Column : Put away Das Kapital

When the crisis erupted last September after Lehman Brothers went bankrupt, the mood was apocalyptic. Many if not most analysts mentioned the Great Depression of 1930s. Some speculated about the end of free market ideology, of free market economy and indeed of capitalism. It was the end of laissez faire. It was noted with irony that the US was nationalising banks and George W Bush (remember him?) was turning the US into a socialist country.

The crisis was the most serious for some 20 years, without a doubt. It was also a double crisis with the meltdown of the financial system as well as a recession in real income and employment. Each had its separate trajectory, but intertwined as the financial meltdown impacted on the real economy by choking off the supply of credit. Asset values plunged, firstly of houses and then of equities. Banks had to be recapitalised by governments to stem the financial meltdown and massive fiscal stimulus packages were required for the real economy. In the absence of commercial credit, central banks had to innovate quantitative easing and become direct lenders to the market, bypassing the banks.

The result has been a big rise in debt burden of governments and a weakening of the balance sheets of central banks. The German Chancellor Angela Merkel has declared herself a sceptic on the policy of large Keynesian packages . Anglo Saxon economies?US and UK?have gone ultra Keynesian and borrowed without restraint. Niall Ferguson the Oxford historian clashed with Paul Krugman about the desirability of the borrowing, warning of a steep rise in interest rates . Krugman has accused him of being ignorant of any economics since the General Theory became available. Krugman holds that while the recession lasts, the economy being short of full employment, interest rates will stay easy. Robert Skidelsky, Keynes?s biographer agreed with Krugman .

Now suddenly the mood music is changing. The National Institute of Economic and Social Research, UK?s prestigious and independent research body has announced that the recession may be over. In April and May output rose , albeit by 0.1 and 0.2 %. The stock markets have risen quite a bit since March. Now we hear the news that US banks which had received massive injections of financial aid from the US government are about to pay back nearly $ 70 billion of federal funds. Lloyds Bank in UK is also about to pay back ?3.2 billion, a respectable fraction of what the government gave it.

It is time therefore to take stock. It is too early to say that the real output recession is over though it may have bottomed out. Unemployment being a lagging indicator will go on rising for a while, but at a slower rate. But it looks like the financial system has recovered from a total collapse. If the major banks can return the money by raising funds on the market, it would signal the end of the meltdown. Credit is still tight and inter-bank lending is still scarce.

But the restoration of banks asset position and the reduction in the federal claims will mean that the financial system has survived the crash in good health. There are still toxic assets sitting in the vaults of banks and these will slowly get released on the market once the housing market revives which it also looks like doing. This will take time but given the banks are able to borrow on the market there is no urgency.

Several things follow from this. The promise of drastic reform of the banking system may not be realised. Once banks are up from the floor, they will begin lobbying the US Congress about the need to leave them alone and not make their recovery precarious. I can just hear the arguments. ?Leave well enough alone. It was not a dysfunction of banks but only excessive credit supply and low rates that the Fed fixed.? The blame will shift on the double deficits that the US government ran and the Chinese financed. Same again in the UK and the bank recapitalisation will be praised for its timeliness but the government will be held ransom about its debt position.

This is as yet a forecast and there are many uncertainties attached to my guess. But the Armageddon predicted by the critics of capitalism did not happen. Compared to the 1930?s this is just a sneezing fit rather than a flu pandemic. It is not even comparable to the 1980s in real recession terms. Interest rates will harden soon in Western bond markets. The medium run macroeconomic forecasts will be cautious since the debt will need to be repaid and we cannot rely on a rekindling of inflation.

It looks like capitalism lives again for the while. Sarkozy can put Karl Marx?s Das Kapital back on the book shelf?unread of course.

?The author is a prominent economist and Labour peer