of the financial system as a whole. Prior to the financial crisis, the new arrangements created in the United Kingdom after 1997 in terms of a tripartite system involving the Treasury, the Bank of England, and the Financial Services Authority failed to identify systemic risks to the financial system because each body was focusing on its particular tasks and the Standing Committee supposed to coordinate their work was insufficiently high powered. In the UK case, a new Financial Policy Committee has been created within the Bank of England which has been given lead responsibility on financial stability.

(p.8) These new UK arrangements are not without their critics, but of far greater significance are attempts to coordinate an international response to the regulation, supervision, and risk management of the banking sector through the Basel III process which is intended to improve the banking sector’s ability to absorb shocks arising from financial and economic stress, whatever the source. The Basel Committee was originally established by the central bank governors of the Group of Ten countries in 1974. Its role developed, first through the provision of a capital adequacy framework and since the GFC through more assertive attempts to promote sound supervisory standards worldwide.

Under the Basel III rules, all banks are expected to raise their minimum core capital to 7 percent of their assets by 2019, although some would argue that is too low. In June 2011, it was agreed to make the most important global banks, the so-called systematically important financial institutions (SIFIs) hold an additional 1–2.5 percent of equity. As with any set of financial regulations, there is a concern about the distortion of competition, both between different institutions and competing countries. For example, designation as a SIFI could in effect create a list of institutions that are certified as too important to fail and hence might be able to borrow more cheaply.

Whatever the defects of the regulations themselves, the real problem is one of implementation. As the Basel Committee itself freely admits, “The Committee does not possess any formal supranational supervisory authority…it formulates broad supervisory standards and guidelines and recommends statements of best practice in the expectation that individual authorities will take steps to implement them through detailed arrangements…which are best suited to their own national systems” (http://www.bis.org/bcbs/history.htm, accessed July 13, 2011). But the very phrase “best suited to their own national systems” opens the door to lobbying to affect the way in which the regulations are applied within a particular entity. For example, an EU draft document leaked in May 2011 envisaged that EU banks would be able to count more of the capital in their insurance subsidiaries than the global rules call for (Masters and Tait, 2011). Several banks, particularly in Asia but also in Europe, should be left off the list of SIFIs.

Paradoxically, if one tightens rules on conventional banks, one could increase the displacement of the shadow banking system which is more difficult to regulate and arguably inherently more likely to be a source of difficulties given its association with “capitalism without capital” (Brown, 2010: 83). These shadow banks take a variety of forms but all are “defined by the fact that, unlike formal banks, they had no access to central-bank liquidity or public-sector credit guarantees, but had built up huge liabilities” (Brown, 2010: 85). This in turn created a race to the bottom so that “In order to compete, practices and instruments that had grown up in shadow banking were…copied and used almost as extensively by the formal banking system” (p.9) (Brown, 2010: 86). The tighter the regulatory screw is turned on conventional banks, the greater the risk that less controllable instruments will flourish.

Derivatives originally had a useful risk protection function. Over time, they became “little more than the vehicles for speculative activity. Instead of being the hedge against risk, they became the risk” (Brown, 2010: 85). The Dodd–Frank legislation in the United States attempts to tackle these nontransparent concentrations of risk by using clearing houses with higher capital and margin requirements for contracts that have not been cleared. The EU is moving in the same direction, but more slowly and with lower margin and capital requirements, leading to a fear in the United States that derivatives business will shift to leading European banks.

Credit rating agencies attracted considerable criticism during the financial crisis for their entanglement with the entities they rated and for getting their structured credit scores completely wrong. As Sinclair notes in his chapter, little has been done to change the regulation of the credit rating agencies despite their identification as suitable culprits. As the crisis entered a potential second phase in the summer of 2011, the agencies again attracted political criticism. At the beginning of July, Moody’s downgraded Portugal’s rating to junk, leading the president of the European Commission José Manuel Barroso to talk about bias. A complex French plan to roll over as much as €30 billion of Greek debt was torpedoed when Standard & Poor’s said it would probably declare Greece to be in selective default if the plan was to be implemented, arguing in effect that “if it looks like a default, we’ll call it a default.” The credit rating agencies were still calling the shots ahead of coalitions of bankers, nation-states, and the EU.

