Tuesday, December 20, 2011

What is the "What is to be done?"

robin blackburn


It is now clear that what began as the Great Credit Crunch of 2007 has developed into a contraction of wider scope and great tenacity, centred in the main oecd countries. Governments acted to avert collapse, but in doing so themselves became a target. Bail-out measures adopted during the early phase of the crisis between 2007–09 saw the us, uk and eurozone authorities increase public indebtedness by 20–40 per cent of gdp, with large current-account deficits. The transfer of debt from private to public hands was carried out in the name of averting systemic failure, but in some ways it aggravated the debt problem since bank failure, however disruptive, is actually less devastating than state failure. Before long, the bond markets were demanding plans to cut these deficits by slashing public spending and shrinking social protection. The centre left and the centre right were already persuaded that the welfare state was too expensive and bureaucratic, and needed to be downsized and handed over to private suppliers. Public services and institutions were leveraged by means of commercial debt, at the expense of future revenues and the intelligibility of the public accounts. Determined not to waste a good crisis, neoliberal policymakers and commentators seized on the disarray to further advance such schemes. Japan, the us and the uk are heavily waterlogged, but their control over their own currency allows them to print money and to devalue. Such expedients have been denied the eurozone states so far. However, the more fortunately placed countries are still highly vulnerable to euroland's miseries because they are invested in its assets and count on it as a trading partner.

The governments of the us and the eurozone do not face exactly the same problems but are seemingly paralysed, stumbling from one palliative to the next. The weaker eurozone countries have austerity imposed upon them while the stronger states proclaim the need to liquidate deficits even though a chorus of eminent economic analysts—from Martin Wolf to Paul Krugman, Wolfgang Münchau to Nouriel Roubini—insist that austerity will only hamper recovery. No case more fully bears out their warning than the uk, since its government has voluntarily used its margin of autonomy to commit to a thoroughly counter-productive retrenchment.

While governments and international organizations wrestle with the crisis, they seem to find it impossible to act on the scale such a momentous contraction requires. Public opinion has turned against the bankers but governments are still in thrall to bond markets that demand cuts in social protection and a further boost to the privatization and commodification of pensions, health and education. Social protection is being dismantled as employees, young and old, are thrown on the scrap heap. The jobless face misery, those still employed are 'nudged'—if not shoved—into the arms of expensive private suppliers. As more countries commit to austerity they help to aggravate the Great Recession, drive their citizens towards commercial suppliers, and strengthen the grip of a new regime of finance capital. But commodification and private finance are beset by inherent limits and obstacles. Private finance, no matter how skilfully leveraged, lacks the scale needed to overcome the contraction. Commercial suppliers of pensions and other social protection are plagued by insecurity, marketing costs and a logic that encourages them to discriminate against women and minorities. At an even more fundamental level, the web has weakened 'intellectual property' rights, sapped the commercial media and broken the music industry. The sequencing of the human genome and the deployment of nanotechnology have likewise resisted commodification. The colonization of cyberspace by capital—for example through Facebook's intimate commodification—is, as yet, on too small a scale to compensate for these blockages.

As the crisis deepens, constructive proposals for a genuine exit from it to the left will be ever more urgently needed. In what follows, I discuss some of the alternative policies that have been proposed within the existing system, and set out some more radical—transitional—perspectives for the longer term. Firstly, however, I will look in more detail at some of the 'rescue measures' applied so far and give an account of the multiplying woes of the Crisis 2.0 world, in which governments, households and financial concerns are all seeking to unwind their debts, or 'de-leverage'. The result has been stagnation, unemployment, the destruction of welfare and the installation of technocratic coalitions bereft of an electoral mandate. I argue that effective resistance strategies will need to address the underlying causes of the crisis—global over-capacity, deficient demand and anarchic credit creation. I urge a broad-based expansion of aggregate global demand based on higher wages in low-wage countries, debt relief in poor and richer countries, new schemes of social protection and a financial architecture geared to public utility.


The current travails of the oecd economies are a product of trends strongly promoted by neoliberalism and globalization—extreme inequality, poverty, financial deregulation, privatization and a pervasive commodification of the life course, via mortgages, credit-card debt, student fees and private pensions. Low wages in emerging economies, and growing indebtedness in the richer countries, created mounting trade imbalances. Together with the deregulation of financial markets, this generated a succession of asset bubbles. The investment banks and hedge funds further expanded credit through the creation of new types of derivative valued at 'model prices' and sold 'over the counter' to institutional investors, thus giving rise to an off-balance-sheet 'shadow banking system' which soon dwarfed the formal, regulated exchanges. The banks' heedless pursuit of short-term advantage led to the largest destruction of value in world history during the Crash of 2008. Government rescue measures were to offer unlimited liquidity to the financial sector, while leaving the system largely intact.

Rescuing Wall Street

October 2008 saw the apparent assertion of government discipline over America's nine largest banks. Their ceos were summoned to Washington by Hank Paulson, the Treasury Secretary, who informed them that they faced bankruptcy unless they accepted government recapitalization. In less than an hour, all had signed a letter Paulson had prepared, offering the Federal authorities equity stakes in their concerns in exchange for injections of new capital from the just-established $700bn 'Troubled Asset Relief Programme'. Goldman Sachs changed its legal status to a bank holding company in order to qualify for tarp funds. The government acquired a majority holding in Citibank, the largest bank on Wall Street. At the moment of greatest danger all the banks undertook to abide by certain rules. These measures followed a state takeover of aig, the world's biggest insurance company, and of Fannie Mae and Freddie Mac, the two largest mortgage brokers. For its part, the British government had been forced to rescue first Northern Rock, then Lloyds tsb group and the Royal Bank of Scotland. Barclays and hsbc did their utmost to avoid becoming entangled in rescue operations, but were nevertheless obliged to accept help from the us tarp.

At no point, however, did the Treasury use its position as owner and creditor to impose on the financial companies that it had saved lending policies that would benefit the broader economy. The Dodd–Frank Act, signed with great fanfare by Obama in July 2010, contained a ratio of law to loophole of 13:87, according to one analysis. [1] Strange to relate, both Wall Street and the City of London emerged essentially unscathed from legislators' attempts to rein them in; 'too big to fail' banks, outrageous bonuses, perverse incentives, slender capitalization, obscure accounting rules, off-balance-sheet items and special-purpose entities remained untouched. The rescued banks declined to resume normal lending to small and medium-sized businesses, ensuring a lingering 'credit crunch'. The Treasury and the Fed were unhappy but gave no marching orders. The banks, keenly aware of one another's problems—they were still sheltering huge unacknowledged losses—also shunned inter-bank lending. All had invested in a range of very dubious assets, not just sub-prime mortgage and other credit derivatives, but also vulnerable corporate and public bonds, not least those issued by weaker members of the eurozone.

