Fabian Next Capitalism Series

Wednesday, 10th March 2010

In the wake of the economic crisis, how far has the financial industry opened itself up to international regulation and what role should institutions such as the G20 and the EU play in contributing to the reform agenda? The latest seminar in the Fabian Next Capitalism Series set out to answer some of these questions. The speakers included Lord Robert Skidelsky, Professor of Political Economy at the University of Warwick and author of a best-selling book on Keynes.

He was joined by Roger Liddle, chair of Policy Network and Michael Izza, chief executive of the Institute of Chartered Accountants of England and Wales. The discussion was chaired by Charles Grant, director of the Centre for European Reform.  Lord Skidelsky began by questioning the underlying causes of the crisis which he divided into two schools of thought. The first took the view that the crisis was caused by loose fiscal and monetary policy, while the alternative, Keynesian view held that the crisis had been generated by savings running ahead of investment. Because household savings had virtually disappeared, the biggest source of savings in the world economy was in East Asia and China and these reserves had been insufficiently off-set by a lack of investment in the United States. In order to avoid another major collapse we had to take international monetary reform seriously and find a way of rebalancing the world economy, said Lord Skidelsky. While the rest of the world had been busy globalising, China had been pursuing a classic mercantile policy and had acquired huge reserves. On the flip side, the Americans were running a large deficit. The situation had become fundamentally unstable.

In order to rectify imbalances, the first thing we needed to do was reduce the quantity of global reserves which had ballooned from $2.6 trillion in 2003 to $7.5 trillion in 2009. An increasing proportion of this was held in gold: 15 per cent up from seven per cent in 2003. This resulted in huge deflationary pressure. What was needed was a package of measures to lower the cost of insurance, the internationalisation and diversification of reserve holdings and an agreement on exchange rates as large currency swings encouraged countries to build up reserves.

On the subject of international cooperation, Lord Skidelsky said we needed to end macroeconomic imbalances and called for the emergence of more plural forms and new centres of power so that we didn’t have to rely on the United States to provide a worldwide security umbrella, building up a huge deficit in the process.

Lord Skidelsky thought there was a trend towards regionalisation rather than Washington-isation which had interesting implications for the future. The pile-up of corporate savings in the US and the increasingly skewed distribution of income could not continue and there needed to be a way of rebalancing domestic economics as well. He argued that Keynes had not envisaged a welfare state as such but rather an investment state, because private investment could not be relied upon to produce full employment. What was needed was a massive reform programme because the system at the moment was unsound and if we did not deal with it we would stagger from one crisis to the next.

Roger Liddle followed and highlighted the contrast between the ideological shift in the UK as a result of the crisis and the relatively slow response internationally. In terms of the domestic scene, we had moved away from a situation where we believed that by simply setting an inflation target and having a sound fiscal policy we could assume a stable economy. We had shifted away from a deregulatory approach and towards a more activist role for government in industrial policy. There was now an almost unprecedented level of planning in terms of national infrastructure.

However, the ideological shift had not translated to the international scene. There had been a great impetus towards cooperation during the crisis and the G20 had made a great deal of ‘in- principle’ declarations on the need for greater economic coordination and financial regulation but there remained a lot of disagreement on how to proceed.

On specific issues such as reserve ratios, there was a feeling these may stifle the funds available to industry for the recovery while there was still division within the banking sector over the need for structural reform. The idea of a financial transaction tax as an insurance against “banking on the state” was appealing but we were a long way from reaching an agreement and if it was to work it would require international agreement.

Liddle thought the G20 was a way for countries such as Germany, Britain and France to convince themselves they had a role on the world stage, while he believed Britain’s fortunes lay in Europe and in getting more coordination into the European economy.

Michael Izza agreed the crisis was the defining event of the last decade and insisted we must learn the lessons from the crisis which, he said, had revealed a number of unsustainable business practices with “painful clarity”.

Many of the people we looked to as our guiding lights had been wrong about the crisis and it had tested a few classic economic theories. We simply couldn’t go back to business as usual but the last few months in the city had come very close to just that, he argued.

The importance of the G20 was viewed differently in other countries outside the UK. For instance in the United States and much of the rest of the world the G20 received very little coverage and the USA was primarily interested in going its own way. The communiqués coming out of London and Pittsburgh had been encouraging, he said, and progress had been made with the establishment of SDRs, the consensus against protectionism and the expansion of the IMF’s resources, but we needed to hold politicians’ feet to the fire to make sure they delivered.

Liddle said that further economic cooperation in a European context was inevitable because of the unfolding crisis in Greece and given Germany’s commitment to the Euro the only possible route was towards gradually increasing cooperation or even an EMF. 
But Lord Skidelsky said it was hard telling countries where their duty lay especially when it ran contrary to the habits and customs of the people concerned. The Germans could well argue that it was up to the Greeks to get their own house in order. Why should the Germans pay the price for their efficiency?

Lord Skidelsky said we had met hugely dramatic events with fairly mediocre responses. We had witnessed the worst economic crisis since the Second World War and if it hadn’t been for a massive stimulus we would have sunken into a depression. In the end, common sense and political survival had taken over from abstract economic theories but now that the worst of the crisis was over, normal service appeared to have resumed and that, he said, was extremely worrying.

Lord Skidelsky called for a complete reconsideration of globalisation. Finance had come to dominate over industry in countries such as the UK and the USA leading to huge imbalances and inequality. He said he was not against international trade as long as it was carefully circumscribed so that it didn’t impinge too much on a government’s basic duty towards its own citizens. He was even in favour of limited protectionism in certain circumstances: “Using the word ‘globalisation’ should not put an end to the argument”.

One delegate said it was unrealistic to expect international action in whatever sphere and the best we could hope for was individual countries banding together. In the absence of a perfect market we needed to think about ‘second-best solutions’.

Liddle agreed that we needed to be more confident about our ‘second-best solutions’ and that from Britain’s point of view, the EU was a good solution. It could provide the basis for financial regulation and it could also provide a model for the world in terms of labour and environmental standards. It could use its power as a trade block to do this. But Britain’s position was weak because although over half our trade was with the eurozone, by separating ourselves from it we had little influence in an area that was fundamental to our national interest.

Lord Skidelsky concluded by saying that he thought public-private partnerships may be the way forward. With governments increasingly squeezed in terms of budgets, the state could oversee new infrastructure projects; conceive new projects through a state investment bank. This was in line with Keynesian thinking. Wherever there were big concentrations of power it was necessary to break them up and he was in favour of a Tobin Tax as a means of creating revenue. Financial services got rewards which were totally out of proportion to the services they rendered and must be slimmed down.

To listen to a podcast of the event, click here.