Both a conclusion and a puzzle is why the GFC did not result in significant change in policy and policy thinking. “We are All Socialists Now” proclaimed the cover of the American magazine Time in January 2009. How do we explain the fact that two years later the question was more whether long-standing, popular policies of government intervention such as Social Security and Medicare in the United States would survive or not? The contributions to this book are therefore more often concerned with trying to explain why change did not occur as much as explaining what did. Martin’s chapter in this volume suggests that stability also characterizes the Scandinavian countries which have been able to retain and adapt their distinctive political economies to challenging circumstances. Some might argue that these countries have used arrangements that once fostered welfare state development and power of unions to pursue greater competiveness and adaptation to globalization. A similar argument has been made about Germany’s use of its structured wage-bargaining process to achieve low unit labor costs and strong economic recovery. A question our contributors address is therefore whether these countries are to (p.10) be seen as pursuing different goals or similar goals as are countries such as the United Kingdom through different means.

One of the issues that needs consideration is why parties of the center-left have not benefitted more from the crisis. First, it should not surprise us that parties of the populist right (or factions within parties such as the Tea Party in the United States) should benefit from a recession. It happened in the 1930s because such parties are able to offer a comprehensive and compelling if dangerously flawed account to those who see themselves as victims. Within Europe, there has been an upsurge of support for existing or new parties of the populist right, even in those Nordic countries that are seen as redoubts of social democracy. Take the case of the True Finns party which enjoyed a surge of support in the 2011 general election in Finland. There have been losers in Finland from processes of globalization and Europeanization, for example, those working in the forest products industry in smaller towns where there is little alternative employment and such a party can appeal to them. More generally, such parties can appeal to fears that inward migration drives down wages or deprives indigenous workers of jobs, as well as making use of other concerns about changes in culture or supposed increases in crime.

However, even in countries like Denmark and the Netherlands where government depends on the tacit support of such populist right parties, they still attract a minority of voters. Center-right parties have, however, prospered in the recession. The CDU/CSU remains in government in Germany, albeit with FDP support, and the Conservatives entered government in Britain, although again in coalition with the Liberal Democrats. The Conservatives might have won outright if they had placed less emphasis on an austerity narrative (Clarke et al., 2011). As Gamble points out in his chapter, public spending in the United Kingdom will actually increase in real terms over the life of the Parliament to 2015. Even though its share of GDP will fall, it would only be back to the same level as 2007. Of course, one change is that more of that money is being spent on the private provision of public services.

What is noticeable, however, is that the traditional social democratic parties have not been able to develop a convincing response to the crisis. As a result, some of their supporters have defected to parties perceived to be more radical, such as the Greens in Germany. The challenge for the social democratic parties is that their usual policy mix consists of more public expenditure and more regulation and this is generally agreed even by those parties themselves not to be a viable approach. Indeed, the Labour Party in Britain, while accepting that reductions in public expenditure need to occur, has merely argued that they should occur more slowly and less extensively than the Coalition Government has proposed. As far as more regulation is concerned, business interests have called for less regulation to allow the market economy to respond to the crisis. There is a widely held view that more effective regulation (p.11) of the financial system is needed, but as several of our chapters demonstrate, this may not be achieved in practice and needs to occur to a large extent at an international level which is beyond the immediate reach of national social democratic parties. Social democracy thus lacks an alternative convincing narrative to the neoliberal one. The “Blue Labour” narrative advanced by Lord Glasman and Jon Cruddas, the MP for Dagenham, effectively urges a return to the past and a reliance on a shrinking blue-collar electoral base, albeit with a greater emphasis on protection for communities against economic forces and mutual forms of economic organization which may have their merits but are not an answer to the immediate imperatives of the economic crisis.

The dilemma for critics of neoliberalism is that “the Anglo-liberal growth model is broken and we lack a perceived alternative” (Hay, 2011: 3). As Morgan notes in his chapter, in spite of the massive delegitimation which has taken place as a result of the crisis, private actors still have been able to limit the degree of legal and regulatory constraint to which they have been subject. In the past, analysts such as Gamble have suggested that the further integration of the EU might offer a way forward and others have suggested that such regional forms of governance might be replicated elsewhere in the world through the development of, for example, ASEAN or Mercosur. However, the response of the EU to the initial crisis was not speedy or impressive and the eurozone is under increasing threat. Given that a fiscal government cannot be constructed in the limited time available, the outcome may be a much smaller eurozone. Indeed, there were those in Germany who originally wanted such a narrower zone without the “Club Med” countries. Nevertheless, the return of competitive devaluation would undermine the single market which, although still imperfect, has been the single greatest economic policy achievement of the EU.

