“A crisis of finance capitalism”
Very interesting Vince Cable article in the Financial Times (subscription) on Saturday. The Business Secretary reiterates his support for the timing of the fiscal consolidation, but has this to say about the causes of the crisis:
“There are those who believe this is essentially a crisis of public finance; the state spends too much. Dealing with the deficit is undoubtedly a major, unavoidable responsibility. But it is also a consequence rather than the cause of the recent crisis. There was a deeper problem with the very structure of our economy that has manifested itself in our huge fiscal deficit. What we have is a crisis of finance capitalism rather than a crisis of social democracy.”
This is significant. The standard Conservative analysis – which is shared*, to some degree, by Blairities – of the causes of our present economic imbroglio is that Gordon Brown irresponsibly over-spent when he was in charge of the Treasury. This, so the argument goes, left Britain massively exposed when the recession came. And now the Coalition is clearing up Labour’s mess.
But Cable is making it clear in this article that, though he backs the Coalition’s deficit-reduction strategy, he does not buy the simple over-spending argument promoted by the likes of George Osborne.
The line about spending being “a consequence rather than the cause” of the deficit is the key. This signals an acceptance that Labour had no choice but to borrow like mad in the bust in order to stop the economy entering total meltdown.
What Labour got wrong, argues Cable, was the surrender of the economy to the dominance of finance:
“The economic model previously pursued was seriously flawed. It rested on a naïve belief in the capacity of the banking sector to drive economic growth and in property appreciation as wealth creation – financial alchemy instead of economic chemistry… Business investment stagnated, damaging our long-term productivity and leaving our basic infrastructure woefully deficient. Domestic imbalances led to substantial real exchange rate appreciation and the loss of a swath of manufacturing. Other countries had elements of this model but the UK was the most extreme manifestation.”
In the new paperback edition of his memoirs, Tony Blair apparently scoffs at the idea that the 2008 meltdown – and subsequent public finance emergency – was a crisis of the market. Well, Cable’s not scoffing at the idea: he’s embracing it.
There is a dividing line in British politics. It runs between those who believe that 2008 was a disaster brought about by under-regulated financial markets and those who think it revealed a disaster of excessive government spending. The line runs through parties as well as between them.
Two different analyses lead to two different conclusions. The market crisis school want finance tamed and state efforts to rebalance the economy. The state crisis adherents want government spending cut back and the mighty engine of finance to be fired up once more (with a bit of new regulation, but nothing too drastic).
*one can find some support for this analysis in David Miliband’s never-delivered leadership victory speech in which he indirectly blames Gordon Brown for forgetting about the business cycle.Tagged in: Gordon Brown, market, over-spending, tony blair, Vince Cable
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