About two years on from the financial crisis the world looks very different to the way it seemed in the middle of the economic collapse.
The broad ideological realignment predicted by many never came. But, back in late 2008, it was hard to get away from the hyperbole. Neo-liberalism was dead. Consumerism was dead.
Even deader was the orthodox approach to economics. The entire academic economics profession was looking pretty unwell.
A cover of Newsweek claimed ”We are all socialists now.” French President Nicolas Sarkozy was photographed reading Karl Marx’s Das Kapital.
A clearly overstimulated Kevin Rudd wrote in The Monthly: ”from time to time in human history there occur events of a truly seismic significance, events that mark a turning point between one epoch and the next”.
For Rudd, it was time for governments to grab back the power his prime ministerial predecessors had relinquished.
As the global economy imploded, the ideas of John Maynard Keynes, the economist who suggested government could step in to save it, were always going to be popular.
In retrospect, Australia survived splendidly. We never quite fell into recession. We should be proud. Or perhaps just relieved. Overseas, the outlook is terrible.
The formula that the government claims worked in Australia – pumping money into the economy with reckless haste – has failed elsewhere.
The United States embarked on an unprecedented fiscal stimulus, bailing out car companies and investment banks. But its economy is still moribund, unemployment projected to hover at about 9 per cent for years. Last month it began another round of printing money.
At least the US government is limping along. Across the Atlantic, the wash-up from the crisis has been even worse. Greece is broke. Ireland is broke. Spain looks like it’s about to go broke.
The crisis that was supposed to destroy neo-liberalism seems instead to have hurt big-spending governments.
Economic slumps are stress-testers. Not all businesses fail in a recession. Those that do are either so marginally profitable they were on the edge of failure anyway – think car companies – or had made such poor decisions that they caused the crisis in the first place – including banks that relied on sub-prime mortgages. So too with governments.
The financial crisis was an industrial-scale test of economic wellbeing. Countries that had bad policies before the crisis failed.
Ireland suffered because, having adopted the euro, its interest rates were set by a European central bank more attuned to French needs than Irish ones. Ireland’s economy – its tax cuts and public service bloat – came to rely on a housing boom caused by those theatrically low rates. The boom collapsed.
Greece’s corrupt public sector has engulfed and suffocated its economy over decades – the government was only just able to pay all its employees during the good times, let alone during a crisis. The US economy was weak after a decade of massive overspending under George W. Bush and the trillion-dollar price of military adventurism. Barack Obama’s spending decadence tipped it over the edge. The American economy is paying for years of government irresponsibility.
Yet countries that were robust and healthy – such as Australia with our flexible labour market, good balance sheet and risk-averse Reserve Bank – thrived.
Academic economists are still studying the causes of the financial crisis. One early finding: it wasn’t ”greed”. How important were the American interventions in the housing market, the US Federal Reserve’s artificially low interest rates, Wall Street’s too-clever-by-half mathematicians, or the global capital regulations that inexplicably favoured mortgage-backed securities?
But we know what’s happened since. The moment for Keynes has ended. Now it’s time for free-market economists such as Ludwig von Mises and Friedrich Hayek. The two Austrians said markets should be free to self-correct – better for governments, and better, in the long run, for economies. Governments should have restrained themselves.
Keynes once famously claimed that when the facts changed, he changed his mind. Having ended its flirtation with collectivism, Newsweek now publishes articles about ”The Triumphant Return of Hayek”. Bitter experience will do that.
The real casualties of the financial crisis haven’t been banks or businesses. They have been the rash governments that tried to save them and the taxpayers who provided the cash.