“A crisis of finance capitalism”

Ben Chu

Vince Cable 001 150x150 A crisis of finance capitalismVery 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).

Perhaps I’m very sad, but I can’t help finding all this much more interesting than what Ed said to David and when and whether Gordon was brutal to Tony.

*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.

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  • Firozali A.Mulla

    In the American conservative mind, there is a link between debt and moral decadence.”

    Nailed it.  Too often the Left fail to make the connection between pocketbook issues such as budgets and money; as well as the role governments have in spending such money, and the cultural/social issues that create the necessity for such spending.

    To acknowledge that government largess is a prime symptom of social malaise is necessary in order to fix the problem.  Once the traditional family began to erode, many were forced to look upon the government as the new parental figure.In our case, the west’s issues stem from the medium/long term consequences on the secual revolution, and how it changed peoples lives and suddenly destroyed people sense of responsiblity and self-reliance. I thank you Firozali A.Mulla DBA

  • greggf

    That’s because it’s the system itself that’s at fault. Manipulation and an excess of Keynesian theory by socialists who cloak themselves as social democrats. 

  • plutotune

    What happened to real investment capital?

    ‘Sadly it seems to me that the causes of the financial crisis, as opposed to the deficit, are barely being discussed by mainstream politicians.’
    Quite right Mr. Chu.
    The problem is, nor is it being discussed in the mainstream media and certainly not in ‘mainstream homes,’ even of those who are interested in economics and politics.
    Why? Ignorance…. or a social delusion of the guilty.
    For example, perhaps the UK housing bubble reflects (reflected) deliberate market making manipulation. Didn’t we all suspect this, really…. and most of us complicit!
    Perhaps, not just top earners, but also a sizeable amount of the UK salaried suffer from the ‘loreal delusion.’
    Maybe house prices and non reflective remuneration (food prices etc, etc.) encompasses a hidden fiction every bit as dishonest as the over leveraged craziness which took place within investment banking/finance capital in New York and the Square Mile. 
    Economic power moving East? A dying American Empire? Crisis within Capitalism?

    Fringe media report of Hundreds of Trillions of Dollars of buried global debt. Libertarians are on the march. Rigged markets are now to be feared as much as big government. What is to be done.
    For those of us out here who believe in cooperation as well as competition, times are getting quite scary.

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