THREE YEARS ago this week the global financial crisis began. Back then it was called the “credit crunch” and seemed a bit quaint and obscure.
Now it has morphed into what the US Keynesian economist Paul Krugman has called the “Third Depression”—after those in the late 19th century and in the 1930s.
One notable development is the extent to which the ruling class has recovered its nerve after the great panic when Lehman Brothers went bust in September 2008.
Philip Stephens, who is quite a perceptive Financial Times columnist despite still believing that Tony Blair was a good prime minister, illustrated this on Friday of last week.
Stephens pointed to the way that, for all the politicians’ brave talk about a new era of regulating the financial markets, the banks and credit ratings agencies have hung onto their power.
He concluded: “Three years on, things are much as they were—except that most of us are poorer. The markets rule. OK?”
Definitely not OK. But Stephens is right that the big US and European banks that precipitated the crisis have been largely successful in seeing off efforts to control them.
His colleague John Gapper wrote in last Saturday’s Financial Times: “This week, the world’s regulators settled on new standards for bank capital and liquidity, rules that were supposed to set an example of global harmony and toughness in the face of banks’ efforts to escape justice. Instead, the Bank for International Settlements diluted earlier proposals and gave banks eight years to comply.”
This is the latest in a string of victories for the banks. Just before Barack Obama signed his Financial Reform Bill into law last month, the New York Times reported: “The ink is not even dry on the new rules for Wall Street, and already, the bankers are a step ahead of everyone else.
“In ways large and small, the broad overhaul of the nation’s financial regulatory system...will eat into the profits of the nation’s banks.
“So after spending many millions of dollars to lobby against the legislation, bankers are now turning to Plan B: Adapting to the rules and turning them to their advantage.”
Then there were the “stress tests” on the 91 biggest European banks. This was an attempt to reassure the financial markets, after the panic in May over Greece, that the European banking system was in good shape. It was a challenging exercise given that many supposedly solid German institutions OD’ed on dodgy US financial instruments during the housing bubble.
In the event, only five Spanish banks, along with one in Germany and one in Greece, failed.
This was widely denounced as a fix. The German commentator Wolfgang Munchau was beside himself: “If you tried to test the safety of cars or children’s toys using the same method the European Union applied in its stress tests on banks, you would end up in jail. The purpose of this cynical exercise was to pretend that the EU was solving a problem, when in fact it was not.”
All this is tribute to the banks’ lobbying muscle on both sides of the Atlantic. But the most important example of their power is provided by the austerity policies being implemented right across Europe.
The crisis started in the private sector, but its impact was limited by a huge increase in public spending. The economists Mark Zandi and Alan Blinder estimate that American output would have fallen by 12 percent in 2009–10, rather than the projected actual drop of 4 percent, without the $1.7 trillion spent by the US government.
But now, of course, the frenzied efforts to roll back the resulting increase in government borrowing are targeting the public sector.
This is another victory for the banks, who are quite literally walking away with the money.
There is, however, a sting in the tail of this story.
If the austerity drive is defeated, then this whole attempt to reinstate the rule of the markets will unravel. The stakes in the struggles unfolding from Greece to Britain are very high.