Only the imminent prospect of the collapse of the us financial system—a 'near-death experience'—had allowed for such an extraordinary use of the public purse. Congress had been reluctant to endorse tarp—the Emergency Stabilization Act that established the programme was rejected when first voted on, in September 2008—and only did so when the legislation had been amended with warm words about the restraints that would apply to banks and the help that would be extended to families facing eviction. But as tarp's 'inspector general' Neil Barofsky himself observed in his balance sheet of the programme, little of the help filtered through to those threatened with foreclosure, whose problems were after all at the root of the sub-prime crisis:

Treasury provided the money to banks with no effective policy or effort to compel the extension of credit. There were no strings attached: no requirement or even incentive to increase lending to home buyers, and against our strong recommendation, not even a request that banks report how they used tarp funds . . . [In February 2009] the Home Affordable Modification Programme was announced with the promise to help up to four million families with mortgage modifications. That programme has been a colossal failure, with far fewer permanent modifications (540,000) than modifications that have failed and been cancelled (over 800,000) . . . As the programme flounders, foreclosures continue to mount, with 8 million to 13 million filings forecast over the programme's lifetime. [2]

If a large slice of tarp funds had gone to debt forgiveness for the low-paid, it might have stimulated consumption in an economy threatened by stagnation as well as lightening the load of bad debt. Instead, plus ça change, plus c'est la même chose best describes the remarkable resilience of the basic practices of the financial sector in the years 2008–11. Despite all the write-offs and bailouts, overall debt levels within the oecd (national debt, non-financial corporate debt, banking debt and household debt) remained stubbornly high, at three to five times gdp. [3] Transferring debt from banks to government did not solve the problem if the government failed to commit great chunks of gdp to a massive counter-cyclical programme and wide-ranging industrial policy.

The us fiscal stimulus, meanwhile, was proportionately on a much smaller scale than those undertaken in the uk, continental Europe and China. [4] The very tentative recovery of 2010 ran out of steam and a return to 'stagflation' loomed. us joblessness was officially tallied at 9 per cent of the workforce, but the number looking for work was 25 million—closer to one sixth. Most employees found the value of their savings slashed and, as noted above, millions were threatened with foreclosure as well as the prospect of poverty in old age. The British banks received a particularly generous bailout, being even more heavily compromised by toxic debt than Wall Street. Yet this generosity did not lead the large banks to attend to the modest credit needs of small and medium businesses. A study found that loan approvals had fallen from 90 per cent to 65 per cent, despite the fact that there were many fewer applications because of poor trading conditions. [5]

The modest effect of the stimulus packages made necessary massive 'quantitative easing', i.e., the printing of money to buy banking assets. The qe undertaken by the us and uk central banks served to boost financial-sector assets and profits but had only weak effects on overall demand and failed to ignite investment in the 'real' economy. The us Federal Reserve revealed in December 2010 that its qe programme had purchased bonds to the value of $3.3 trillion from us banks, using the newly minted money to pay and dramatically boosting bank liquidity. These institutions used this help to reduce their own indebtedness. They could then invest, at little or no risk, in public bonds or high-quality consumer debt. To get that $3.3 trillion into perspective, we might note that it is more than four times as large as the tarp, which was just the visible tip of the bank bail-out effort. [6] The soft money lent to the banks allowed them to borrow at bargain-basement rates—1 per cent or less—and then to place it in government bonds paying 4 or 5 per cent, or consumer credit paying 12 to 18 per cent. It is not surprising that the big banks once again reported huge profits and that bankers' bonuses ballooned. Before long, however, the financial authorities in Brazil and China were complaining that 'quantitative easing' in the us and Europe was exporting inflation and fostering new asset bubbles in real estate in the emerging economies.

Further down the line, these sums will be hacked back from core social programmes. In 2010 Obama appointed a bi-partisan commission to propose ways to reduce the public deficit. Some of its members suggested that Social Security benefits should be cut by raising the retirement age, weakening indexation and other measures. In July 2011 Obama offered a 'grand bargain' to the Republican Congressional leaders, whereby they would agree to lift the ceiling on official us debt in return for $4 trillion of savings, with the programme of government spending cuts to include Social Security. [7] While the Republicans refused this tempting concession, cuts to Social Security were no longer off-limits so far as the White House was concerned. The deal eventually reached in August 2011 committed Congress to cutting the federal budget by $2,400 billion over ten years, but entrusted the task of specifying these cuts to a super-committee that reported its inability to reach any conclusions in November. This was the signal for new horse-trading to commence. Social Security and Medicare, the health programme for older citizens, will be candidates for butchery. Though they will be reluctant to admit it, enough Democrats believe in 'saving' these programmes by cutting benefits to make a deal a possibility, despite the sharpness of factional cleavage.

Eurozone flaws

In Europe, meanwhile, banks that had also indulged in reckless lending were hit hard. Large-scale rescues were required in Iceland, Greece, Ireland and Portugal in 2009–10, with double doses and uncertain results. By 2011, Italy and Spain were next in line. Once again, banks had lent unwisely but expected to escape any of the negative consequences. The eurozone proved vulnerable, however, because the currency was not supported by a significant fiscal authority. The ecb was not established as a 'lender of last resort'. The Merkel government was unwilling to permit it to print trillions of euros in 'quantitative easing', as central banks in the us and uk had done; a stance reflecting some combination of historically rooted debt and inflation phobia, tough bargaining tactics and distrust of the banks. The bail-outs required elaborate negotiations between the various national financial authorities, each of which had special interests to defend, especially where their own banks faced a default or 'haircut'. The rescues imposed drastic austerity programmes on recipient governments, destroying pension entitlements and driving down living standards while sometimes allowing the banks to be paid in full. Attempts to expand the European Financial Stability Facility (efsf) in the summer of 2011 did not calm fears for long—despite pledges from national governments totalling €440bn, of which €211bn came from Germany—because it was both cumbersome and inadequate. [8] Each national government had to endorse the scheme and when it became clear in October that Greece would absorb most of the facility, leaving nothing for Italy with its €1.9 trillion of debt, the response was not to contribute more resources to the efsf but instead to resort to cdo-style financial engineering, such that its cash base would be used to insure loans totalling nearly a trillion euros.

From any point of view European financial institutions had been found wanting. Many of the eurozone's financial titans—notably Deutsche Bank and Société Générale—had taken part in the credit-derivatives orgy and have yet to admit their full exposure, whether to us credit derivatives or to eurozone bonds. The plethora of default swaps in the sovereign bond markets made it harder to tackle the return of the Greek debt problem in 2011.

As the crisis ground on, eurozone officials proposed in July 2011 that a new Greek bailout should be financed by a levy on the banks. Such a tax would not count as a 'credit event' or default, and would thus not trigger payouts from those holding Credit Default Swaps on Greek bonds. One report commented: 'The plan, which advocates believe could raise €30 billion over three years, could help satisfy German and Dutch demands that private holders of Greek bonds contribute to a new €115 billion bailout.' [9] (The 'private holders' being, of course, the banks.) However, resistance from the banks was sufficient to block the proposal, despite the seriousness of the situation and the modesty of the proposed levy. The banks accepted only a €17 billion write-down of their bond-holdings, which they regarded as preferable to a 0.025 per cent levy on their assets throughout the eurozone—seen as the thin end of a very undesirable wedge. The British government was prepared to allow a very modest bank levy (its banks are comparatively well capitalized), but exerted itself mightily to block a tiny Financial Transaction Tax favoured by the French and Germans as a gesture to public opinion (the City and the hedge funds see the ftt as a nasty threat).

