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Monday, March 09, 2009

"Seeds of its Own Destruction"

Martin Wolf looks at some of the ways the world may change in response to the crisis:

Seeds of its own destruction, by Martin Wolf , Commentary, Financial Times: ...In the west, the pro-market ideology of the past three decades was a reaction to the perceived failure of the mixed-economy, Keynesian model of the 1950s, 1960s and 1970s. The move to the market was associated with the election of Reagan ... in 1980 and the ascent to the British prime ministership of Margaret Thatcher the year before. ...

Today, with a huge global financial crisis and a synchronised slump in economic activity, the world is changing again. ... If the financial system has failed, what remains of confidence in markets? It is impossible at such a turning point to know where we are going. ... We are witnessing the deepest, broadest and most dangerous financial crisis since the 1930s. ...

Among the possible outcomes of this shock are: massive and prolonged fiscal deficits...; a prolonged world recession; a brutal adjustment of the global balance of payments; a collapse of the dollar; soaring inflation; and a resort to protectionism. The transformation will surely go deepest in the financial sector itself. ... After the crisis, we will surely “see finance less proud”, as Winston Churchill desired back in 1925. Markets will impose a brutal, if temporary, discipline. Regulation will also tighten. ...

No less likely are big changes in monetary policy. ... Yet a huge financial crisis, together with a deep global recession, if not something far worse, is going to have much wider effects than just these. ...

One transformation that can already be seen ... is a ... shift in attitudes towards inequality: vast rewards were acceptable in return for exceptional competence; as compensation for costly incompetence, they are intolerable. Marginal tax rates on the wealthier are on the way back up.

Yet another impact will be on the sense of insecurity. ... The search for security will strengthen political control over markets. A shift towards politics entails a shift towards the national, away from the global. ... protectionist intervention is likely...

The impact of the crisis will be particularly hard on emerging countries: the number of people in extreme poverty will rise, the size of the new middle class will fall and governments of some indebted emerging countries will surely default. ... Helping emerging economies through a crisis for which most have no responsibility whatsoever is a necessity.

The ability of the west in general and the US in particular to influence the course of events will also be damaged. The collapse of the western financial system, while China’s flourishes, marks a humiliating end to the “uni-polar moment”. As western policymakers struggle, their credibility lies broken. Who still trusts the teachers?

These changes will endanger the ability of the world not just to manage the global economy but also to cope with strategic challenges: fragile states, terrorism, climate change and the rise of new great powers. ...

On June 19 2007, I concluded an article on the “new capitalism” with the observation that it remained “untested”. The test has come: it failed. The era of financial liberalisation has ended. Yet, unlike in the 1930s, no credible alternative to the market economy exists and the habits of international co-operation are deep. ... The world of the past three decades has gone. Where we end up, after this financial tornado, is for us to seek to determine.

    Posted by on Monday, March 9, 2009 at 12:24 AM in Economics | Permalink  TrackBack (0)  Comments (14)


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