The Writing Was on the Walls of the Palacio de la Moneda
Note: this post was published in November 2008.
At the end of April of this year, this blog published a post that was titled ‘2008: The Year that Monetarism Died?’ What was a question mark then is a certainty now: even Mervyn King, the governor of the Bank of England, has effectively accepted that the policy of making inflation ‘public enemy no. 2’ (after terrorism) no longer works. The irony is that the Bank’s Monetary Policy Committee (MPC) response—cutting interest rates by an extraordinary 1.5%—is still premised on the same monetarist philosophy, even if it throws the house of gradualist policy out the window. As I suggested in the earlier blog,
The monetarist discourse—an integral and indeed central aspect of the neoliberal ideology that continues to dominate the UK, and much of the world—is premised on the notion that governments can use the supply of money, as regulated by central banks, to control inflation. Two arguments underpin this logic. The first is that central banks actually can control inflation by controlling the money supply, i.e. by raising or lowering the main interest rates. The second is that inflation is the main economic bogey. Simplifying somewhat, and to paraphrase Mother Julian of Norwich, the idea is that if inflation remains low, then all will be well, and all manner of thing shall be well.
New Labour—and more specifically, Gordon Brown—are keen as mustard on this, Milton Friedman’s great idea. It was of course New Labour who set up the Bank of England’s ostensibly independent Monetary Policy Committee, and gave it the task of determining the Bank’s main interest rates each month. Until 1997, this had been the prerogative of finance ministers (or chancellors of the exchequer) who were prone to mismanage the interest rates for political reasons. An independent body would take care of this problem for once and for all, or so it was argued.
Since I wrote that post, the fallacy that underpinned the monetarist discourse has become the reality of a global economic crisis. Not only are we heading for what is euphemistically described as a ‘deep recession’ (more on this below), but the monetarist discourse has simply stopped having the practical consequences that neoliberal economists have long ascribed to its policies. The media late yesterday were full of news of banks in the UK refusing to pass on the interest cuts to home owners. This morning the Chancellor is trying to browbeat the banks into submission. If he succeeds, it will be the best evidence that the mythical market, left to its own devices, no longer works in the image of the quaint 18th century marketplace favoured by the neoliberals.
The question in April, as now, was why politicians like Gordon Brown and Mervyn King (make no mistake, he too, is a politician) continue to try to adhere to monetarism, and to its parent ideology, neoliberalism. No doubt there are complex reasons for this, ranging in Brown’s case from first-hand experience of the chaos and frustration of Labour’s long years in the political wilderness, to the blind certainty, in the years after his party returned to power, that all was well, and all would be well. Cynics might add that when one is surrounded by banker friends, and when one’s party is bankrolled by hedge fund managers, then it is difficult not to be a neoliberal.
Whatever the case, it seems very clear that the New Labour project was, and remains inspired by a few fateful words that were published back in 1962 by Milton Friedman. These words go a long way in explaining the state of the economy, but more generally, the state of the polity. The words are found in the introduction of Friedman’s famous book, Capitalism and Freedom:
‘…the scope of government must be limited. Its major function must be to protect our freedom both from the enemies outside our gates and from our fellow-citizens: to preserve law and order, to enforce private contracts, to foster competitive markets.’
Interpreted in the way that they were by Thatcher, Reagan, Blair, and now Gordon Brown, these words begin to explain three major aspects of politics in the UK, if not beyond. First, they begin to explain why New Labour has been so devoted to protecting the private sector. Second, they begin to explain why the government has been so keen to follow the US in waging war ‘outside our gates’. Third, they begin to explain why such enormous strides have been taken in the direction of a panoptical society, viz., one in which we are persuaded to think that we are all constantly being watched. ‘Our’ freedom must be protected, after all, not just from the ‘enemies outside our gates’, but from ‘our fellow citizens’. Perhaps one significant change in the now decades-old policy is that New Labour is interested in ‘big government’ if and when it serves the purposes of corporate welfarism.
