When the global financial system suddenly collapsed in 2008...
When the global financial system suddenly collapsed in 2008, it seemed obvious that it had swept away an entire way of organizing the world.
If capitalism were to survive, it would need to be turned upside down. And so it is proving. And yet 16 years and five presidential elections after Lehman Brothers collapsed, the alternative is still emerging.
The two key moments of economic crisis in the 20th century were the Great Crash of 1929, and Richard Nixon’s ending of the gold standard in 1971.
The version of capitalism that fueled the Gilded Age and the Roaring ‘20s perished suddenly in October 1929. It was replaced by a model which would be labeled Keynesianism
Initially, Herbert Hoover’s administration trusted capitalist creative destruction. They let banks fail, hoping the system would be cleansed, while America took a disastrous turn towards protectionism with the Smoot-Hawley tariffs.
Franklin D. Roosevelt arrived in 1933 determined to balance the budget.
The financial system was brought to order and tightly regulated, most famously by the Glass-Steagall Act that forbade commercial banks from dabbling in investment banking.
The miserable stagflationary 1970s ensued, but pieces of a new order steadily fell into place.
The collapse of the Thatcher-Reagan world in 2008 was absolute, but a response took a while to take shape. Rahm Emanuel, Barack Obama’s first chief of staff, said “you never want a serious crisis to go to waste.”
But that is exactly what the Obama team allowed to happen.
Under pressure from the Tea Party revolt, thoughts of New Deal-style big fiscal spending were abandoned, but by printing money, the Federal Reserve turned what might have been a screeching conflagration into a slow-burning train wreck.
During Covid-19, Trump spent money on a scale unseen in generations, as did many other governments around the world.
Trump’s return largely ratifies a new order that is already in place.
If there is a defunct economist who should take the credit for the model now emerging, the best option might be Jean-Baptiste Colbert, who ran Louis XIV’s treasury in the 17th century and
whose name is now synonymous with the doctrine of mercantilism — a philosophy of economic nationalism, with intervention by the state if necessary to advance their interests at the expense of others.
The idea that governments can exert such influence over the private sector, as well as international trade, has been absent from the west (if not from China) for more than a century.
Now, the notion has taken hold that the free market system really did fail in the Global Financial Crisis, and efforts to mend it from within haven’t worked.
John Authers is a senior editor for markets and Bloomberg Opinion columnist. A former chief markets commentator at the Financial Times, he is author of “The Fearful Rise of Markets.”
John Authers Bloomberg 22 november 2024
The Fearful Rise of Markets: A Short View of Global Bubbles and Synchronised Meltdown
https://www.amazon.com/Fearful-Rise-Markets-Synchronised-Meltdowns/dp/0273731688
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