Back to "the wild falls of laissez-faire"?

First published in jimsresearchnotes 11 July 2009

“The Wild Falls of Laissez-faire (Röpke, 1950, p.187)

The period of US sole-superpower status has lasted a single generation and, with the rise of China, it is a hegemonic status that may be nearing its end. But in that relatively short period of time the world economy has reverted to the wild boom-slump roller-coaster ride that der dritte weg was specifically developed to avoid. Stock market crashes in 1987 and the home ownership negative equity crisis of the 1990s, the Asian and Russian finance crises of 1997/8, and no fewer than two bubbles and post-bubble crashes crowded into in the first 7 years of the new millennium – the collapse of the dot-com bubble in 2000 and the housing mortgage finance crash of 2007 – are just the first fruits of the unleashing of Friedman economics on the world.

The sub-prime mortgage crisis is the deepest world economic crisis since the Wall Street Crash of 1929. More important for housing, it reflected the fundamental weakness of the monotenural housing system of home-owning societies and the bank crashes of low-income house-purchase finance institutions like Fannie Mae and Freddie Mac in the USA where the whole problem started and Northern Rock and Bradford and Bingley in England – all of which had to be bailed out by governments using taxpayers money to purchase or take over their toxic assets. With a few exceptions, such as oil-rich Norway, the countries that were hardest hit are also the more extreme monotenural home-ownership countries, notably the USA, Britain, Ireland, Iceland and the Baltic States, especially Latvia.

By contrast, although banks in countries which had not put all their eggs into the one basket of monotenural home ownership also suffered sub-prime lending crises, they were not nearly as deep or acute. More important they were not domestic mortgage crises since, luckily, there is still no desperation in Third Way housing markets to buy into owner occupation, thanks to the unitary rental market. Countries with unitary rental markets suffered least of all, though they did of course suffer the knock-on effect from the collapse of their export markets in the ensuing global economic depression, especially Sweden and Germany, which are particularly dependent on export industries.

Sweden: here we go again…

The Swedish experience is particularly noteworthy as this is its second bank crisis in 15 years, making it clear that Sweden’s nationalised banks were unable to learn from the experience not to repeat the same mistake. Rather, it is a structural problem, given the need to maximise profits in a global free market based on wild speculation. What makes it worse is that one of the two banks in most trouble is Nordea, the very bank, which under its original name of Nordbanken was nationalised in the early 1990’s bank crisis. This time it has not been speculative lending in commercial properties in Sweden that threatens its downfall but its hard-sell rash investments in the Baltic States and especially Latvia.

Paying for the wild falls of laissez-faire

Governments are clearly becoming increasingly drawn into subsidising their countries’ banking sector, and questions are already being asked about returning to regulation. Ultimately the bill for the neoliberal experiment will have to be paid by taxpayers. This in turn raises the question of how far governments can protect banks and other speculation-prone companies from bad debts in times of recession that Stiglitz has described as socialism for the rich.

The signs are not good. In the UK in particular there are already indications of triumphalism in the City that finance institutions are too big for governments to allow to fail, and predictions of the return of the gravy train.

Yet crisis after crisis, each new one deeper than the one before and each time large amounts of tax money being used to bail out finance institutions is unsustainable. The time will come when the cost of these generous welfare handouts to big business will become so burdensome, requiring ever harsher cubacks in welfare to the needy that even if it remains politically possible for ordinary voters to be made to accept it as necessary it will simply be unaffordable by countries driven deeper and deeper into debt by socialism for the rich.

References

Röpke, Wilhelm (1950)

The Social Crisis Of Our Time University of Chicago Press, Chicago (trans. A. and P. Schiffer Jacobsohn) [1942]

Each Post is a freestanding short paper that has not been peer reviewed before publishing. Notes may combine into the equivalent of a working paper for seminar purposes.

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