he severe economic crisis and growing social and political crises affecting the Eurozone and much of the world today have at root cause financial liberalisation/de-regulation and its consequence: dear, yet easy money. The latter created by the 'invisible hand' the unregulated private financial sector, and then used to make massive capital gains from reckless, speculative activity. 'Liberal' economic policies,advocated first by financial interests, parroted by 'hired guns' in the economics profession and then by politicians, liberated the commercial finance sector after 1971 to create and gamble with 'easy money' and make apparently effortless capital gains.
Since 1971, finance has sought effectively to detach itself from productive sectors of the economy, while creating more debt than the 'real' economy's ability to service that debt. This debt-creation weakened and increasingly subordinated debtors individual, corporate or sovereign to the interests of finance, which moved from acting as servant of the economy, to master.
Finance's post-war ascent to mastery was a direct result of Hayekian and Friedmanite policies. These represented the interests of finance, and vehemently opposed Keynesian policies that restrained and regulated mobile capital between 1933 and 1971 in Britain, parts of Europe (not Germany) and the United States.
As a result of the adoption of neo-liberal policies by successive Conservative but also Labour governments, easy but dear money has been used to lure consumers into reckless spending sprees and debt, with interest and amortization payments absorbing future earnings. Simultaneously and as deliberate result of policy, earnings in western economies have fallen, and continue to fall in real terms. This decline in incomes hurts the majority, but does not serve the interests of bankers well, as it makes the extraction of exorbitant 'rent' from debtors unsustainable.
Labour governments failed to restrain reckless finance; or to boost the incomes of the majority. It was a Labour government that in 2002 knighted one of the icons of neo-liberal thought and the foremost cheerleader of easy but dear money: Alan Greenspan. And it was Labour governments that presided over incomes policies in the 1970s and subsequent declines in living standards.
According to a recent TUC report, 'Livelihoods in crisis' (June, 2011) The wages of middle income Britain grew by an average of just 56 per cent between 1978 and 2008, despite GDP increasing by 108 per cent over the same period, and for workers in some skilled trades incomes actually fell in real terms. New estimates in the TUC report show that the UK is now seeing a bigger fall in real household disposable incomes than in the 1930s and the biggest fall excluding World War II and the General Strike since 1921.
So, with one hand, neo-liberalism encouraged the private creation of vast mountains of costly debt. With the other, it curtailed the growth in both individual corporate and sovereign income that would have helped pay down debts. The cuts in income for individuals and households are mirrored by cuts in taxation income for sovereign governments, and in austerity policies that exacerbate the decline in government revenues while increasing welfare payments. Hence today's Eurozone crisis. For it is important that we understand the events of these last few weeks not as a new outbreak of crisis, but as a continuation of the banking crisis that first came to the public's attention in 2007-9.
Despite the dishonest rhetoric of bankers and their political friends this crisis is not a crisis of government finances. It is first and foremost a private banking crisis. It is now just four years since the 'debtonation' on 9 August, 2007, when banks lost confidence in the viability of other banks, and stopped lending to each other. After a year when the fuseof huge debts endured a 'slow burn', the 2008 Lehman bankruptcy exploded the financial system and threatened systemic failure.
Without consulting taxpayers, central bankers and politicians rushed to the aid of bankrupt financiers. Private losses were socialised, and attempts at recovery were nursed by central bankers who pushed interest rates down to very low levels. Thanks to the weakness of politicians of both Left and Right, as well as the impotence of central bankers, this nationalisation of private losses was offered almost unconditionally to an immensely wealthy and unaccountable elite.
While politicians, central bankers and economists in the UK and US applied only weak stimulus measures to the real economy and did little to support the incomes of individuals and the profits of small businesses and entrepreneurs, they continued to give valuable taxpayer backed support to the finance sector. But with the election of the Coalition government in 2010 even this minimal stimulus for the real economy was threatened by policies for austerity.
Now, in 2011, austerity policies adopted across most western economies mark the final failure of the existing arrangement between public interests and the interests of private wealth. Financial liberalization has failed. The banking system has bitten the governmental hand that feeds it and now increasingly threatens economic depression, social degradation and political upheaval. The only way forward is a new arrangement, based on ones that have better served societies since the dawn of civilisation: since Aristotle identified the evils of usury and the barrenness of prosperity based on speculation. The only genuine solution to the crisis must involve a largescale reversal of liberalisation.