As I see it, a government that is conceived mainly as serving the interests of the private sector—a sector that has become identified with the interests of the major private corporations—and of waging war against enemies within and ‘without’ can only end up in tragedy. It is also more likely to be corrupt to the extent that not just the economic, but also the social and political currency of the day quite literally becomes money. Witness the truths that have recently emerged about Tony Blair in relation to the Ecclestone Affair (1) and other scandals that followed it.
Perhaps most tragically for all of us, such a government is also more likely to have its hands tied when the time finally comes to intervene directly and forcefully to save the economy from implosion. The inertia of the ideology is perfectly exemplified by the volte face of Mervyn King, whom, according to the Guardian today, ‘had been resisting rate cuts all summer and into the autumn as he and most of his colleagues on the MPC fretted about rising inflation rather than the growing threat to the wider economy from the credit crunch’(2).
Alas, despite the extraordinary u-turn, it may be a case of too little, too late. There is, apparently, no agreed definition of what counts as an economic depression, as opposed to a recession. But as the country’s economy stumbles on in the terrible uncertainty of our times, it is worth remembering one lesson, if it can be called that, from the last depression. The Great Depression is typically characterised as having begun with the famous ‘Black Thursday’ of October 29, 1929. In fact, the US economy continued to turn over for the following six months or so. It was only really in the spring, or some would say the late summer of 1930 that the economic collapse began to take its toll. It is possible to argue, of course, about exact dates and economic indicators. My point is that anyone who thinks that we’ve been spared an economic depression, and that now is the time to buy houses or invest in shares, may be jumping the proverbial gun. The banks remain so powerful that there is no guarantee that any government will be able to force them to do what needs to be done, i.e. to loosen the credit that is so desperately needed to return, paradoxically, to the old modus operandi. Vincent Cable of the Liberal Democrats was right in this sense when he noted that the rescued banks were ‘making monkeys’ out of Brown’s government(3). It might further be noted that in Britain especially, we have grown so reliant on the banking industry as a major part of the economy that the sector’s collapse is likely to have huge consequences for unemployment—consequences that will, however, take some time to feed through the system.
As if to add the proverbial last nail to the economy’s coffin, the government’s new-found pragmatism is by no means synonymous with a change of political heart. On the contrary, New Labour almost certainly remains in the ideological spell of neoliberalism—as evidence of this, witness the return, at the height of the crisis, of ‘Lord’ Mandelson to the New Labour cabinet. Mandelson is not just a hard-line neoliberal; as his imbroglio with the Rothschild family and with the Russian oligarch revealed, he is at the heart of the corruption of New Labour as a party in the grip of the material interests of some of the fiercest advocates of neoliberalism.
Given these circumstances, I would argue that we have a recipe for continuing, and quite possibly deepening, crisis. Perhaps the one ‘wild card’ is Barak Obama’s election–will he be able to change the political and economic dynamics in the US, and beyond? We can only hope that he will.
I should now explain what all of this has to do with the Palacio de la Moneda. In another blog, written this time in December 12, 2007, I suggested that
… economic liberalism has come and gone for centuries now, but its neoliberal variant came roaring to life in the 1970s and 80s when American monetarists led by Milton Friedman first ‘demonstrated’ that its principles could be made to work in Chile—that is to say, in Pinochet’s dictatorship. The Conservatives in Britain were the first to try to emulate this nefarious experiment. Indeed, it is not surprising that Margaret Thatcher was so keen to visit ‘Mi General’ during his infamous house arrest in London; after Pinochet, Thatcher was the second ruler to sign up for Friedman’s neoliberal model and its bitter prescriptions. In one of the great ironies of the time, Thatcher’s own Cecil Parkinson said in an interview [in the Chilean newspaper El Mercurio] that ‘It [the Chilean economic experience] is very similar to what we are trying to develop now in Great Britain.
I might add that we should not be surprised that it was Gordon Brown’s own ally Jack Straw who pardoned Pinochet and let him go back to Chile. New Labour, whose members are even more neoliberal than the Conservatives, must now be hoping that we have forgotten that the Chilean experiment came to an end in 1983 when Pinochet had to take over some of the largest Chilean banks to stop them from going bankrupt.
