WorldView: 'We got back to understanding some of the basics about how the economies and the financial markets work, and not live in Alice in Wonderland as we have been for a while".
This remark by Reuters chairman Niall FitzGerald at Davos captures an important feature of this week's crisis in world capitalism. Bill Gates, George Soros, Robert Reich, Martin Wolf and Joseph Stiglitz were among the high priests and practitioners of the system to voice their concern that we are at a critical juncture in its development. It is as much about politics and states as economics and markets.
The largest US interest rate cut for a generation was one indicator of its extent, steep falls and recoveries in stock markets another, the spectacular €4.9 billion French banking fraud a third, and the state rescue of the Northern Rock bank in the UK a fourth.
All concerned the turbo-capitalism of financial markets that has driven the system's profitability in recent years. The sudden shift in attitudes to the state among its beneficiaries led Martin Wolf to observe acidly in the Financial Times that "no industry has a comparable talent for privatising gains and socialising losses".
It is a sharp reminder that the capitalist system works in cycles of expansion and contraction, creation and destruction of value, in its effort to maintain profitability. It is now genuinely worldwide following the privatisation of the Chinese and Indian economies along with the globalisation of financial markets. Extraordinarily, Jérôme Kerviel, the Société Générale trader, had accumulated €1.5 billion losses by the end of last week. They tripled in three days this week - partly because the bank's efforts to offload the losses helped trigger the worldwide selling frenzy. The system's irrationality has rarely been so clearly revealed.
The high priests are divided about whether the expected US recession - defined technically as two periods of negative growth in a row - will drag the rest of the world into the same condition; and then over the much more worrying possibility that a depression could follow if this crisis is mismanaged. That the system's cyclical nature is manageable remains a bedrock of mainstream economic commentary, on the basis of what we have learned from the Keynesian demand-management experience in the post-war western world.
Those lessons were obscured during the supply-side neoliberal revolution of the 1980s and even more so in the recent casino/derivatives phase of finance capitalism when it became legitimate for the likes of Kerviel to bet your savings and mine on future market movements to boost bank profits. The Financial Services Centre in Dublin is a temple to these values, deeply embedded in Ireland's own recent speculative bubble. We have been all too willing to take the gains and now face the losses.
Those post-war lessons are now once again being put at the centre of public debate. FitzGerald and the other figures mentioned well know the importance of state and inter-state regulation in these circumstances, but some of them - Soros particularly - are scathing about how central banks failed to foresee this storm coming and take timely preventive action. Bill Gates called on the Davos plutocracy to help create a "caring capitalism" capable of relegitimising itself with poor people rather than the rich who have been the primary beneficiaries of its latest phase. In the US Hillary Clinton insists - and Bush has shifted towards - frontloading the $150 billion tax rebates to working and middle class families whose incomes have stagnated or fallen in real terms while inequality soared.
As Ray Kinsella of the UCD Smurfit School wrote in these pages on Wednesday: "What we are observing now is a global problem. What is demonstrably missing is global leadership, commensurate with the scale and nature of the problem." He believes the EU must lead a debate on how to make the transition to a new model with a more sustainable ethos than the existing contagion-prone US one, pressing for a fundamental reform of the existing Bank of International Settlements and International Monetary Fund structures into a global central bank.
He, like Soros, is worried about how such a transition can be managed. It could be traumatic and costly. Soros says that although a recession in the developed world is more or less inevitable, China, India and some of the oil-producing countries are in a very strong counter-trend. "So, the current financial crisis is less likely to cause a global recession than a radical realignment of the global economy, with a relative decline of the US and the rise of China and other countries in the developing world. The danger is that the resulting political tensions, including US protectionism, may disrupt the global economy and plunge the world into recession or worse". He says the current crisis is the culmination of a super-boom based on the dollar as the international reserve currency for the last 60 years.
Those comments get at the political reality behind the present economic turbulence. Widespread talk about whether Europe and Asia are coupled or decoupled to the US tends to obscure that reality, since there is obviously more linkage between world financial sectors than between them and the real national and regional economies. Comments by EU leaders to the effect that European real economies are not as indebted and are better regulated than the US economy hint at a coming decoupling of economic models, as do similar ones in Asia about the lessons they drew from the 1997-98 crisis about the proper role of state regulation there.
In geopolitical terms, and in the language of political economy rather than positive economics, what we are witnessing is the end of US hegemony in the economic sphere - the so-called Washington consensus and security doctrines. We are looking towards a more multipolar world in which Europe and Asia will have greater power, the precise nature of which depends on how China and Russia in particular reconfigure their international positions.
The transition will be traumatic for the incoming US president as s/he seeks to retrieve lost power and influence in the world. Alongside the contradictions between the US and emergent economic models which require a global central bank there is another between the waning US-dominated post-1945 multilateral political order and the need for greater global governance to help manage this transition.