The Acid Burns Through - Requiem for Neo Liberalism

For Paul Mason, BBC Newsnight’s Economics Editor, there is a scene in the film Alien that provides a powerful allegory for the ways in which the global financial crisis has seeped through several floors of the economic system creating along the way severe tensions and challenges that threaten the whole process of globalisation. You can see this scene here. In it, Ash (Ian Holm) tries to sever the alien off Kane (John Hurt), but the blood that gushes out turns out to be acid which then burns a hole in the ship. As the acid works its way inexorably through several floors, the fear is that it will eventually reach the shell of the space capsule and endanger everyone within in.

Paul Mason argued in his excellent, colourful and thought-provoking talk at the RSA this lunchtime that neo-liberalism is a broken doctrine and that the fallout from someone stabbing the beast that is banking has been deeper and longer-lasting than anyone could realistically have imagined. The banking crisis fed through with incredible speed to hit the real economy, indeed the rapidity of the transmission mechanism took policy makers by surprise and was a catalyst to the extraordinary stimulus policies drafted in during the spring of 2009 and beyond.

Back to our chosen film for the day – Alien!

So a global banking crisis shot straight through to the real economy. It then seeped through to the level of the state (government) which is usually made of thicker stuff and able at least to introduce stabilisation policies such as a fiscal and/or monetary stimulus. During 2009-10 the state has taken much of the strain, reflected in record peace-time budget deficits and a mountainous increase in public sector debt. But the stresses of this response to the crisis have really started to show through. Mason’s recent trip to the United States reported extensively on Newsnight suggests to him that the American bi-partisan political system is now under enormous pressure. Just last year we witnessed the sovereign debt crisis afflicting several Euro Zone countries and major questions about how much further governments inside that currency bloc will be prepared to go to bolster and bail out those nations who have run into serious fiscal difficulties.

The acid attack continues - it now threatens relationships between social classes (witness the demonstrations on the streets in France and Greece about who should shoulder the burden of fiscal austerity) and it risks attacking another floor - economic and political relationships between states. This is why the whole process of globalisation might come to a shuddering halt and go into reverse - for there are plenty of commentators flagging up the risks of nation states opting to drag themselves out of semi-permanent recession and deflation by competitive devaluations of their currencies and by introducing a raft of protectionist import controls. Currency wars (which seem to have begun) tend to spill over into trade wars and when this happens, globalisation as we commonly know it is over and we might be back to the 1930s.

This RSA talk heralded the publication of Paul Mason’s updated book Meltdown – An end to the age of greed. For those who bought the book when it first came out in the spring of 2009, Paul Mason has added extra chapters on the fiscal and monetary stimulus policies of 2009-2010 and also a final chapter looking at the reckoning – who will pay for the global financial crisis and the seismic changes in the size of the state in many countries that has resulted from it.

The post lecture discussion at the RSA focused in part on future directions for banking reform and here Paul Mason argued that the Bank of England itself is now raising the possibility of structural changes to banking in the UK that would not have been considered feasible just a couple of years back. Only this week the Governor of the Bank Mervyn King has outlined at least four fundamental changes under consideration ranging from much higher capital ratios (or capital cushions), a new Glass Steagal Act separating commercial banking from higher-risk investment banking, mutualised pools of assets within any one banking business (to protect the deposits of retail depositors) through to the possibility of abolishing fractional reserve banking (effectively banning money lenders from investing).

We should never underestimate the power and influence of the banking lobby to resist widespread root and branch reform but the options are at least being considered. Reforms and tougher controls will inevitably bring about disintermediation as banks and other finance houses change to an altered regulatory system. Might we be on the threshold of greater diversity in our banking sector? Could this be the decade for a strong revival of mutual funds, of ethnic banks, local and regional banks together with some state-owned banks? Will sufficient capital flow into banks that are in Mervyn King’s words “boring – acting as utilities rather than casinos”? Will enough bright and ambitious people want to work in them? One hopes that they will – one doesn’t have to be a testosterone fuelled risk-loving trader to make a positive contribution to the financial system and help fund the growth and development of innovative, dynamic and socially-aware private sector businesses – the engine of future growth.

Banking inevitably dominated questions from the floor, but there was also an intriguing one about quantitative easing. The first round of QE in the UK has been worth around 12 per cent of national income – so where is it? Where has all of the money gone? This is a good question and one that perhaps reverberates around the hallowed walls of the Bank of England. QE has been used in the main to purchase good quality government debt from the banking system, helping to drive down long term bond yields to record lows, but doing precious little to stimulate lending to hard-pressed SMEs and home-owners. A second bout of QE is all but inevitable and this time will the BoE opt to use debt purchases to take some of the bad debts off the hands of risk-averse bankers? Or could QE be used more imaginatively to support capital investment by the state or the private sector?

Either way for QE to work when an economy is struggling to evade the clutches of recession and the lingering fear of a deflationary depression, it has to show through eventually into demand for goods and services. The pressure is on the Bank of England to demonstrate clearly that this is happening for private sector demand (as well as exports) is the vital ingredient in the recovery mix given the fiscal tightening that is now set in place.

This was a lively and engaging talk from one of the BBC’s most gifted communicators. The RSA holds a series of lunchtime talks and debates at their London base and if you are in the vicinity they are well worth popping along to. Further details can be found here.

Paul Mason’s blog Idle Scrawl can be found here