The eurozone heads of government eventually concocted a plan in late October 2011 whereby the private holders of Greek debt would accept a 'voluntary' write-down of 50 per cent. This was a shock to institutional investors, insurance houses as well as pension funds, that had acquired euro-denominated bonds covered by cds insurance as a 'risk-free' asset, in conformity with their clients' mandate. While some were insured against a partial write-down, most were not. According to a Financial Times report, the terms of the write-down were deliberately chosen to avoid triggering compensation, infuriating investors who had been counting, in the event of a default, on receiving their cds insurance. The upshot was to cast doubt on the wider sovereign cds market:

It is unclear how far eurozone banks have used cds to hedge their exposures to eurozone debt. However, the published level of outstanding sovereign cds for Italy and France is more than $40bn, and the Bank for International Settlements recently suggested that us banks have now extended over $500bn worth of protection to eurozone counter-parties on Italian, French, Irish, Greek and Portuguese sovereign and corporate debt. [10]

Institutional investors need a proportion of 'risk-free' assets to balance their portfolios: could they now honestly rate Italian, Spanish or even French bonds as 'risk-free'? Many pointed out that only a proper 'lender of last resort' backed by a strong economy and tax system could supply the risk-free core which a financial system requires. [11] By the close of 2011, the German government seemed ready at last to back such an approach, but only at the dire cost of establishing a fiscal autocracy with an iron grip over the entire eurozone.

Pension woes

In the Crisis 2.0 maelstrom, pensioners are being hit from every side. In 2008, global retirement funds dropped by 20 per cent in one week. In the us, a recent survey found that 67 per cent of adults aged 45–54 had less than $50,000 of savings, sufficient to buy an annuity of just $300 a month; this was up from 55 per cent in 2007. [12] After more than half a century of lavishing tax incentives on private pension schemes—401(k)s, iras, occupational schemes and the like—it is still Social Security entitlement, averaging $1,100 a month, which saves nearly half the us elderly population from destitution. Even in the best of times, defined contribution (dc) schemes were eroded by the 'cost disease' of heavy marketing, admin and customization charges. (The Social Security Administration caters to over 150 million employees and 50 million beneficiaries, with a staff of 68,000—about the size of a single large investment bank.)

Meanwhile the defined benefits (db) pension funds experienced an extraordinary roller-coaster ride across the ups and downs of qe-induced stock-market run-ups and collapses, even before the sovereign bond crisis. By the end of September 2011 Mercer, a leading pension consultancy, estimated the deficit in private, corporate us db schemes at $512 billion, close to the level noted in early 2009, when stock markets were still reeling. For its part the uk's Pension Protection Fund (ppf) estimated the deficit in the corporate schemes it insured at £196 billion. An Economist report citing these figures also estimated that the deficit in us public schemes had grown by $1.3 trillion in the previous two years. The report also pointed out that qe was aggravating the problems faced by these funds, as any lowering of bond yields raises the accounting estimate of the cost of fulfilling future obligations to beneficiaries. [13]

In addition, the operational principles of db pension funding have an unfortunate 'pro-cyclical' impact: faced with a recession-induced deficit, the corporate sponsors of the fund are required to put more money into the scheme, so at a time of weak demand the corporations are being encouraged to save, not invest. This can only further depress demand. As share values once again tumbled from August 2011, some schemes grew so mired in deficits that they menaced the very existence of the sponsors, with further dire consequences for members and beneficiaries. The us Pension Benefit Guaranty Corporation (pbgc) and the ukppf monitor scheme performance and furnish insurance to the members of schemes whose corporate sponsors go bust. However, the insurance supplied usually amounts to about 70 per cent of what has been promised. In the us the leading corporations in a whole series of industries—airlines, steel, automobiles, auto components—have been taken through Chapter 11 bankruptcy protection, enabling corporate rescuers (otherwise known as 'vulture capitalists') like Wilbur Ross to shed pension liabilities, handing them to the pbgc. [14] The weak and worsening data on us savings and retirement prospects showed, once again, the hollowness of Washington's 'success' in tackling the crisis.

Meanwhile the shift by many governments from public pension schemes to mandatory private provision has proved a comprehensive disaster for the countries concerned. The rocky state of stock markets has meant that the promised accumulation targets have been missed by a mile. Up to the eve of the crisis, the imf and World Bank had aggressively promoted the commercialization of pension provision, as Mitchell Orenstein has shown in his Privatizing Pensions. [15] Between 1994 and 2008, thirty countries in Latin America and Eastern Europe were pressured to abandon their public pension systems and to replace them with personal pension funds managed by commercial finance houses. The international agencies resorted to shameless bullying, and to what Orenstein calls 'resource leverage'—countries in the midst of a difficult transition to democracy were denied all financial assistance unless they agreed to pension privatization. In addition funds were made available by the World Bank to carry through campaigns of public persuasion, while key individuals were offered inducements and attractive employment if they went along with the process.

In 2008 newly established pension funds in Poland lost 17 per cent of their value, in Bulgaria 26 per cent, in Slovakia 12 per cent and in Estonia, value fell by 32 per cent in one fund, 24 per cent in another and 8 per cent in another. [16] The financial crisis left governments short-changing both pensioners and employees, with the former receiving devalued pensions while the latter were left dismayed by the insecurity of their savings. Pension privatization had been costly for the states involved because of the 'transition problem'—somehow governments had to pay some sort of pension to all those who had been in the public system while making sure that contributions from today's employees were invested in the new pension funds. The only feasible way to do this was to float a loan, yet doing so ratcheted up public debt and Eurostat rules did not allow this to be offset by positive balances in private pension pots. While Brussels had failed to spot the danger in Greek bonds it was vigilant in insisting on full disclosure of the 'transition loans' required by pension privatization.

As successive waves of crisis suggested, the method of coordinating an economy by means of a stock exchange is plagued by instability and systemic risk. Finance of any sort must expect uncertain outcomes, but the 'free market' exacerbates what is an inevitable problem and allows banks to blackmail the political authorities. Mega-banks are known to be dangerous, yet Western governments continue to indulge them and shelter them from losses. Matters are even worse where financial entities are not only 'too big to fail' but also 'too big to save', as may be the case with several European banks. The financial industry lobbies still permeate government, fund the dominant political factions and sustain key 'think tanks'. Applying further doses of the very medicine that weakened the patient in the first place perpetuates its attendant problems.


Mainstream policy responses appear to be based on the assumption that recovery requires little more than deleveraging after a burst housing bubble and boosting growth after a business-cycle decline. But as I have suggested above, the current travails of the core economies are the result of deeper imbalances within the global system. Underlying the massive growth of the us financial sector over the past decades has been an epochal loss of American manufacturing competitiveness. In 1998 Robert Brenner argued in 'The Economics of Global Turbulence' that rising global over-capacity in manufacturing meant that oecd economies faced a major contraction. [17] Throughout the neoliberal era, Western governments did their utmost to restore profitability rates and sustain an illusion of unending growth. Loose credit conditions encouraged households, enterprises and local government institutions to take on large amounts of debt. us households resorted to credit—including nearly $1 trillion of 'home equity loans' (second mortgages). The fiat dollar system instituted after 1973 permitted a vastly expanded dose of credit creation. As the French economist Jacques Rueff once warned, the dollar regime creates an international balance of payments system that functions like a game of marbles in which, after each round, 'the winners return their marbles to the losers', as Washington's creditors invest the dollars they receive for goods sold to the us in dollar-denominated instruments in order to keep their own currencies competitive, while the us could simply print more dollars to pay its bills. [18] In successive decades the Germans, Japanese and Chinese learned this lesson. Its effect was to boost credit creation and mask the weakening of the us economy.

