Ed Rooksby: The Global 'Credit Crunch' and the Media

With excellent timing, just as I'm being held up as an example of one of those awful anti-capitalists, here is a guest post from Ed Rooksby on the unsuitability of capitalism as an economic model. Thanks Ed!

When the prevailing judgement in the business pages of the national press is that things are likely only to get worse, you can be pretty sure that the economic climate is pretty bad. Those well schooled in the mystical absurdities of neo-classical economics and paid handsomely to further propagate that strange mixture of platitudinous banality, pseudo-science and otherworldly abstraction are not normally given to pessimism when it comes to the operation of the glorious global markets. If Evan Davis thinks we’re in trouble then we should be very worried indeed.

Over the next few months house prices are likely to slide and home repossessions are likely to soar (as an aside, the one positively good thing about all of this is that Sarah Beeny, Phil Spencer and Katie Allsopp are not likely to be on TV quite so bloody much in the near future). Given the importance of house price inflation to the overall health of the UK economy (as well as the availability of easy credit for consumer spending on things other than homes) the credit crunch is likely to spill over from the financial markets into the ‘real economy’ – we could be facing a significant slowdown in economic growth and a corresponding increase in unemployment.

We can expect, in the near future, to see a glut of TV programmes and newspaper articles purporting to explain the crisis in layman friendly terms and it’s interesting to wonder what view they’re likely to take. I’ve already seen one documentary special on the subject – ITV’s ‘Repossession Repossession Repossession’ (ho ho) presented by Jeff Randall. There’s a Channel 4 ‘Dispatches’ programme lined up for the near future. The Dispatches TV trailer and pre-viewing online synopsis appears to suggest that it’s those flashy, smirking City bankers who are to blame.

As far as I can make out, the argument seems to be that it’s avarice and short-termism on the part of City-boys and girls (and reluctance on the part of government to reign in their excesses) that has led to the financial crisis. Randall’s programme focused on financial ‘short-termism’ too, but, interestingly, seemed to lay much of the blame on ‘us’ – the general public (which is an increasingly old fashioned term for which the word ‘consumers’ is now usually substituted). The programme was accompanied by metaphorical images of faceless persons gorging themselves on food and drink at some riotous dinner party somewhere in West London (haven’t we all?) – images which the viewer was given to believe represented our collective financial (and, it was implied, our moral) irresponsibility over the past few years of easily available low-interest credit. As the final credits rolled most viewers, I imagine, felt suitably chastened after an hour of Randall’s finger-wagging displeasure. He was most disappointed with us.

I wouldn’t be surprised if most mainstream accounts of the crisis over the coming few months take a similar view – the Dispatches or Randall explanation (or some amalgamation of the two). Both of them are misleading and inadequate. Of course, I have no objection to TV programmes giving those awful creatures in the City a good kicking – but this won’t do for an explanatory account of the financial crisis and coming recession. There is something rather irritating about capitalist economists chastising bankers for ‘excessive greed’ – capitalism is, after all, founded on greed.

The promotion and rewarding of greed is essential for the running of a capitalist economy. Furthermore, we are given to believe that greed is an essential and central part of ‘human nature’ and that the economic harnessing of this human trait is the fundamental genius of capitalism. To focus on the ‘excessive greed’ of financiers is a simplistic, moralising response that effectively distracts attention from the deeper structural determinants of the crisis and, indeed, serves to head-off any critical examination of the logic of capitalism itself.

The stupid moralising of Randall’s explanation is much more obvious. This is not to say that there isn’t an element of truth in it – but to point at ‘consumers’ as a whole and to say with a patronising, but resigned sigh ‘Ahh well, it’s because we’re all weak and silly creatures and now we’ll all pay the price for our collective folly’ (we won’t all pay the same price of course - in previous downturns there was an enormous transfer of income and wealth to the rich) just won’t wash. Randall’s thesis might be interpreted as an appeal for a return to the Victorian capitalist ethic of frugality, spending within your means, self-denial and personal financial discipline. But those days, if they ever really existed, are long gone – and for a reason.

Here we come to the crux of the matter. The Western economies have, for 30 years or so, been reliant on a steady expansion of credit and debt – and for the past 15 or so years they have relied on the growth of private debt (i.e. personal borrowing rather than public, government deficits). One of the central thrusts of economic policy in the West (and particularly in the UK and the US) has been to encourage the individual consumer to borrow so that he or she can buy. This approach lay at the heart of Brown’s legendary (mythical) ‘prudence’. Randall’s attempt to pin the blame for the crisis on the profligacy of Joe Public is simply absurd.

Why have Western governments so energetically encouraged the expansion of personal debt over the past few years? The answer is that this policy provided a temporary means of warding-off some of the negative effects of long-running and deep-seated problems in the ‘real economy’. As Robert Brenner argues, “Economic performance in the United States, western Europe and Japan, by virtually every standard indicator – the growth of output, investment, employment and wages – has deteriorated, decade by decade, business cycle by business cycle, since 1973”.

This long slowdown in capital accumulation is rooted, Brenner goes on to point out, “in a major drop in profitability, caused primarily by a chronic tendency to overcapacity in the world manufacturing sector, going back to the late 1960s and early 1970s”. Governments have been forced to find methods of counteracting this slowdown – and what they settled on was expansion of consumer demand (first through the inflation of public deficits and later through the inflation of asset prices and the reduction of short term interest rates to encourage large-scale personal borrowing). This, however, has done nothing to improve the health of the underlying real economy – rates of profit (as opposed to profit levels) were not restored. The US and UK governments especially have been, as Brenner writes, literally papering over their economic problems with debt (a growth in the paper economy). Sooner or later the growing disparity between the financial sector and the real economy had to stop. Bubbles don’t keep getting bigger indefinitely.

This wider historical economic context was completely absent from Randall’s account. Its absence allowed him to present a simplistic morality tale about changing social attitudes in relation to debt – as if sometime in the last 15 years everyone simply decided en masse to become a profligate bastard for no good reason at all. I imagine that there won’t be much in the way of contextual information in the Dispatches programme either – City bankers just decided to become greedy, short-termist wankers (which they are) because they just felt like it and because they’re bad.

The trouble is, that pointing to this wider economic context raises awkward questions about the logic of capitalism itself – might it be, as socialists have always argued, that capitalism has an inherent tendency towards crisis and recession? It’s so much easier for the mainstream media to identify various scapegoats (whether bankers or silly Joe Public) than it is to bring themselves to acknowledge the structural, systemic roots of economic crisis – to acknowledge that the problem might just be capitalism itself.