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The next financial crisis

We’ll crash again unless global leaders answer some fundamental economic questions.

Political leaders across the world seem already to be treating the global financial crisis as a one-off event. We were unlucky. Yes, we may have been driving at 100mph through a densely populated neighbourhood. There was an accident, but we'll keep hold of the wheel next time and improve the brakes. How quickly we forget.

It's a long road from the multilateral resolve of the 2009 G20 Summit in London to today's paranoia, small-mindedness and cowardice in the face of domestic politics. European finance ministers meet today with seismic activity along the eurozone fault lines starting to spike, while the IMF faces an uncertain immediate future at just the wrong time.

Domestically, the likes of David Miles and Andrew Haldane of the Bank of England warn us about future uncertainty, with financial crises more a matter of when than if. The Independent Commission on Banking knows how exposed we are as an economy. And yet, the commission recommends fairly small-scale action – bank shares climbed in the aftermath of its report being published. The reprt was more frightened of the City of London's competitiveness than any potential damage to the remainder of the economy.

In the UK context, the coalition has succeeded in selling its particular outlook on the economy as a consensual position. It is anything but. Its immediate policy – austerity despite financial stasis – is profoundly disputed in the economic academy and by the specialist commentariat. Moreover, the government has done little to drive towards a better global financial institutional structure.

Tasty story

Where the last government was ahead of this debate, the coalition prefers to hide behind a consumable story about debt. Meanwhile, it is failing to address the fundamental challenges of restoring strong growth and creating the right rules of the game.

We have an economic and financial system that is inherently uncertain and crisis-prone. We remain in the midst of a crisis that has gone from sub-prime mortgages to global financial crisis, to global recession, to sovereign debt crisis, and could yet become an even more ferocious debt and financial crisis. Greece, Ireland, Portugal and perhaps Spain are trapped, insolvent and capable only of a fiscal masochism that ultimately makes the problem worse as national income suffers as a result. And the whole time, the system remains fundamentally unchanged.

Two basic questions emerge that few of our leaders dare ask with the public in earshot. First, do we accept globalisation or not? Second, if we accept it, how do we ensure that it creates jobs and shared wealth instead of destroying them?

The answer to the first question is not obvious. We do have a choice. Globalisation is not a force of nature. There is a perfectly legitimate argument in favour of trying to play globalisation by your own rules. This has limits even for the world's two largest economies, China and the United States. In fact, in both economic and financial terms they are highly mutually dependent.

Unless legislators are willing to give preference to independence over economic prosperity the question then becomes: how do we do globalisation and make it consistent with democratic legitimacy and national welfare? What the ongoing global financial crisis shows is that we haven't got it right at all.

In a stark warning in this week's Newsweek, Gordon Brown argues that we have not properly addressed the cracks and friction in the global economy. Globalisation offers new markets as well as new competition. Play it right and we all prosper. Get it wrong and the global financial crisis of 2008 threatens to be the first of many.

Calamity lane

What is clear is that the world is crying out for leadership. The alternative is what we have now: mutual suspicion, fear, unenlightened national interest, race-to-the-bottom competition and uncertainty. We can neither afford this reckless evasion of the real challenges posed by globalisation nor pretend that there is a cosy retreat. Both nationalism and inaction pose serious threats to jobs, growth, climate change, social justice and global poverty reduction.

Once, in the historically recent past, leaders chose to create the institutional architecture of shared prosperity in response to the Great Depression and the economic devastation of the Second World War. These institutions were both domestic and international, and based around financial regulation and multilateral support for economic change combined with an opening of trade and exchange. What this meant is that societies could embed the global economy in domestic social institutions. It empowered democratic nations without precipitating economic calamity.

Whether the eurozone pops or not, strong leadership and institutional creativity are now needed once more. In this regard, leadership at the global level – including in the IMF, within the major economic blocs and domestically – is the most vital just as it suddenly seems so lacking. Or we could just repair the car that has just crashed, pretend we simply got unlucky, and go for a joy ride again. Somehow, that doesn't seem to be very sensible. Nonetheless, it is exactly what we seem to be doing.

Anthony Painter is a political writer, critic and researcher. Follow him on Twitter at @anthonypainter.