The epochal rise of China and other Asian producers after 1992 brought a huge increase in productive capacity and sent floods of dollars to swell the us financial-account surplus, but proportionately it added much less to global aggregate demand. The rise of the Asian producers could have been good news for everyone if their worker-consumers had been better paid. But wages were driven below their value in emerging and developing states, leaving a consequent shortfall in demand. Prabhat Patnaik has defined this as a classic 'realization crisis', on a global scale. [19] During the boom years of the late 1990s, China helped to maintain the gigantic credit expansion by investing its surplus in us Treasury bonds. [20] Deficiencies in demand resulting from stagnating wages in the West, and far lower pay in the East, could be held off for a time by finding new ways to increase us household debt, via easier mortgages, credit-card facilities and automobile loans. European consumers joined the party in the new century and their governments were grateful for cheap loans. Institutional investors—not least pension funds and insurance companies—helped to produce an opaque financial system, one which was a prey to asset bubbles, unregulated 'shadow banks' and a proliferating 'financialization'. [21] Between 2000 and 2007 many pension funds turned to hedge funds to boost their rates of return, allowing themselves the risk involved because they had stowed away tens of billions in 'risk-free' eurozone bonds.

But the easy credit flooding the us and Europe had become detached from economic fundamentals. Growing inequality in China blocked the sort of balanced growth seen in postwar Europe. Chinese workers or farmers could not earn enough to become good customers for overseas products, while in the us low-paid or poor borrowers were taking on too much debt—especially housing debt they soon found impossible to service. The non-performance of these 'subprime' mortgages not only helped to bring about the crisis in 2007 but has stubbornly remained central to it ever since. [22] Ultimately, the best way to tackle the fundamental imbalances that produced the crisis will be to reduce global poverty. If low wages and poverty hold back consumption and perpetuate global recession, then ways must be found to restore demand at the roots of the global economy.

'The Way Forward'?

With the us, uk and much of the eurozone now facing renewed recession compounded by the threat of further banking and sovereign debt crises, dissident voices are beginning to be heard from within the ranks of the economic establishment. In an October 2011 paper, 'The Way Forward', Daniel Alpert, Robert Hockett and Nouriel Roubini noted that successive rounds of monetary and fiscal interventions by the Federal Reserve and us Treasury had failed to produce a sustainable recovery and urged that only more radical measures had a hope of success: 'Current economic conditions call for a much different kind of recovery programme than those proposed or attempted thus far—one that is more sustained, more substantial, more concentrated, and more strategically aimed at creating new sources of wealth.' [23] Like Glyn and Brenner, they identified the roots of the asset bubbles in long-term excess global capacity and huge trade imbalances, and argued that poverty and inequality—within countries and between them—played a significant part both in provoking the crisis and preventing recovery.

Roubini and his co-authors estimated that the massive overhang of household and financial debt in the us, 'occasioned by our worst credit-fuelled asset-bubble burst since the late 1920s', could take between five and seven years to wind down, during which time great damage would be done. More formidably, the crisis was the upshot of epochal shifts within the world economy. The entry of successive waves of new export-oriented economies, peaking with China in the early 2000s, had decisively shifted the balance of global supply and demand:

In consequence, the world economy now is beset by excess supplies of labour, capital, and productive capacity relative to global demand. This profoundly dims the prospects for business investment and greater net exports in the developed world—the only other two drivers of recovery when debt-deflation slackens domestic consumer demand. It also puts the entire global economy at risk, owing to the central role that the us economy still is relied on to play as the world's consumer and borrower of last resort.

In addition, the entry of China's vast low-paid workforce had further shifted the balance of power between labour and capital in the developed world, resulting 'not only in stagnant wages in the United States, but also in levels of income and wealth inequality not seen since the immediate pre-Great-Depression 1920s.' [24] In response to this, 'The Way Forward' proposes a three-part plan, comprising:

  1. A $1.2 trillion five-year plan of us infrastructural investment, to take advantage of a 'historically unique opportunity' to put idle capital and labour to work at an 'extremely low cost'. The size of the effort would be critical, since further feeble 'stimulus packages', tax cuts and 'quantitative easing' at a time of excess capacity would be 'pushing on a string', while vain attempts at deficitcutting could actually increase overall deficits.
  2. 'Debt overhang reduction', offering relief to low-income debtors and requiring financial institutions to accept write-downs against non-performing assets.
  3. 'Global re-balancing' that would see wage rises and welfare improvements in developing states; better social-security provision for old age in China would reduce excessive saving and encourage consumption, with the pledging of state assets to such a programme. The global 'rebalancing' rubric also covers a proposal for the setting up of a 'World Economic Recovery Fund', to be financed by surplus countries but with constitutional changes to give them fair representation in the World Bank and imf.

How should these proposals be assessed? The best way to boost wages in China would be to improve labour rights, not—as these authors see it—mainly through a revaluation of the Chinese currency. The renminbi has appreciated over the last two years but the main gains from this go to compradors rather than producers. Better wages going direct to Chinese households would have the most direct impact on consumption levels. Popular agitation for better pay and social protection is insistent and should be met. [25] Roubini and his fellow authors rightly argue that decent pension coverage for all Chinese workers would encourage them to save less and spend more. 'The Way Forward' calls for debt forgiveness and supplies some technical elaboration on how best to accomplish this, but its debt-forgiveness proposals are meaner than those of the tarp Inspector General. 'The Way Forward' does not really deliver on its promise to identify 'new sources of growth', confining itself largely to infrastructure programmes and the setting up of a 'World Recovery Fund'. Nor does it address the need for state-sponsored re-capitalization of the banks.

Global minimum wage?

A more radical set of proposals is urged by Richard Duncan in The Corruption of Capitalism. Duncan had already pinpointed the low-wage problem in his 2003 The Dollar Crisis, which offered a strikingly accurate prediction of the coming crash. He urged the case for a global minimum wage in the export sector, to be enforced both by international institutions and by the workers themselves. [26] He concedes that achieving a consensus on the need for modest but steady wage rises in the export zones would be hard. The large corporations have sub-contracted work to these areas, or built their own facilities there, because they see low labour costs as essential to profitability. Yet the global income gap is now so large that a minimum wage would only marginally raise prices to the final consumer. If an hourly wage of $3 is raised to $4 this will boost local demand by about a third, but would lead to a price rise of only 2 or 3 per cent. The experience of 'fair trade' projects shows the scope for winning support for minimum wages in the export sector. Building the audit and inspection regimes needed to enforce the global minimum wage would pose difficulties, but Duncan argues that these would be far from insuperable, especially given the keen interest that wage-earners typically take in their pay.

Duncan urges that wages in the Western corporations that dominate the export sector can be invigilated far more readily than other wages or income; indeed the cross-border movement of goods and services is already subject to monitoring. The moral case against very low pay for hard work and long hours is easy to make. Unlike traditional commercial protectionism, the proposed new norms would not seek to exclude imports from low-wage countries but only to set a floor beneath which export-sector wages should not fall. It would be designed to raise aggregate demand in ways that would spread through the entire economy. Most oecd countries already have some type of minimum-wage legislation, but do not focus on the wages and conditions in the export sector, as Duncan urges should be done. Raising wages in the export sector would have a significant impact on aggregate demand in low-income countries, which would by itself help generate growth.

While there are points of agreement between Duncan's analysis and proposals and those of Roubini and his colleagues in 'The Way Forward', Duncan is more specific regarding 'new sources of wealth'. He urges that low interest rates and a glut of capital mean that public authorities could cheaply fund large-scale programmes in renewable energy, nanotechnology and bio-technology. [27] In Duncan's view each of these programmes, if properly funded, would require $1.2 trillion, for a grand total of $3.6 trillion. Duncan explains that the enterprises that would undertake these ambitious programmes would themselves not be government-run but would rather be public 'trusts'. While Duncan's approach has the needed scale and scope, he seems a little uncomfortable with the fact that he is advocating such sweeping measures of public entrepreneurship. He attacks the bank bailouts and the stimulus programmes as a corruption of the spirit of true capitalism, while the measures he proposes would nurse the accumulation process back to rude health. However, if public finance establishes these new trusts, they should surely remain in public hands. While his categories may be disputed, in the present conjuncture state capitalism may well be preferable to new doses of austerity and privatization, so long as this public entrepreneurialism is accompanied by measures to empower communities and working collectives.

