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The return of the state:
How government is back at the heart of economic life
John Plender, Financial Times, August 21 2008
For the best part of three decades, policymakers in the developed world followed Ronald Reagan and Margaret Thatcher in seeking to roll back the frontiers of the state. The triple mantra of privatisation, liberalisation and deregulation held sway.
Yet the problems that began in credit markets a year ago now cast a cloud over the strong market orientation of western policy. After the collapse of banks such as Bear Stearns in the US and Northern Rock in the UK, and against the current background of mounting speculation about the viability of mortgage giants Fannie Mae and Freddie Mac, the Anglo-American approach to capitalism appears badly flawed.
In the US, monetary policy has been substantially loosened, while Keynesian-style fiscal activism is back in fashion. A $150bn budgetary boost in this presidential election year is probably just a start.
In a recent powerful defence of finance capitalism, Raghuram Rajan and Luigi Zingales argue that free markets are vulnerable to attack in downturns because they rest on fragile foundations, depending on the goodwill of politicians for their existence.
Saving Capitalism From The Capitalists, Crown Business (2003)
In a powerful indictment delivered at the Economic Club of New York in April, Paul Volcker, former chairman of the Federal Reserve, said: “Simply stated, the bright new financial system – for all its talented participants, for all its rich rewards – has failed the test of the market place.”
Against that background, there is understandable resentment that wayward bankers are being bailed out. Such socialism for the rich is unlikely to please electorates in the worst-hit countries.
Public choice theory, with its view of politicians and bureaucrats as “personal utility maximisers”, has heavily influenced economic thinking. The blunders and scandals that recur in mature democracies have left electorates disillusioned with political elites.
Public ownership, meanwhile, failed to deliver on its promise in the west and failed completely in the Soviet Union. So interventionist policy now evokes widespread scepticism.
Only in banking, thanks to recurrent and catastrophic failures of risk management, does public ownership appear to compare favourably with private.
These are historic moments for the world economy.
First and most important, what is happening in credit markets today is
a huge blow to the credibility of the Anglo-Saxon model of transactions-orientated financial capitalism.
A mixture of crony capitalism and gross incompetence has been on display in the core financial markets of New York and London.
Martin Wolf, FT 12/12 2007
Joseph Ackermann, chief executive of Deutsche Bank,
"I no longer believe in the market's self-healing power".
Financial Times, March 26 2008
How the banks can win back confidence
Josef Ackermann (Deutsche Bank), Financial Times July 30 2008
Jackson Hole Paper 2
Destroying the Tower of Basel
Andy Haldane, the Bank of England’s executive director for financial stability is about to call on the world’s top economic officials
to cast aside more than 50 years’-worth of thinking on how the global financial system should be regulated.
Financial Times, Money Supply Blog, August 31, 2012