Banks: Are they finally losing their grip on the economy?
The rather brilliant theorist of economic history, Carlota Perez, argues that after very large financial crashes, economies change their mode of operation. Systems that have been run by and in the interests of financial speculation become far more focused on the ‘real economy’. Profits and wealth are generated less by playing around with money and more by the search for productivity and innovation in other sectors.
This process often begins with the banks and other financial bodies losing economic, political and popular credibility. Their sphere of influence and their freedom of activity becomes constrained not just by the fact that financial conditions have changed but also by a new regulatory regime and a political backlash.
That Perezian turning point may just have arrived. Darling’s bonus tax, Obama’s insurance levy, a growing campaign for a transaction tax and now, most strikingly, Obama’s new Glass-Steagall, suggest that something significant is finally happening over a year after the crash. If there is a serious popular and political backlash against the Cadbury deal (which as Robert Peston points out is underpinned by some strange incentive schemes for the banks involved), then we will really know times are changing.
Perez also says that the decades after a major crash are characterised by more progressive economic policies than the laissez faire approach that shapes the pre-crash period. That has already happened in relation to industrial policy. If Perez is right, the approach could spread to other policy areas as well. I’ve written in a lot more detail about that here.
Of course, many on the left are disappointed by the fact that only a few months after the crash it seems to be the right that has reaped the electoral benefits in Europe. But maybe more patience is required.
It’s worth remembering that the policy transformation ushered in by the Attlee Government only began sixteen years after the Wall Street Crash. The economic work that influenced that whole post-war generation (Keynes’s General Theory of Employment, Money and Interest) wasn’t even published until a full seven years after that financial catastrophe. The Beveridge Report which established the blueprint for the Welfare State only appeared in 1942. Indeed, even in the States, it was four years before the original Glass-Steagall Act was passed.
I don’t think we are about to see a policy revolution of the sort that followed 1929 but more subtle though profound shifts may already be beginning.