Duncan's proposals chime in well with measures proposed by Diane Elson and other feminist economists who advocate new trade policies which would outlaw child labour, gender discrimination, ecological malpractice, denial of labour rights and very low wages. [28] These authors argue that trade imbalances have their roots in 'absolute' rather than 'comparative' advantage; the imbalances reflect technology gaps and skill gaps rather than 'perfect competition'. [29] In many export zones the workforce is dominated by young women, as yet unburdened with family responsibilities but possessed of 'nimble fingers', discipline and a capacity for sustained hard work. Trade rules could establish minimum wage rates—eventually, perhaps, a 'living wage' sans frontières—as well as safety standards, access to education and labour rights for these workers. A parallel case for trade rules that would discourage the super-exploitation of the poorest workers has been made by Jean-Luc Gréau, formerly chief economist of medef, the French employers' federation. [30]

The British debate on how to tackle the crisis has also produced radical proposals, if none as comprehensive as those just considered. Robert Skidelsky urges the need to go beyond monetary measures and commit large public resources to a very active National Investment Bank. [31] Gerald Holtham argues that such a public bank could raise growth and reduce deficits by financing investments that would earn future revenues, such as social housing or toll roads. [32] Holtham suggests that one of the already nationalized banks could be adapted to this function and, if guaranteed by the government, could borrow money cheaply.

Pension funds, because of their vast size—they account for approximately a quarter of total global financial assets—move politicians and financiers to visionary proposals that could channel these providential reserves of cash to fix the decaying social fabric. Since contributions to retirement schemes are tax-favoured, it seems only fair to put them to work until they are needed to pay pensions. But what would be the risks and the rate of return? The British financier Edmund Truell has argued that the uk's public-sector pension schemes would become far more affordable if members' contributions were mobilized to boost investment in infrastructure. In this way the government could slay two dragons with one sword. It would find the finance for a vast £1.3 trillion programme of public works, on the one hand, and on the other staunch looming deficits in Britain's public-sector pensions. The pension funds would enjoy special access to such government-supported construction projects, enabling them to borrow cheaply and earn a guaranteed return. [33]

However, much would depend on exactly how the new public-sector pension arrangements were set up and run. I have already pointed out that private, commercial pension provision is costly and precarious. The public sector—both employees and the government itself—have the needed personnel and expertise to set up a body which would run these schemes, so this is what they should do. But it would not be equitable to supply this government-sponsored second pension for public-sector workers and neglect to make similar provision for all citizens. The eminently justified defense of their members' entitlements by Britain's public sector unions could only be strengthened by a campaign for a universal second pension. [34]

However, it would be necessary to have strong guarantees and clear guidelines. If retirement funds invest in public projects then their rate of return should be clearly protected. Some of the dangers may be gleaned from a recent report:

Four infrastructure fund managers and uk pension funds representing more than £50 billion of funds under management signed an initial agreement with the Treasury to invest in schemes such as railways, roads and energy projects . . . The Treasury is hoping to set up a new model of investment in infrastructure to replace the now broadly discredited private finance initiative. A review began earlier this month in ways to raise private finance for such schemes which would provide 'better value' than pfi, where the typical cost of capital was 8 per cent. The model will offer lower returns but is expected to be linked to rpi inflation. [35]

The British government, having dedicated itself to fiscal retrenchment, is desperate for an 'off-balance-sheet' mechanism to fund badly needed investment in infrastructure. But pension funds will find these investments too risky unless the government is prepared to guarantee both the principal and a minimum rate of return. The funds should not be expected to face the risk of cost overruns. However if such guarantees are offered then some provision would have to be made in the public accounts and, following the costly expedient of pfi, it would be more difficult to offer certain profits to the Treasury's projected commercial partners. While the British Chancellor embraced this project, its size was modest (only £3 billion a year) and its details are not yet agreed. Most uk pension fund managers lack the skill or size to evaluate public infrastructure projects, but a public body would enable them to pool resources to this end. [36]

Pension funds and schemes offer participants a nominal stake in the capitalist order while actually supplying only a very modest supplement to public schemes. Pension assets are held by nearly everyone in the Netherlands and a few other states. The more common pattern is for about a half of employees to be covered and for there to be great inequality in the value of that coverage. Thus in the uk and us half of all tax relief accrues to the richest 10 per cent of employees. However the public bodies that have been set up to regulate pension funds—the pbgc in the us, and ppf or National Employment Savings Trust (nest) in the uk—could be endowed with more resources and more powers (on which more below).

In the best of cases, proposals to invest in infrastructure take many months to have an impact on employment. The quickest way to boost demand would be to lower taxes on earnings and consumption. In both the United States and Europe, payroll taxes (social security contributions) could be overhauled to remove them completely from low-paid workers and the under-30s while raising the ceiling above which such contributions are payable. Such a reconfiguration, if properly calibrated, could with one blow boost demand, lower the cost of hiring new workers, and raise tax from higher earners. The adoption of such a change by German governments over the last few years has seen unemployment drop from 9 per cent to 5 per cent, while the pay of ig Metall members rose by 13 per cent in the years 2005–09. [37]


Crisis 2.0 has seen debts incurred by the banks being taken on by pensioners, students, teachers, care workers and the unemployed, as governments capitulate to the bond traders and ratings agencies, bailing out some undeserving lenders at 100 cents to the dollar. Recognizing and writing off losses is an essential part of the recovery process, but a deliberate and selective process is preferable to an ad hoc crisis response. Strategies should include an audit of public debt, leading to selective debt repudiation, with 'odious debt' wiped out entirely. (Odious debts are usually defined as those contracted by a regime without the citizens' consent and for objectives that are against their interests, with the creditors being aware of these conditions.) An audit allows the processes by which the debt has expanded to be documented and identifies which creditors should legitimately be paid. In 2007 the Ecuadorean President Rafael Correa appointed a Commission for the Full Audit of Public Credit, consisting of international economists and legal experts—caic, in its Spanish acronym—to establish the legitimacy, legality and adequacy of Ecuador's loan negotiations and renegotiations since 1976. The caic found numerous irregularities and illegalities, some dating from the renegotiation scheduled by the 1995 Brady Plan. Armed with the audit, the Correa government succeeded in bringing debts of $3.2bn to us banks down to under $1bn.

If other countries undertook such an investigation they might well discover undue pressure, the suborning of public officials and the corruption of legislators. (The above-mentioned 'transition' loans to countries privatizing pensions could be an example.) They might also uncover debts contracted under such onerous terms that even repaying them several times over did not discharge them. Just as the subprime crisis was greatly intensified by 'shadow banking' practices, so the sovereign-debt crises that followed have been exacerbated by hidden government liabilities, especially those enjoying 'implicit' government guarantees. In Les dettes illégitimes, the French economist François Chesnais extends the idea of 'odious debt', arguing that public debts should be repudiated as illegitimate if they are contracted in the course of making 'gifts to capital'—for example, public investment in state-owned assets as a sweetener for privatization, or fiscal deficits incurred as a result of low levels of direct taxation, where tax revenues are deliberately replaced by debt. [38] The venerable principle of Jubilee recommends the cancellation of debt. However, there is still scope for discrimination, since sometimes the rich owe money to the poor, and bear full responsibility for having borrowed it. If Italy repudiated all its bonds it would hurt small savers, since millions of the latter together hold 14 per cent of the total. Those advocating radical solutions should be careful not, unwittingly, to drive the petty bourgeoisie into the hands of the fascists. (Repudiation could, of course, exclude such savers and genuine pension funds and charities.)

