The collapse of Lehman Brothers, the legendary icon of American finance, exactly one year ago set into motion a ripple effect that hurtled the US and global economies into the scariest depths since the Great Depression. While downturns are outcomes of cumulative processes and behaviours rather than single big bang events, ?9/15? will be remembered in history as a milestone that exposed the problems of some over-financialised advanced economies.
Although Lehman?s crash was preceded by the bankruptcy of Bear Stearns in March 2008, the cascading effect of ?9/15? on the American and OECD economic systems was unparalleled. Like rotten apples hidden from public view by tangled baskets, the corpses of complex securitisation and repackaged bad debts began rolling out into the open after Lehman went broke. The truth needed propulsion and Lehman was the immediate jet fuel.
In the twelve months since ?9/15?, post mortems on what went wrong in the US, the UK and elsewhere have drawn attention to the failure of regulatory institutions and the politics thereof. Since the 1980s, Anglo-Saxon capitalism inched ever closer to the prototypical liberal market economy, where industrial and financial relations are managed entirely by competing corporations based on their respective strengths.
Many countries in continental Western Europe, however, retained the social democratic variant, wherein non-market institutions like legal and regulatory bodies, trade unions and employers? associations facilitate or sanction economic practices. Corporate felons would find it harder to flourish in social democracies because these systems do not strictly separate the economy from the polity.
On the other hand, liberal capitalist economies like the US, Britain, Australia, Canada, New Zealand and Ireland perfected the concept of the minimalist state a little too much for their own good. Today, the carcasses of Lehman in New York, Northern Rock in Newcastle and the Celtic Tiger bear testimony to the inherent weaknesses of excessive deregulation.
Ironically, since capitalism is an integrated structure, even the social democracies with a pedigree of alert state monitoring of markets were not spared when the financial tsunami struck after ?9/15?. Contagion and coupling effects produced a truly global slump. The appropriate role of the state and of the political class in every economy, regardless of the nuances within capitalism, became the talk of the town.
Since the US has been the pivot on which the entire post-World War II capitalist enterprise hinged, maximum interest has deservedly been trained upon the political happenings in Washington. At the time when Bear Stearns bit the dust, Americans were transfixed by the climaxing Democratic Party primaries in which an upstart grassroots mobiliser called Barack Obama was giving the establishment candidate, Hillary Clinton, a run for her money.
But the big questions of the rot within the entrails of the economy and its solutions were not central yet and the economy did not feature prominently in Obama?s stunning string of victories that sealed his nomination for the presidential election. Eventually, when Obama faced off against the Republican nominee, John McCain, the latter did raise the battle cry of his opponent?s alleged cryptic socialism. But even here, the onus was on tax cuts and credits rather than big-issue boxing over the role of the state in a downwardly spiralling economy.
Since Obama?s ascent to power, a seesaw ensued among various sections and factions in the American business and political world, with no clear winner in sight. The expectation that a radical left movement would emanate from the coattails of Obama?s massive election campaign and compel him to overhaul the core economic system inherited from Ronald Reagan has not yet fructified.
Most average Americans, who were picking up the tab of bailouts of Wall Street megaliths, did not ?rise up? in any revolutionary tide to push Obama to fully nationalise banks and tightly police hedge funds, derivatives and other dubious financial instruments. Instead, they cursed bankers, queued up for temporary jobs or looked abroad for fresh career opportunities. The depoliticisation of so-called ?Main Street? by decades of economic prosperity and boom was apparently so sticky that even a systemic crisis impairing livelihoods of millions could not produce fundamental rethinking about what an ideal economy should look like.
Obama persisted with a neo-Keynesian state spending approach that still respected the boundaries of capitalism. White collar crimes may now be more acutely scrutinised, but the power of the financial lobbies to stymie institutional reforms limiting their freedom continues to hold sway, both inside the White House and in the US Congress.
With the latest buzz that the ?worst is over?, financial elites are pushing the case that government should scale back after trespassing on the private sector during the heady emergency months. Obama himself trod very cautiously when the state took over failing corporations and beat the liberal drum of temporary intervention to correct market deformities. Big businesses in the US are now holding him to the word and a slow momentum is being built against the state becoming a permanent presence in their domains.
The skyrocketing fiscal deficit and threat to the supremacy of the US dollar as a global reserve currency are also strong arguments being propounded for a rollback of the state as the economic crisis tails off. This attempt to restore liberal market economy is most evident in the current brouhaha over healthcare, where Obama?s critics allege that he is expanding the footprint of the state into the private lives of citizens.
As always, the direction which the American economy takes from this point will depend on the respective power that contending sides bring to the battlefield. A jobless rebound of the economy will not cool tempers or conclusively allow unmediated free markets to return.
9/15 unleashed the genie of public oversight of the economy. The idea cannot be bottled back without a prolonged fight.
?The author is associate professor of world politics at the Jindal Global Law School