On the 14th September2018 Yanis Varoufakis´s delivered the keynote address at the OECD offering an analysis of the roots of the 2008 financial crisis and some proposals for a new International New Deal.
I think his analysis is broadly correct but weak in parts, and the proposals for what might constitute an International New Deal are very weak.
He correctly identifies 2008 as a victory for US finance capital over European finance capital. This happened because there is no banking union in the EU so it’s giant banks sit inside corralled national economies that are too small to bail them out, unlike the US banks which sit inside the giant continental economy of the US, and so any one of them could fail and not utterly crash the host economy and the US could (probably) afford to bail them out. See this FT article for more information about the relative decline of the European banks and the rise of the US and Chinese banks.
By contrast if any one of the giant banks in the European Union went bust it would be impossible for their respective host economies to bail them out without bankrupting the host state, and without a banking union there us no shared pan-EU liability and thus no external help, so the banks have been forced by regulation to contract business and avoid risks a lot more than the US banks, forcing down their rates of profit.
The retreat of the European banks has been matched by the advance of the Chinese banks. The Chinese growth model, based largely on an unprecedented level of increasingly unproductive credit fuelled investment, is unsustainable and is reaching its debt limits. In order to buy time and sustain it’s investment based growth model China is exporting massive amounts of capital to fund infrastructure investment in emerging countries (One Belt and One Road) which means it can externalise the resulting debt. Much of this investment will prove to be unproductive and will lead to dangerous debt bubbles.
At the same time as these shifts in banking and credit, the massive monetary experiment of Quantitative Easing and ultra low interest rates has flooded the emerging countries with cheap dollar credit, kept afloat bankrupt countries like Italy (through ECB purchase of Italian public debt) and inflated asset bubbles (much of it in the property markets). As the QE money printing machine is slowly spooled down and turned off in the US and the EU, and as the US slowly pushes up its interest rates the result, unsurprisingly, is a spreading debt crisis in emerging markets. A key indicator of a returning crisis in the EU is what happens to Italian bond yields after the ECB stops buying them in the next year.
What I think is missing from Varoufakis´s analysis is the identification of the key and deep rooted weakness of the global financial system, originally elucidated by Hymen Minsky which is this: if banks can create money at will – which they can – and if there are no capital controls so that money is free to move around the globe chasing rates of return, then there is nothing to prevent the endless creation of self inflating debt bubbles. If cheap transnational capital credit flows start to inflate an asset bubble or start an unsustainable debt fuelled boom then the banks can create more or less endless amounts of new money, and new debt, to flow into and continuously inflate the resulting debt bubbles.
It seems to me there are only two solutions: either a switch to full reserve banking which would mean a fundamental restructuring of the financial system which of necessity would have to occur simultaneously at a global level, or the reimposition of significant capital controls at the national level to prevent capital inflows from setting off bubbles and debt mountains. Both would prove very, very difficult to implement politically. In my opinion given the way the financial crisis has fractured international collaboration it is more likely that national capital controls are achievable than a new world order. Such national controls would of course mean the end of the Single Market in the EU.
Varoufakis´s outline of a international new deal seems weak.
It starts off with the proposal for a ‘Large-scale Green Investment Program’. As a rule of thumb if you see any economic proposal that has the word ‘Green’ in it then it is always just vacuous magical thinking (i.e shite). There is no Green economy, there are just loss making projects that have to be subsidised with public money, and which do not contribute anything to building a dynamic and growing economy that can also deliver stability, social welfare and fairness. If we are going to subsidise anything it should be social housing, transport and training rather than the production of machines that make very expensive, and unreliable, electricity.
The next proposal is for ‘Fair trade deals, based on minimum living wages for poor countries and a job guarantee scheme for the deprived regions of the richer countries’. Sounds great but there is no detail to show how it would work. The collapse of wage growth in the developed economies since the financial crash has exposed the fundamental defeat that organised labour suffered in the 1980s and 1990s, and it was this defeat that had led to the iniquities of the current system. Reversing that defeat is a big generational struggle. Personally I think it will be demographics that will be key.
Varoufakis´s last proposal, an ‘New International Monetary System’ based on a global trade & capital clearing union, is eerily similar to Keynes proposal at the 1944 Bretton Woods conference for a new internal currency called the ‘Bancor’. Keynes’s proposal was shot down by the USA, the new hegemonic power, and instead we got the dollar/gold hybrid that collapsed in 1971. Given that it took the vast disaster of WW2 to achieve even the Bretton Woods agreement I shudder to think what scale of disaster would be required to resurrect a global consensus for a new global currency