It should be recalled that debt and credit are two sides of the same coin. Credit is a wonderful thing if used to nourish the real economy, producing 'goods' and avoiding 'bads'. The bad side of easy credit was seen in successive speculative bubbles in third-world debt (1980s), dot.com shares (1999–2001), and property and mortgages (2004–07), each of which did little or nothing to boost the real economy. But since 2008 we have seen that recovery has been prevented by the chill shadow of a credit famine.

A sovereign default that imposes losses on large-scale financiers, not poor savers, may be a worthwhile option in a case like that of Greece. Large tranches of Greek debt would certainly count as 'odious'—for example the large loans taken out from French banks by the Karamanlis government from 2005–09 to fund purchases of French fighter jets, or the vast sums spent in preparation for the 2004 Olympic Games. Sovereign default imposes a high price: countries that forfeit the confidence of the markets immediately find borrowing expensive or impossible. Argentina's wholesale default in 2001 paralysed economic activity: many jobs were lost, businesses wrecked and savings wiped out. Attempts to use barter to resuscitate the economy proved cumbersome and often ineffective. However, the piquetero movement and a wave of factory occupations allowed some enterprises to survive until they could be saved by the Kirchner administration in 2003. Argentina was to show that there is life after default—and negotiations too. Argentina repudiated debts totalling $81bn. After an interval, and anxious to regain normal trade facilities, the Argentine government offered its creditors 35 cents on the dollar. Aware of the weak state of the Argentine economy, most of the country's creditors accepted, though compared with other defaults the write-down was a severe one. After a steep devaluation, the Argentine peso was stabilized at a competitive rate. Agricultural exports recovered and under presidents Kirchner and Cristina Fernández income and employment revived.

A Greek exit?

In the case of Greece, devaluation would not be an option unless the country took the expensive step of reverting to the drachma. But in other respects, the country is already suffering the catastrophe which established wisdom claims debt repudiation would bring. Attempts to stave off default have already brought about economic collapse and the country has effectively been shut out of international capital markets since spring 2010. A repudiation would leave the remaining debt more sustainable, and Greece could continue to borrow internally, as it did before 2001. One commentator has pointed out:

If Greece had defaulted in early 2010, Greek debt could have become sustainable in the long run with a write-down imposed on bondholders of considerably below 50 per cent of total debt. The country would have had to borrow internally, perhaps issue ious (as it has done already), and impose a few modest cuts. The effect of such a policy would have been mildly recessionary. What was done instead by the troika was to provide Greece with loans so as to cover its budget deficit without default, in exchange for increasingly draconian budget cuts, tax increases, and institutional changes of dubious value . . . The effect of this policy has been a fast downward spiral of the economy. Since debt keeps increasing and the country keeps getting poorer fast, debt is becoming ever less sustainable. The debt-to-gdp went from 115 to 160 per cent in less than two years. [39]


Tackling the problems of finance will centrally require the building of public-utility banks and credit systems, reaching out from national centres and devolving resources to every locality, on the one hand, and cooperating with regional and global partners, on the other. [40] Strategic public ownership is a necessary but not sufficient condition, since public authorities can be tempted into their own speculative excesses. A public-utility finance system would have at its core publicly owned and publicly accountable banks, regulatory agencies and social funds. The latter would inform and empower individual citizens and regional or local networks. The neoliberal model, by contrast, hands over public assets and social programmes to private corporations and promotes a pervasive commodification of health, education, pensions and access to the natural environment.

While social ownership and local finance should be encouraged, stringent safeguards are needed to insulate such funds from commercial and speculative pressures. Community banks and building societies have shown that they can give good service, if prevented from taking on extraneous 'leverage'. However, they soon run into trouble if 'liberated'—i.e., deregulated or privatized—and permitted to act like commercial banks. Thus German manufacturing corporations have long benefited from the country's largely publicly owned Landesbanken; but during the last decade or so several of these banks were tempted to speculate with complex mortgage derivatives and ran up huge losses as a result. This phenomenon is yet another example of the perils of deregulating and semi-privatizing public-finance networks—other cases in point being the us Savings and Loan associations, Fannie Mae, many British privatized former mutuals (e.g. tsb) and the Spanish Cajas. Each of these worked well for decades as publicly owned and well-regulated institutions; all got into difficulties once deregulated, privatized or demutualized.

Public resources and enterprises need to be continually replenished if they are not to be overtaken by the momentum of private accumulation. Rudolf Meidner, the Swedish labour economist, proposed an annual share levy on the major corporations, each of which was to issue new shares each year equivalent to 20 per cent of its profits, to be distributed to a regional network of social funds. The proposal has the advantage that it shaves a sliver of value from all shares, even those held in tax havens. However the social fund network would hold the shares it received for the long term, and use the dividend income they generate for specific purposes, such as pension provision. [41] A number of states—notably Norway, Australia and China—nurtured sovereign funds or 'future funds' which acted as a buffer during the crisis. Such funds might be invested in ways that promote productive capacity, social housing or environmental protection. Projects like these build long-term assets which can be drawn upon in case of events both unpredictable (natural disaster) and predictable (an ageing population). In some countries, publicly run provident and pension funds also play this role; the managers of such funds invest in development or social infrastructure but are increasingly aware that these should foster environmental sustainability. In the us and eu, though, free-market principles and private lobbies have discouraged sustained public investment programmes.

Twenty-first-century advocates of public enterprise and social planning need to reshape them in ways that avoid their historic pitfalls. Recent years have seen striking successes for publicly sponsored economic development, but with some serious accompanying problems. Thus it manufacturing in Taiwan's Science Parks and agricultural production in Brazil's cerrado backlands have enabled these countries to become the world's leading suppliers in several of the lines of production chosen for development by the public agencies concerned two or three decades ago. In the Brazilian case, a crucial role was played by the Embrapa, the Brazilian Agricultural Research Corporation, and its success in rehabilitating the soil of the cerrado, previously inhospitable scrubland. [42] Public subsidies were used strategically to set up viable entities rather than to cover ongoing operational deficits. Yet the very success of the publicly sponsored programmes in Brazil and Taiwan has created unacceptable environmental problems. Though worrying, these problems should not be unmanageable if the public authorities and the productive new entities were answerable to local communities for their impacts.

Unfortunately, the success of these programmes also makes them juicy targets for privatization, with business interests stepping in to take charge. The demands of the knowledge economy put a premium on the socialization of research costs, an excellent example being the German Fraunhofer research network, with its 18,000 staff and budget of €1.65 billion. This public network has made a vital contribution to the successes of Germany's Mittelstand, or medium-sized enterprises. [43] China has supplied both positive and negative examples of state entrepreneurialism. [44] The sheer scale of Beijing's intervention has been such as to have an impact on the global economy, something that could never be said of even the most powerful commercial organization. In most medium-sized or large states the public authorities also have the potential advantage of size. This is a critical consideration in any deep-seated crisis.

