I remember exactly where I was on that sunny day in 2007 when it was reported that inter-bank lending had frozen. Bankers knew that their peers were bust, and could not be trusted to honour their obligations. I then naively believed that friends would get the message. I also hoped in vain that the economics profession as a whole would add its voice to those few that warned of catastrophe. Not so. Apart from readers of the Financial Times, and of course some speculators in the finance sector itself, very few seemed to notice. Fully a year later in September 2008 when Lehman Brothers imploded, it dawned on the wider public that the international financial system was broken. By then it was too late. The world was perilously close to complete financial breakdown. The fear that bank customers would not be able to draw cash from ATMs was real. Blue-chip industrial companies called the US Treasury to explain they had trouble funding themselves. Over those hair-raising weeks, we lived through a terrifying economic experiment that very nearly did not work.
Given this backdrop, it came as no surprise that policymakers, politicians and commentators had no coherent response to make to the crisis. Many on the left of the political spectrum were just as stunned. Like most economists, they seemed to have a blind spot for the finance sector. Instead their focus was on the economics of the real world: taxation, markets, international trade, the International Monetary Fund (IMF) and World Bank, employment policy, the environment, the public sector. Very few had paid attention to the vast, expanding and intangible activities of the deregulated private finance sector. As a result, very few on the Left (taken as a whole, with clear exceptions), nor the Right for that matter, had a sound analysis of the causes of the crisis, and therefore of the policies that would need to be put in place to regain control over the great public good that is the monetary system.
Neoliberalism—the dominant economic model—prevailed everywhere. Paul Mason wrote a book in 2009 called Meltdown with the subtitle: The End of the Age of Greed. How wrong he was. Ten years now from the start of the 2007 recession, while inequality polarizes societies, the world is dominated by an oligopoly greedily accumulating obscene levels of wealth. And despite the initial meltdown, the global financial crisis has not come to an end. Instead it has rolled around from the epicentre of the Anglo-American economies to the Eurozone and is now focused on so-called ‘emerging markets’. Private bankers and other financial institutions are gorging on cheap debt issued by central bankers, and have in turn dumped costly debt on firms, households and individuals. The publics in western economies have suffered the consequences. At the time of writing, millions are in open revolt, backing populist, mostly right-wing political candidates. They hope that these ‘strong men and women’ will protect them from hard-headed neoliberal policies for unfettered global markets in finance, trade and labour.
So what is to be done by the forces for good – progressive forces – to stabilise the global financial system and restore employment, political stability and social justice?
First, we need wider public understanding of where money comes from and how the financial system operates. Regrettably these are areas of the economy gravely neglected by many progressive and mainstream economists—a convenient blind spot that is no doubt welcome to the finance sector. The second aim of any progressive movement should be to channel the public anger generated by bankers and politicians into a progressive and positive alternative. Sadly, the Right are more effective at channelling public anger into the blaming of immigrants, asylum seekers and other bogeymen. And as worrying, sections of the so-called Left are channeling anger at bankers into neoclassical economic policies for resolving the crisis. They take the form of ‘fractional reserve banking’, the nationalization of the money supply and the pursuit of ‘balanced budgets’ for governments. These are policies which owe their origins to the Chicago School and to Friedrich Hayek and Milton Friedman. They would have devastating impacts on the working population and those dependent on government welfare. So this book challenges the flawed, if well-meaning, approaches of civil society organisations that are steering many on the Left into, to my mind, an intellectual dead-end.
So, besides a wider understanding of the finance system, what is to be done to restore economic prosperity, financial stability and social justice?
The answer in my view can be summed up in one line: bring offshore capitalism back onshore.
For a regulatory democracy to manage a financial system in the interests of the population as a whole, and not just the mobile, globalised few, requires that offshore capital be brought back onshore by means of capital control. Only then will it be possible for central banks to manage interest rates and keep them low across the spectrum of lending—essential to the health and prosperity of any economy. It is also essential to the management of toxic emissions and the ecosystem. Only then will it be possible to manage credit creation, and limit the rise of unsustainable consumption and debts. And only then will it be possible to enforce democratically determined taxation rules, and manage tax evasion. Democratic policy-making—on taxation, pensions, criminal justice, interest rates, etc.—requires boundaries and borders. A borderless country could not enforce taxation rates, or agree which citizens should be eligible for pensions, or detain criminals. But freewheeling, global financiers abhor boundaries and regulatory democracies.
There are brave economists who have for many years argued that states should have the power to manage flows of capital. They include professors Dani Rodrik and Kevin P. Gallagher, and have lately been joined by some orthodox economists, including the highly respected Professor Hélène Rey, who has argued that the armoury of macroprudential tools should not exclude capital control. Until now their voices have been eclipsed by effective lobbying from financiers on Wall Street and the City of London. At the same time the arguments for capital control have not attracted support from the Left or from social democratic parties. On the contrary, most social democratic governments both accept and reinforce a form of hyperglobalisation. To bring global capital back onshore would be transformational of the global monetary order. Only then could we hope to restore stability, prosperity and social justice to a polarised and dangerously unequal world. Only then could we hope to manage the challenge of climate change.
Excerpted from The Production of Money by Ann Pettifor. Copyright 2017 by Ann Pettifor. Published in March by Verso. All rights reserved.
