It feels to me like we’ve crossed the Rubicon. I knew we had in August 2007 when it became apparent that Northern Rock’s shadow bank, Granite,was going to pull the edifice down. It felt the same way in the summer of 2008 when it was clear that the banks were heading for bust. This morning it feels that the euro is heading the same way.
Yields on Euro denominated bonds from Ireland, Portugal and Spain reached record levels yesterday. In other words, the Irish austerity package has done nothing to calm the markets. The neoliberal prescription has failed. Worse, talk of contagion now spreads to Belgium and even the Netherlands and France.
I can see no rational reason for most of this: the Irish economy is, I admit, a basket case. US businesses such as Intel, Pfizer and Microsoft are all saying this morning that Ireland must resist pressure from France and Germany to raise corporate tax rates: but they would, wouldn’t they? What do they care about Ireland? As Simon Johnson, the former chief economist at the IMF notes in the New York Times:
At least 20 percent of Ireland’s G.D.P. is from “ghost corporations” that have little or no real activity in Ireland. Corporate taxes are set at 12.5 percent, but leading global corporations are able to construct complicated schemes involving other offshore tax havens that reduce their effective tax rates to the low single digits.
The Irish insist that raising the corporate tax rate would not generate additional revenue – effectively acknowledging the point that this part of the economy cannot be taxed as part of the anti-crisis policy mix. You will know that reality has finally set in when all the relevant numbers are presented relative to G.N.P., not G.D.P.
Northern Rock had a shadow bank. Ireland has more than one shadow economy: there is, of course, the illicit sector that every economy suffers but in its case there is this second shadow – the efficiently condoned but entirely uncontrolled (or is it uncontrollable?) Corporate shadow that supposedly lifts income and well-being and Ireland but in fact merely made passes through, leaving hardly a taste of tax or employment behind.
It is these shadows that are bringing economies to their knees. Ireland has lost the ability to manage its economy,to make choices in the best interests of its people,to impose tax where tax is due, and all because of this shadow.
States as large as France are subject to doubt as to their ability to pay, not because there is anything fundamentally wrong with their economy but because the shadow of international finance – the bankers, the hedge funds and investment managers who are supposed to represent the best interests of their customers, such as your pension fund and my pension fund – that shadow has fallen across their debt, and so we must all suffer.
I admit, I am worried. I was worried in September 2008: worried enough to buy reserve stocks of food at that time. I’m not doing that, just yet. But in some ways this situation feels even more troubling. The shadow seems now to be out of control, and to be bringing about the very crisis that could bring its own destruction. It will only take one major sovereign debt failure, a failure not caused by underlying economic reality, but by the impact of the shadow of banking, for bank contagion to spread like wildfire. If Ireland failed then so would banks in the UK, Germany and Belgium. Belgium, currently without a government since last April, could then fail in turn due to failure to support its banks. And the process could spread.
This situation has developed for obvious reason: we did not nationalise banks when we should have done in 2008. The resulting opportunity to reform the banks has been missed . The political will did not exist. Tax haven activity has been allowed to continue. And those fault lines are at the core of the current crisis.
Can we get through the next few weeks? We can, but there are big caveats. First, there has to be a willingness to close markets when they threaten stability. Markets do not come first.
Second, there has to be a willingness to say that the banking system of the world is failing and only by bringing it into state control, probably without compensation, can we reclaim necessary control of economies from the irrationality of those who seek to destroy them. If both sound like wartime measures then so be it: that’s how serious I consider this situation to be.
Third we have to be willing to pump any amount of money into the economy to maintain liquidity, and that will mean hard cash on occasion when people demand it. I sincerely hope the printing presses are running.
Fourth,whilst talking of printing money, the European Central Bank will have to undertake quantitative easing, purchasing the debts of Ireland, Spain, Portugal and any other country risk of default to achieve four goals. The first is liquidity,the second is the reduction of interest rates in these three states, the third is the protection of the Euro and the last is the creation of orderly markets. It is very worrying that Germany appears not to comprehend these needs at present.
These measures might work. The first two, at least, are drastic,but so is the current crisis. We are in the death throes of capitalism 3.3 as Anatole Kalestky calls it. The death throes of an economic order are usually associated with war.That is something we to avoid. But we also have to be aware of the risk of that massive disruption, and embrace that idea when accepting the radical reordering of the economic organisation of society that we require. I have no doubt that what will emerge will be capitalism: indeed, it should be. But it will not be the same capitalism as we have now, and it will recognise its strong underpinnings in the foundation of democratic states to which it is accountable.
I believe that is possible but I will also be honest: I am worried, just about as much so as I was in September 2008.