The aims of any new development programme should be to stimulate investment-led growth, foster sustainability, encourage the formation of human capital, and yield a growth in productivity. Such a package would seek to decommodify major areas of social life, giving everyone free access to decent health care and education, and endowing everyone with a share and say in the control of economic resources. [45] A public-utility finance system, buttressed and sustaining networks of social funds, could reconnect finance to its social context and democratize its workings. The traditional socialist model of 'nationalized' and planned economy has had its successes—and in some areas may still have its uses. It makes sense for railways, electric power, water and other natural monopolies to be publicly owned and run. But the command-economy model has had its day. If markets are properly monitored, regulated and socialized they can play a useful, even valuable, role. [46] The social ownership of pension funds—and their management alongside the pursuit of socially responsible criteria—can add an extra dimension to this. National and international regulators will find it difficult to have the information they need to oversee a myriad of economic actors. Socially owned institutional investors would add another type of 'regulation from below' to enhance 'regulation from above'. They could, for example, use their shareholding powers to foster a minimum wage in the export sector of countries with low gdp per capita. Public credit should be deployed to invest in a green economy as well as to reduce the scale of global poverty and to defray the costs of ageing. The anarchy and uncertainty of global exchanges and capital flows must be addressed and regulated in ways that empower and inform the generality of citizens and the communities to which they belong.

In many ways the approach I have sketched is the polar opposite of that associated with Hayek, Friedman and free-market economics. But the latter school has accepted the need, in extreme conditions, for a financial stimulus—using helicopters to drop great sacks of cash on all and sundry. Yet in practice the helicopters drop cash only on the banks. If printing money is in the public interest, why shouldn't everyone be on the receiving end? Why shouldn't the helicopters drop the cash on the poor, or on the whole population? In a very unequal society, putting money in the hands of those who need it most is the best way to raise demand. In addition to the introduction of a minimum wage in the export sectors, the granting of debt relief to struggling households in the advanced-capitalist countries would not only be worthwhile in itself but would also help to generate higher aggregate global demand and a prospect of overall growth. The current overhang of household debt induces stagnation. The Australian economist Steve Keen proposes a radical debt-destroying strategy: 'governments should give the public a dollop of cash. Those that had debts would be obliged to pay them down, those that didn't would be free to spend the money however they wished. The result would be lower debt levels and greater spending power.' [47] An even more radical strategy would simply cancel all debts, or all debts up to a threshold amount (say £35,000), but the frugal might object and the banks would take a hit. Keen's even-handed civic premium could be welcomed by all as a positive way to cut debt that is an obstacle to recovery.

As the tarp 'inspector general' Barofsky explained, a bailout 'from below', reducing the burdens on the poor and low paid, would have been more effective—and more conducive to public utility—than the banker-friendly bailouts 'from above'. Debt-relief programmes also need to be extended to those burdened by student loans. In Britain student debt is forecast to treble to £70 billion by 2015. Student debt is particularly heavy in the United States where it is expected soon to reach the $1 trillion mark, only just short of total credit-card debt. [48] True to the spirit of financialization, indebted students and graduates are invited to manage their debt in a complex variety of ways. Those who make unlucky choices can find themselves subjected to financial suffocation—by 2009, nearly 9 per cent of holders of student debt were in default, with dire consequences for their credit rating. The need to service such debt distorts the options students face and has a dampening effect on demand.

We face the need to reconstruct a concept of the public, one that has room for, but is not wholly defined by, public ownership, national regulation, income redistribution and decent social services. It should correspond to the 21st century and the epoch of globalized capitalism and the knowledge economy. From the standpoint of humanity as a whole, a 'nationalized industry' represents a partial interest. When such a concern invests overseas, the balance of public interest would have to be struck between at least two 'publics' and often many more, just as within any state there will have to be a balance between the interests of employees of a state enterprise on the one hand and citizens on the other. The 'public interest' is best determined by a multiplicity of institutions and practices, offering broad access to information, debate and decision. So long as states enjoy sovereignty they will play a key role in facilitating—or denying—such democratic accountability and in meeting the challenge of the crisis. If the rescues demand vast amounts of public money, as is already clear, then any positive outcomes should accrue to public bodies, just as Norway's massive state pension fund is a legacy of the government rescue of the country's banks in 1988.

Even within the constraints of a capitalist society there are institutions to be found which manage to contribute to a manifest public interest or concern. The us Social Security programme or the British National Health Service could still be improved, but nevertheless for over half a century they have embodied the principle of universal coverage. Both programmes were saved from repeated threats to their integrity by the mobilization of public opinion and continue to face such threats today. But they show that the notion of public service can be successfully defended even in the most inhospitable of contexts.

High road to development

I have placed the crisis in the context of epochal imbalances and inequality, and have proposed a development path based on a living wage, good working conditions, education for all, decent levels of care, gender equality and high skills. The needed boost to demand would have to stem not solely from higher wages but also from investment in infrastructure and green technologies, as well as funding decent pensions, healthcare, education and welfare systems. So far as governments and enterprises are concerned the objective should be to pursue the 'high road' of competitive advantage, based on improving existing levels of education, skills and care, and shunning the 'low road' which bases competitive advantage on sweated labour, gender gaps and the dumping of social costs. This approach seeks to humanize the global chain of commodity transactions using international agreements, national legislation, multi-actor 'codes of conduct', labour rights and collective bargaining, community representation, transparency rules and ethics commitments from corporate and financial agents. The production and sale of commodities presumes reproduction of the work force, and waged labour is combined with unpaid care work. Support for unpaid care workers dovetails with ensuring decent working conditions. Finally, economic arrangements should be such as to ensure something close to full employment and that economic growth is not based on the squandering or ruin of the earth's resources.

Such a strategy is, clearly, very far from the agendas of the states and political classes now running the world. But their measures have so far only succeeded in deepening and perpetuating the crisis. Should it now take a turn for the worse, with a further financial meltdown in the Atlantic economies and a slowdown in China, all bets will be off. In that eventuality—and indeed, in any longer-term perspective—it is vital that constructive proposals for a genuine way out of the crisis, to the left, should be worked out now.

[1] Nomi Prins, It Takes a Pillage, 2nd edn, New York 2011, p. xi.

[2] Neil Barofsky, 'Where the Bailout Went Wrong', New York Times, 30 March 2011.

[3] Stephen Cecchetti et al., 'The Real Effects of Debt', bisWorking Paper 352, September 2011, p. 7, Table 1. For the dynamic of 'historical cycles' of debt see Elmar Altvater, The Future of the Market, London 1993, pp. 87–177.

[4] The Obama Administration's fiscal stimulus was persuasively criticized at the time by Paul Krugman and Joseph Stiglitz, both for its small size and for its heavy reliance on tax cuts.

[5] Katie Allen, 'Banks accused of failing small firms after lending plunges', Guardian, 29 October 2011.

[6] Gillian Tett, 'Lessons in a $3,300 billion surprise from the Fed', Financial Times, 3 December 2010.

[7] Jackie Calmes, 'Obama Grasping Centrist Banner in Debt Impasse', nyt, 12 July 2011; Clive Crook, 'Obama's failed debt ceiling gamble', ft, 11 July 2011.

[8] Quentin Peel, 'Germany and the eurozone: Besieged in Berlin', ft, 26 September 2011.

[9] Peter Spiegel, Quentin Peel and James Wilson, 'Move to tax banks seen as key in Greece plan', ft, 20 July 2011.

[10] Gillian Tett, 'Greek bond losses put role of sovereign cds in doubt', ft, 18 November 2011.

[11] As another ft commentator put it: 'The presence of a risk-free asset can hardly be overstated in a modern financial system. Each insurance company, each pension fund needs to invest part of its income in such assets. Through a combination of short-sightedness and financial illiteracy, the European Council has now put itself in a position where it desperately needs Euro-bonds, if only to assure the existence of a functioning financial sector.' See Wolfgang Münchau, 'The only way to save the eurozone from collapse', ft, 14 November 2011.