The Euro may only be one aspect of the liberalised architecture, but it is a major component and a pernicious one, with its onesize-fits-all monetary policy and prohibition of the monetisation of government debt (except to bail out banks...!). Instead of Eurozone countries drawing on their own central banks for financing they are obliged by the treaties that established the ECB to turn to private capital markets for the resources needed to pay for trade and development.
The Euro is the antithesis of a democratic currency, which should be deployed to support a nation's economic activity. The currency and the banking system should be there to support the weak and restrain the strong. Instead the Euro benefits the strong at the expense of the weak. As such it can play no part in monetary reform and must therefore be dismantled.
The Euro must be understood not as a currency of the people, but as an ideal of private wealth. It is a currency which detaches the credit-creation system from democratic oversight and delegates those immense powers to private, unaccountable bankers - to use for private gain. For the Euro is a perversion of the greatest monies in history. These arose as a relation between people and the state.
Through the institutional development of central banks, domestic banks, state borrowing, paper currency and double- entry book keeping, national monies have underpinned all of the economic development of the greatest societies of the world. Money, when used most effectively, has been aimed at the interests of society, of productive labour, and vibrant state and private activity alike. But the Euro is a money or currency aimed only at the interests of private wealth. It is divorced from individual nation states. Its statutes explicitly prohibit the support of state activity through money creation or Quantitative Easing powers available to economies like that of the US and UK with their own accountable central banks.
On the contrary, Eurozone governments are denied the kind of support that the Federal Reserve and Bank of England provided to their economies during the crisis. Instead the statutes of the European Central Bank (ECB) explicitly prohibit the support of state activity through money creation. If countries of the Eurozone were to regain policy autonomy, to restore and rebuild their own central banks, then their currencies, their monetary systems, social, private and financial interests could be re-aligned.
Prosperity could be reignited. Issued through the central bank and domestic retail banks, a nation's currency can help finance and underpin a programme of public works expenditures, and in parallel, through multiplier processes, the spending of newly earned income to revive private activity. Of course a central bank has to carefully regulate the creation of credit: the creation of more credit than there is potential within the economy will lead to inflation.
Conversely, the creation of too little credit as is happening now will lead to a deflationary spiral. But these are matters best judged by central bankers and their expert staff answerable to democratic institutions. If left to the 'invisible hand of the market' that is, the private commercial sector as occurred under liberalisation then the creation of excess credit for speculative and destructive purposes will be inevitable.
By adopting its own currency and ensuring that its central bank works with an elected government to prioritise the interests of the whole of the economy not just the finance sector - jobs and prosperity can be restored. The expertise to facilitate such a transition exists, moreover the very nature of money guarantees precedent on which action can bebased. It has been done before successfully. The last time the world threw off the chains of private wealth was in the 1930s.
Then, Britain led the way. In September 1931, financial interests demanded high interest rates and austerity as the impact of the Great Depression hammered the people. At this point Britain, like Greece today, became defiant. The UK threw off its fetters and left the gold standard the Euro of a century ago. Under Keynes's tutelage, sterling replaced the gold standard and was revived as a money managed by the Bank of England and protected from speculative and vested interest. Then in 1934, President Roosevelt freed the US from 'nine mocking years with the golden calf' (Speech at Madison Square Garden, 31st October,1936).
The American economy bailed out of that era's equivalent of the Euro and it's so-called 'stability and growth programme', freed the dollar from 'the fetters' of gold, and the American people from 'three long years of the scourge' of austerity. The government of the United States then embarked on the finest programme of public works expenditures known in modern history. Great public buildings were erected, symphony orchestras established, writers were sponsored not least John Steinbeck fantastic murals created, swimming pools built.
When, in 1935, a socialist government took power in France and freed the franc from the fetters of the gold standard, only the fascist economies remained in thrall to private wealth. Interrupted by war, and diluted at Bretton Woods in 1947, finance was still restrained as servant not master through the age of economic and social advance from 1945-1970. Today, the likelihood of the UK or US once again taking this lead and defending society from the predations of private wealth is slim indeed. But there is no theoretical reason why the lead should not be taken by a smaller nation like Greece.
The history of the world teaches us the ebb and flow of prosperity between nations. It would be fitting too if a new era was to arise from the cradle of western civilisation. Certainly Greece would feel the full force of the anger of private wealth, through their allies in the media, academia and politics. But this will follow from fear not reason. Because Greece will show the world not only that there is an alternative, but that the alternative is very good.