Both the origins and consequences of the GFC were indeed global. The triggering event for the crisis was the bankruptcy of Lehman Brothers and the refusal of the US authorities to rescue it—a bankruptcy heard around the world. AIG was destroyed by a unit within the American firm employing just over 300 people based in the City of London. A flood of Chinese money into the United States intended to hold down appreciation of the Chinese currency surely contributed to the easy credit that produced lax lending standards and ultimately the crash. Similarly, the consequences of the GFC have been global. In particular, though not directly caused by the GFC, the crisis has been seen as a defining moment in which economic and financial power shifted, primarily to Asia but also with gains for Brazil. The rise of China, a fascination with the BRIC (Brazil, Russia, India, and China) as a new power group in world affairs, contrasted with uneasy feelings of decline in Europe and the United States. Several chapters in this book address these issues with one devoted to China itself, and others (Grimes) assess the degree to which strong regional (p.12) institutions have arisen in Asia that can provide alternatives to the traditionally Western-dominated IMF and World Bank. Perhaps one useful conclusion arising from these chapters is that we should be wary of unilinear projections of Asian economic success that suggest that Western decline is already here. We do not understand the nature of the Chinese political economy sufficiently well to be able to predict its limitations; we may be uncomfortably aware that we continued to describe and explain the inexorable rise of Japan right up to the stagnation of the Japanese economy starting in the 1990s.

Perhaps the most basic question looking forward that can be asked about the GFC is whether it might recur, triggered by a sovereign debt crisis in Southern Europe, even though the EU repeatedly took steps to shore up the Greek economy and avoid contagion in 2011. Our contributors are generally pessimists in this regard as is implicit in the emphasis on limited change following the GFC in chapters on individual countries. Wilson takes the view that American reform efforts, ostensibly among the most comprehensive, have amounted to little change. Morgan takes a similar view in reviewing the success of banks in avoiding a ban on over-the-counter trading. “What is remarkable is that all this has happened within three years of a massive financial crash, significantly attributable to trading in these instruments and secondly where banks are extremely unpopular. Nevertheless, they have been able rescue and retain some key parts of the business model which contributed to all this. In spite of all the contestation, law has been reshaped to only a minimal extent and the power of the financial institutions, despite its weakening in the aftermath of the crash, has been reasserted.” This is not to say that the GFC will recur; presumably even financial institutions have some capacity to learn from the past. However, the policy response to the GFC has been remarkably limited.

No doubt there are many reasons for this including fear of disadvantaging one’s own financial institutions compared with overseas competitors, the complexity of the issues, and the political power of financial institutions. Earlier we cited the literature on policy change as suggesting that the discrediting of an established paradigm creates the opportunity for change. However, the literature on policy change does not suggest that events discrediting the currently dominant policy paradigm are sufficient to cause change. In a famous formulation, John Kingdon (1984) linked major policy changes to the confluence of three developments—recognition of a problem, political circumstances, and the availability of new policy ideas. It is perhaps the last of these—new policy ideas—that has been conspicuously absent. Writing on the United Kingdom, Gamble argues that the policy paradigm dominant before the GFC has shown extraordinary capacity to recover from it. “Neoliberalism however has showed much more resilience than some expected, and has crept back so that three years after the crash you could be forgiven for thinking that it had never been away.”

(p.13) It is tempting to suggest that the GFC drove countries back into their own traditional paradigms with the United Kingdom and the United States clinging to neoliberalism while countries with different traditions moved in opposite directions. Martin’s conclusion that “the Nordic high level of coordination, positive attitudes toward the state and solidaristic policies endure. Social democratic, continental and liberal countries seem to be learning rather different lessons from the crisis; thus while the new British government is moving to cut spending to the bone, the Scandinavians believe that Keynesian anti cyclical spending continues to be the appropriate course of action…model countries will continue to diverge into their chosen paths after the crisis in much the same way that they did before.” On the other hand, studies of the countries with strong statist traditions do not support this conclusion. Thus, Schmidt argues that “As for his dirigisme, Sarkozy was no de Gaulle, not even a pre-1983 Mitterand. Even though his denunciations of free-market capitalism were a U-turn in terms of discourse, they did result in sustained dirigiste policies. This is not because his discourse was mere rhetoric. It is because he was constrained in his policy initiative.…” Schmidt sees these constraints as being the “elimination of policy instruments of the past” used in dirigiste policies and the watchfulness of the EU for any policies that undermined the “level playing field” of the internal market. Clift, while emphasizing the continued ideational power of dirigisme, also concurs in the view that old style dirigisme is dead. “Gone are the days of the French state as dirigiste ‘gatekeeper’ of strategic finance pulling the strings and inducing big French industrial firms to do its bidding.” We are still unsure what the Chinese variant of capitalism is. As Breslin notes, “Identifying what the China model actually entails is a difficult exercise that generates conflicting conclusions” (this volume). It is therefore premature to ask whether the GFC forced China back into a traditional policy approach.

At the onset of the GFC, it seemed reasonable to suppose that there would be widespread reconsideration of neoliberalism. That reconsideration may have occurred in academic circles particularly among those always critical of it. It is the enduring strength of neoliberalism that is now impressive.

References

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