Don’t throw out the baby
30 Nov 2008 0 comments. tbs.pm/2214
Richard Elen wrote in October 2008 on the EMC MediaBlog about the financial crisis sweeping the world. The Thatcher/Reagan economic experiment was a disaster, he suggested; it was time to sweep the existing consensus aside and revisit the period of statism inaugurated by Clement Atlee’s 1945 administration – as of late 2008 the closest this country had ever come to a socialist government.
Not so fast. Richard was quite right to point out that crucial sectors on which we all depend (i.e. utilities, public transport, the financial sector etc.) should not be left entirely to the vagaries of market forces. More generally, however, ever since the collapse of Lehman Brothers brought the crisis to a head in September 2008, “hysterical Marxists and others from the dustbin of the Left”, to use Simon Heffer’s what I would call accurate, if somewhat colourful, description, eagerly predicted the collapse of capitalism.
The banks can’t be trusted to run themselves, they said; their innovative streak outpaces the ability of the regulators to keep up; big and greedy companies fleece their customers for all they can get away with. It is time to rein them in, they continued; time for the state to start calling the shots; time for multi-national corporations and the “military-industrial complex” (whatever that means) to be put firmly in their place under the thumb of governmental control.
At this point, it is worth stepping back a little to put recent events in their historical context. The autumn of 2008 marked the point where pendulum reached its extremity of travel and started to change direction.
Ironically, it was the Left who helped usher in Thatcherism: the unions’ excesses and their abuse of power in the 1970s, culminating in the “winter of discontent” of 1978/9, created the exceptional circumstances that, at the time, made a change of government seem more attractive. In normal times, it is quite likely that James Callaghan would have won in 1979, his proven experience trumping the novelty factor of a female prime minister and the uncertainty of a change of direction led by someone who had little proper experience of wielding Cabinet power.
But 1979 was not normal times. Mr Callaghan’s experience wasn’t enough to persuade the voters he was best placed to deal with the problems. The electorate must have thought: “he got us into this mess; the other lot can’t be any worse and might do better.” The pendulum swung to the right. Privatizations, de-regulation and the city boom were the result.
Unfortunately, it went too far. Just as the unions’ excesses in the 1970s proved to be a disaster for the movement and – more importantly – all those who relied on collective bargaining to stop unscrupulous bosses playing one off against another (Asda, owned by Wal-Mart and reputed to be anti-union, was found to discriminate against union members; what little New Labour did in respect of collective bargaining was not enough), so the financiers’ excesses proved to be a disaster for capitalism and, by extension, the countless millions around the world whom The Economist said it had lifted out of absolute poverty. By October 2008, capitalism was facing its 1979 moment. The question was: how would it respond?
At the time of writing, in November 2008, the current writer believes that if world leaders had any sense, they would start by ameliorating the worst excesses of the financial system. One of the questions on Any Questions? recently was: “Who’s to blame for the recession?” The answer: almost everyone. All those who lived beyond their means. The banks who offered 105% or 110% mortgages and the hapless home-buyers who signed on the dotted line of whatever paper the mortgage providers thrust in their faces. The loan companies and debt consolidation charlatans who flogged rip-off financial services and the consumers whose profligacy had left them in need of toxic loans in the first place. The banks who offered increasingly baroque financial instruments to all and sundry and institutions around the world who contaminated the pensions of millions of workers with collateralized-debt obligations and credit-default swaps without performing due diligence.
The sober banking industry that existed before the Thatcher/Reagan revolution had a conservative approach to risk and to debt. Knowing your customer and knowing you could honour your obligations to creditors were at one time programmed into the DNA of the banks. It’s all very well saying that greed is intrinsic to the species; that does not abrogate from anyone the need – nay, the duty – to exercise personal responsibility for one’s own actions and fiscal as well as social and moral rectitude, and to live within one’s means.
This does not alter the fact that the banks were allowed too much rope, and they duly hung themselves with it. This is, I think, where the Thatcher/Reagan reforms screwed up most severely. It is a truism that the markets are driven by greed and by fear. Greed led the financial sector to take risks it did not fully understand; freed from its past constraints, and fuelled by short-termism and an obsession with the next quarter’s results, innovation increased and profits soared. Unfortunately, they were built on foundations of sand.