[12] Employee Benefits Retirement Institute, 2011 Retirement Confidence Survey, and for 2007 George Magnus, The Age of Aging, London 2009, p. 87. The $50,000 figure excludes the house they lived in and membership of the fast-disappearing Defined Benefit pension schemes.

[13] 'A trillion here, $500 billion there', The Economist, 15 October 2011.

[14] I discuss this in 'The Subprime Crisis', nlr 50, March–April 2008.

[15] Mitchell Orenstein, Privatizing Pensions: The Transnational Campaign for Social Security Reform, Princeton 2008. See also Camila Arza, 'The Limits of Pension Privatization: Lessons from Argentine Experience', World Development, vol. 36, no. 12, 2008. Several countries that had adopted private pensions subsequently revised their retirement systems to give greater importance to the 'public pillar' of state pensions—Chile, Hungary and Argentina among them.

[16] Dariusz Stanko, 'Pension Fund Returns: The Case of Central and Eastern Europe', in fiap, Investments and Payouts in Funded Pension Systems, Santiago de Chile 2009.

[17] Robert Brenner, 'The Economics of Global Turbulence', nlri/229, May–June 1998, subsequently published in book form with an afterword in 2006.

[18] Quoted in Richard Duncan, The Dollar Crisis, Chichester 2003, p. 43.

[19] Prabhat Patnaik, Re-Envisioning Socialism, New Delhi 2011. Patnaik stresses the role of global poverty in precipitating and shaping the crisis: pp. 148–64, 259–71.

[20] Andrew Glyn, 'Imbalances in the World Economy', nlr 34, July–August 2005. See also Maurice Obstfeld and Kenneth Rogoff, 'Global Imbalances and the Financial Crisis: Products of Common Causes', paper presented at Federal Reserve Bank of San Francisco conference, Santa Barbara, 18–20 October 2009.

[21] A theme I developed in Age Shock: How Finance is Failing Us, London and New York 2006. A revised, paperback edition will appear in 2012.

[22] See Graham Turner, The Credit Crunch, London 2008. Buying a house is one of the largest financial transactions that the citizen of a developed country will make in their life (acquiring a pension is the only comparable investment) so it is easy to see why mortgages are big business. In 2007 us household debt was around 120 per cent of gdp, with mortgages, including second mortgages, comprising over four-fifths of the total. While us households shed some debt in the years 2007 to 2011, a 15 per cent decline in house prices—and a rise in unemployment to 9 per cent—brings losses for investors and foreclosure to mortgagees (on which more below). On the role of poverty in generating the crisis see Raghuram Rajan, Fault Lines: How Hidden Fractures Still Threaten the World Economy, Princeton 2010.

[23] Daniel Alpert, Robert Hockett and Nouriel Roubini, 'The Way Forward: Moving from the Post-Bubble, Post-Bust Economy to Renewed Growth and Competitiveness', New America Foundation, October 2011, p. 14.

[24] Alpert, Hockett and Roubini, 'The Way Forward', p. 3.

[25] See Au Loong-Yu, 'Alter-Globo in Hong Kong', nlr 42, Nov–Dec 2006.

[26] Duncan, Dollar Crisis, pp. 233–50.

[27] Richard Duncan, The Corruption of Capitalism, Singapore 2009, pp. 188–90.

[28] See Irene van Staveren, Diane Elson, Caren Grown and Nilufer Cagatay, The Feminist Economics of Trade, London 2007.

[29] The 'absolute advantage' thesis has been developed by Will Milberg, whose approach focuses on deficient aggregate demand: see Will Milberg, 'Is absolute advantage passé? Towards a Post-Keynesian/Marxian theory of international trade', in Michael Glick, ed., Competition, Technology and Money, Cheltenham 1994; Anwar Shaikh demonstrates that the acquisition of competitive advantage is determinant, and not the result of a mythical 'perfect competition', in 'Globalization and the Myth of Free Trade', in Anwar Shaikh, ed., Globalization and the Myth of Free Trade, London 2006.

[30] See Jean-Luc Gréau, Le Capitalisme, malade de sa finance, Paris 1998 and other works discussed by John Grahl, 'Dissident Economics', nlr 69, May–June 2011.

[31] See Robert Skidelsky and Felix Martin, 'Osborne's austerity gamble is fast being found out', ft, 1 August 2011. Skidelsky has also advocated this approach in articles for the New Statesman.

[32] Gerald Holtham, 'A national investment bank can raise our growth', ft, 21 October 2010.

[33] William Robins, 'Radical Plan for Fund to Plug £1.3 trillion Black Hole', City Wire, 1 November 2011, and Sunday Times, 6 November 2011. This scheme could be run entirely by public, not-for-profit funds but Truell, a director of the Pensions Corporation, seems to envisage commercial insurance running it.

[34] I explain how this might look in chapter 7 of Age Shock.

[35] George Parker and Jim Pickard, 'Fund managers back infrastructure plan', ft, 26 November 2011.

[36] In recent decades banks have deployed the techniques of financialization to dominate infrastructure finance, often with unfortunate results. See Kate Burgess and Paul Davies, 'Pension funds need convincing on infrastructure', ft, 29 November 2011.

[37] On German trends, see Brooke Unger, 'Europe's Engine', The Economist, 13 March 2010.

[38] François Chesnais, Les dettes illégitimes: Quand les banques font main basse sur les politiques publiques, Paris 2011, pp. 95–141. See also the recommendations by a group of attac economists in attac, Le piège de la dette publique, Paris 2011.

[39] Stergios Skaperdas, 'Seven Myths about the Greek Debt Crisis', University of California, Irvine, forthcoming.

[40] For the concept of the 'public utility finance system' see Gowan, 'Crisis in the Heartland', nlr 55, Jan–Feb 2009 and Chesnais, Les dettes illégitimes, pp. 17–24, 131–6.

[41] Chapters 5 and 7 of Age Shock have information on this experience. The 'wage earner funds' plan was enacted in the 1980s in a much scaled back version and then wound up in 1992 by a Conservative government; the assets in the scheme were used to set up a string of research institutes which strengthened the Swedish economy.

[42] See 'Brazil's Agricultural Miracle', The Economist, 28 August, 2010. For the wider Brazilian context see Emir Sader, The New Mole, London and New York 2011. The vicissitudes of public ownership in Latin America are explored by Carlos Aguiar de Madeiros, 'Asset-Stripping the State', nlr 55, Jan–Feb 2009.

[43] The Economist, 5 February 2011.

[44] For the innovative approach of the Chonqing authorities see Philip C. Huang, 'Chonqing: Equitable Development Driven by a "Third Hand"', Modern China, Spring 2011.

[45] See Diane Elson, 'Market Socialism or Socialization of the Market', nlr i/172, Nov–Dec 1988; Robin Blackburn, 'Economic Democracy: Meaningful, Desirable, Feasible?', Daedalus, Summer 2007.

[46] As classically argued by Karl Polanyi, The Great Transformation, London 1944.

[47] As summarized by Larry Elliot, 'Time we wean ourselves off high debt', Guardian, 20 November 2011; see also Steve Keen's website, Debtwatch. The inherent defects of stock exchange finance are identified in Keen's prescient book: Debunking Economics, Annandale, nsw 2001, pp. 251–7.

[48] 'Student Loans in America: The Next Big Credit Bubble?', The Economist, 29 October 2011.

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