The question for me has been, and remains, just when, why, and how did Gordon Brown forget what happened in Chile? (For one economist’s assessment of what did happen in Chile in the early 1980s, see my Gordon Brown’s Financierism and the ‘Economic Miracle’ of Chile).
Back to the Palacio de la Moneda: this is the name of the presidential palace in Santiago de Chile which Pinochet bombed in order to depose the democratically elected Salvador Allende during the ‘other’ 9/11. The name, which paradoxically means in Spanish ‘The palace of the coin’, is a reference to the fact that the building housed the Chilean mint from 1814 to 1929.
The current (outgoing) U.S. administration’s ‘lineage’ to the other 9/11 bombing has been well documented: if it was Nixon’s CIA that helped to organise the coup, it was also that administration that served as a nursery for many of today’s leading neoconservatives: amongst several others, Dick Cheney himself (if in doubt about either of these two claims, see the declassified documents at the George Washington University website. See also Wikipedia’s biographical entry on the remarkable vice-president). What is perhaps less well known is the fact that many Chilean generals would not have signed up to the coup—many were extremely reluctant to join in—had it not been for the ‘Chicago boys’, a group of Chilean economists trained by Milton Friedman, who suggested that they had the solution to the economic chaos that the Nixon administration itself had helped to stoke in order to prepare the ground for the coup. That solution was, of course, the very neoliberalism that Margaret Thatcher eventually emulated, and which Gordon Brown and his allies seem quite willing to continue to impose on England, Northern Ireland, and Wales.
UPDATE, November 9, 2008: Gordon Brown published an extraordinarily opportunistic article in the Observer today. The following extracts give a sense of the manoeuvre being attempted by Brown:
“This is a defining moment. A new chapter of the human story is being written and will be studied by our children, and their children, and their children after them. It is up to us whether 2008 is remembered for a financial crash that engulfed the world or for a new resilience and optimism from a generation which faced the economic storm head on and built the fair society in its wake.”
“Today we are seeing not just the collapse of failed institutions but the collapse of a failed laissez-faire dogma. In this first financial crisis of the global age the old free market fundamentalism, no matter how it is dressed up, has been found wanting.”
“Our government is pro business; I believe in markets, entrepreneurship and there are many areas of the economy that need the spur of more competition. […] But the events of the past months bear witness, more than anything in my lifetime, to one simple truth: markets need morals. ‘Greed is good’ is no prescription for the good society, but neither is it the mark of a good economy. It is the progressive values – rewarding hard work, co-operation, responsibility while penalising excess and reckless risk-taking – which will ensure our market economy works efficiently and fairly.”
Eh? This coming from the man who has done the most to promote the very values he is now criticizing is rich in every sense of the term. The question is, whom did he think he would be fooling by writing the article? Does he think that we are all so foolish? If so he could do worse than read the responses logged by the newspaper’s comment-is-free section.
UPDATE 2, November 12, 2008: The Bank of England has announced today that we are headed for a far worse downturn than expected. It is forecasting economic deflation, and a far longer downturn than it did three months ago. See the Guardian’s ‘UK recession to be deeper and longer than feared‘
UPDATE 3, November 21, 2008. The Guardian today began its editorial with the following extraordinary sentences: ‘With any luck, Britain will get through the next two years with nothing worse than a recession. But that cannot be guaranteed.’
(1) See for example “‘Blair Intervened’ on Tobacco Ban in http://news.bbc.co.uk/1/hi/uk_politics/7665718.stm, accessed November 7, 2008.
(2) Ashley Seager, ‘Governor’s cautious demeanor shaken by dramatic u-turn’ in Guardian, http://www.guardian.co.uk/business/2008/nov/07/bank-of-england-interest-rates, accessed November 7, 2008.
(3) Simon Bowers, ‘Rescued Bank to Pay Millions in Bonuses’, in Guardian, http://www.guardian.co.uk/business/2008/nov/01/royal-bank-scotland-vincent-cable