But saying that the Thatcher/Reagan experiment was a disaster is to throw the baby out with the bath-water. Yes, it was almost certain that the financial sector would revert to a sane regulatory system, and lessons would be learnt. But, as The Economist pointed out in its editorial “Capitalism at bay”, the aversion to a strong state present in democracies should reassert itself.
As a rule, the state has no business telling businessmen and businesswomen how best to run their affairs. The state should set standards that all must adhere to: trading standards, property and contract rights and responsibilities, health and safety, employment and industrial relations practices. In some areas, there has been a case for more regulation, not less: there was a need to strengthen the Employment Relations Act 1999, for example, to deal with employers such as TRW, Asda-Walmart, Amazon, Europackaging UK Ltd, T-Mobile and Sky who had attempted to circumvent its provisions (although no government should ever countenance a return to the closed shop, which in effect gives unions the power to dismiss staff.)
But in general, the state should butt out and let business do what it does best. The state’s role should be that of a referee, setting the rules and ensuring they are enforced and all activity constitutes fair play. It should not be an active player in the economy, because, by and large, that is not its strength.
There are, of course, exceptions. Essential services, such as utilities, public transport, etc. should be brought more under public direction, and run in the interests of customers, not shareholders. A disadvantage of the bus networks being under private ownership is that a decision to cut a route serving small villages in rural areas that hundreds of people rely on throughout the week can be made for the wrong reasons i.e. it is not profitable enough and the shareholders won’t subsidize it. To this extent Richard was quite right.
This is no less wrong than a government – a Labour government – shutting half the post offices. It is remarkable that since Labour came to power in 1997, the post office network has shrunk in the space of eleven years from about nineteen thousand to twelve thousand, a rate of decline far in excess of the two thousand or so closed by Margaret Thatcher over a similar period. The Government finally announced on 14 November 2008 that the Post Office was to continue to handle pensions and benefits. This correspondent honestly did not know whether to be relieved that it had secured the business, or disgusted that the contract was ever put out to tender in the first place.
Ownership of the gas, electricity, water, bus and rail companies should be the preserve of non-profit-making companies under the strategic guidance of the state. The electricity and gas markets have been shown not to work properly. In these areas, the problem was less a lack of competition than the fact that these areas constituted natural monopolies (were we really going to dig up the ground to lay overlapping gas delivery networks to supply each home?) and there was no real scope for innovation (what further innovations could be made in the supply of gas to one’s home?). Here, we needed to accept that gas, electricity and water were monopolies that would not benefit from innovation wrought by competitive pressures and, as such, should be run on a not-for-profit basis by competent professionals with a statutory requirement to serve the interests of their customers.
Transport is also problematical. In practice, deregulation of the bus network led not to the bracing winds of competition but a series of local monopolies. In Cambridge, for instance, the local services were all absorbed into Stagecoach, a national privately-owned transport company that had snapped up Cambus, the local operator. Here, also, local, regional and national bus and rail services should be run by not-for-profit businesses and in the interests of their passengers and an overarching strategic public transport policy. For instance, the timetables of local and regional buses serving the rail station should bear in mind the timetables of arriving and departing trains.
Broadcasting is another wholesale exception to the normal rules of capitalism and the free market, at least, if you value public service broadcasting. It was generally agreed that Home Box Office, a US network popularly called HBO, produced a slate of programmes of consistent quality, including The Sopranos, Six Feet Under and The Wire. But it produced those programmes as a subscription service that users had to pay to see. Ironically, HBO’s foreign audience may have been better served, with free-to-air or free-to-view networks buying in HBO exports for local broadcast.
