On 15 December the SOAS Research on Money and Finance (RMF) group, in conjunction with BOND and the Bretton Woods project, hosted a follow up to October’s UK seminar on the financial crisis. The first event highlighted the causes of the financial crisis and this seminar aimed to utilise academic work on the topic in the development of coherent policy responses.
50 representatives of NGOs, development organisations, labour unions, think tanks, and academia discussed recent developments of the current crisis and the role and aims of civil society organisations in the lead up to the G20 meeting to be held in London in April 2009.
The following issues were highlighted throughout the presentations and the ensuing discussion: traditional policies have not worked and fundamental change is needed; if such a change is to materialize, who are the actors that need to press for this change; and how this should be done?
Why traditional policies do not work?
Robert Wade of the LSE argued that the current crisis is not one in but of the current financial system, as a result, traditional policy responses do not work in a predictable way or to the necessary degree. Uncertainty in the markets is too pervasive for stabilisers to have an effect. The regulatory and policy decisions of the past decade have been based on the assumption of efficient markets which are self-correcting. In the face of the current empirical observations this idea has proven to be faulty and government intervention is back on the agenda. The question is not if but how governments can and should intervene. Wade predict that by 2015 ‘planning’ will no longer be a toxic word with governments realising that they must involve key actors in a process of joint decision making.
Philip Arestis explained that monetary policy in the last years focussed on frequent interest rate changes to control inflation. However, given the enormous household indebtedness and asset holding, household consumption has become much more sensitive to interest rate changes. Low interest rates create bubbles, whereas high interest rates put pressure on vulnerable groups in society and have regressive distributional effects. Therefore, monetary policy should not only focus on inflation measured by the consumer price index but target net wealth, since this is the transition mechanism between asset prices, debt and consumption. The other presentations also emphasized that asset price inflation had been seen as “normal” and part of “good banking”.
Traditional fiscal policies like tax cuts are also not likely to work, Costas Lapavitsas argued. As indebted households focus on repaying their debts instead of consuming, tax cuts cannot have a great effect on overall demand. Fiscal policy must become more radical, manifest in public spending on housing and infrastructure as well as more redistribution policies. He argued that injecting capital into Banks will not have the desired effect as it is not being passed on to consumers, but hoarded by banks. Additionally, the trust necessary to sustain the sector has been too badly eroded.
Jan Toporowski emphasised the current regime´s huge regressive distributional effects. The bulk of debts are held by members of the middle class, not poor people. If firm´s investments exceed household savings firms go into a financial deficit and need to cut down their investments, which leads to lower employment rates and lower wages. Thus, workers pay the price. Analogously, the debt expansion in rich countries is ultimately paid by poor countries via their trade deficits, making clear the necessity of addressing inequality and global redistribution of wealth.
The potential for regime change
As Robert Wade pointed out, past crises were accompanied by serious discussion about necessary reforms but ultimately very few of those were implemented. However, all researchers argued that substantive changes are necessary and likely given that every pillar of the Anglo-American model of regulation has failed. It is clear that business as usual is not a solution.
Additionally, because the financial regime brings about problems that fiscal policy alone cannot ultimately solve, not addressing them will lead to ever growing pressure on governments to rethink the financial system and address its weaknesses. Given the high levels of debt in the UK and US, expansionary fiscal policy without reforming the underlying financial system is simply impossible.
Also of importance is the need to advocate for a return to public provision of health, education and pensions in order to undo financialisation i.e. the turn of finance to the individual and market solutions; and to eliminate the dependence of people for health, education and pension system on unsustainable asset price inflation.
Analysing the crisis in structural terms must not obscure the fact that the current financial regime is the outcome of decisions and actions deliberately taken by policy makers, especially financial liberalization, unregulated financial innovation and faulty monetary policies. Although changes are necessary and the regime produced its own instability, these changes will not occur automatically. Pressure from civil society is greatly needed.
Find below links to the day´s four presentations
- A change of financial regimes, Robert Wade, Development studies institute, LSE
Audio / Video
- Policy implications of the current crisis, Philip Arestis, Cambridge centre for economic and public policy, University of Cambridge
Audio / Video
- Accommodating the debts of the middle classes, Jan Toporowski, Research on money and finance, Department of Economy, SOAS
Audio / Video
- A turning point in policy making, Costas Lapavitsas, Research on money and finance, Department of Economy, SOAS
Audio / Video