Morality & the economic crisis June 30, 2010Posted by larry in Uncategorized.
Tags: ethics, large organization & government, Mellon, morality
If you think Krugman’s Third Depression was scary, have a look at these comments on the recent BIS (Bank for International Settlements, the bankers’ bank) report – Britain ‘might not cope with another bank emergency’ and BIS annual report is frightening reading. [actual article titles] The report itself is 216 pages long. The report indicates that the financial sector is too big. And since there are no environmental checks on size, government will have to engage with this issue. But, of course, they won’t until it is too late (if recent experience is any guide).
The US still has something of a manufacturing sector but it is nevertheless unknown whether it could cope with another serious banking crisis. The UK industrial sector was virtually wiped out under Thatcher. Companies didn’t move overseas, as many did in the US; they disappeared. So, where is the socio-economic backup that could be an engine of an economic recovery? It doesn’t look like there is one – the financial sector was encouraged to move into the vacated manufacturing niches with the result that the UK economy is inherently unstable because seriously unbalanced.
Along with a relatively weak industrial sector, there is another worrying factor to take into consideration concerning how well the US and UK are likely to respond to this crisis as it goes on. It is this: When each of these crises struck, BP’s situation and government attitudes to and responses to the crisis in the financial sector mirrored one another. BP wanted to make money hence didn’t want to invest in safety measures; government regulators went along with this. The banks wanted to make money and thus didn’t want to invest in safer risk assessment measures, and government regulators went along with this. Attempts to fix what went wrong went side by side with trying to make sure that the system and those at the top did not lose – BP didn’t want to lose any equipment while the banks didn’t want to lose any bonuses. So, no real fix was actually implemented, only tinkering. In both cases, it may be too late to rectify the situation.
While there are dissimilarities, the socio-political similarities are so striking that one thing becomes incredibly clear – the response is to fix only up to the point where going any further would result in financially dislocating the fixers and those to whom the fixers are economically related from their economically privileged positions – such as, the nouveau, nouveau riche (cf. James K. Galbraith, The Predator State Ch. 9).
In the two scenarios in question, this sort of a fix does not constitute a fix at all but only a stopgap, which could well result in further potential catastrophe down the line. If history is evidentially relevant, government policy is making such a catastrophe more likely rather than less likely. And this is particularly so if some coalition members entertain a view even slightly similar to that held by the infamous Andrew Mellon, the Secretary of the Treasury under Herbert Hoover. Mellon’s response to the 1929 crash was to “[l]iquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. … It [a panic] will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.” (Reported by Hoover at the time.)
There is another side to such a view of the current crisis. And this is the possibility that some genius has figured out that if the economic distributive status quo is not to be tinkered with, and there is no industrial/manufacturing base to pick up any slack in the event of another financial crisis, it might help to allow the banks to make a lot of money before the next crisis comes so that there will be at least some kind of financial cushion in place. But the essential part of this strategy, a Tobin tax large enough to create such a cushion within a reasonably short period of time, has not been implemented. All that has been implemented is a token tax instead of a Tobin tax. Pathetic. Someone isn’t thinking this through. Perhaps no one is.