For those who valued an infusion of input from different regions, the de-regulation that led to the end of ITV as a federation of independent broadcasters was a disaster and marked its inexorable retreat from the high-water mark of quality programming for which it was world-renowned. This, not her economic reforms, was Mrs Thatcher’s worst mistake. And for those who value public service broadcasting, and the excellence of Radio 4 at its best, the disaggregation of the BBC that saw its transmitters, playout facilities and many other assets sold off, and its failure in the first decade of the 21st century to be a true political, cultural and social microcosm of the entire country it serves, were causes for concern.
Public service broadcasting cannot be treated as a garden-variety business. Left to the market, you end up with lowest-common-denominator fare that will suit most of the people most of the time, but not produce really great programming outside the occasional niche such as the likes of HBO.
Let us not forget that Mrs Thatcher and Mr Reagan were very close while they were both in power. Had the Left not driven voters to the Conservatives in 1979, it is quite possible that, without her influence, Mr Reagan’s policies might have been slightly different. Still, when the storm broke the US had had three presidents since Mr Regan: Messrs Bush Sr, Clinton and Bush Jr. Likewise, the UK had three prime ministers after Mrs Thatcher: Messrs Major, Blair and Brown. Any of these men should have kept an eye on how the banking and financial system was using its newly-won freedoms and had the gumption to apply a touch on the brakes when necessary.
The Thatcher/Reagan experiment was arguably right in the circumstances, but successive leaders failed to recognize when the forces it unleashed were threatening to go too far, or had indeed gone too far. Alan Greenspan allowed the housing bubble to expand like there was no tomorrow; it duly burst, showering us all with foul-smelling droplets. Iceland allowed its banking sector to grow beyond all reason; many Britons suffered from the Icelandic government’s inability to support its banks and deal with the aftermath.
But none of this is any reason for doing away with capitalism and the free market. Its role is to generate the wealth that benefits us all and without which a progressive government’s social programmes cannot be funded. The state’s role is to by and large give business its head but keep it on the straight and narrow. Social democracy, which fuses the best bits of both capitalism and socialism, is not a bad concept.
Doubtless economic deregulation, while bequeathing many benefits on the world economy, also had its downside, and this was reflected in the global financial crisis that swept the world in 2008. But it was far from the only cause. As The Economist pointed out, the financial crisis could not be blamed on deregulation alone: policy mistakes and the developing world’s ambitions and policies all played their part. Those who delight in holding Thatcher and Reagan to be the fount of all evil should read The Economist‘s editorial carefully and take due note.
In the space of two generations, the excesses of both left and right were thoroughly discredited. The priority in late 2008 was for the world’s leaders to build a new mixed economy; to construct solid foundations harnessing the power of capitalism and the free market to generate wealth, innovation and prosperity while learning the lessons of the past and applying the necessary restraints to stop capitalism from again falling victim to the inevitable consequences of its own excesses. This called for better, if not more, regulation; for finding the right balance between unbridled capitalism and raw socialism; for forcing if necessary the banks to take a far more cautious approach to risk; for ensuring that those who borrow money will be able to repay it.
When world leaders gathered in the New Hampshire town of Bretton Woods in 1944, they were faced with the task of ensuring that the mistakes immediately after the First World War were not repeated. One lesson of the inter-war years was that bleeding Germany dry and the financial instability that resulted were significant causes of the rise of fascism in Europe. Financial instability produces political instability produces war. The International Monetary Fund, the International Bank for Reconstruction and Development (part of the World Bank Group) and – indirectly – the General Agreement on Tarrifs and Trade, which much later became the World Trade Organization, were the result.
The lesson of the global financial crisis of 2008 is that international finance is too important to be left solely to the whim, greed and fear of the markets. It is insane to create financial instruments that are so opaque that nobody understands them, or to take on debt when you cannot identify the debtor. Furthermore, anyone who tries to run a household according to good housekeeping principles knows that you buy only what you can afford and spend only what you have earned. If you have to go in hock for something then you probably cannot afford it: if you are tempted by a new car, or expensive consumer goods, you save up the money first.
The pursuit of profit at all costs and incorrigible short-termism were fundamental causes of the 2008 maelstrom; it is clear that the world needs nothing less than a new Bretton Woods to reconstruct the global financial system to meet the demands of the twenty-first century.