Giulio Tremonti
“THE CAUSES AND POLITICAL EFFECTS
OF THE FIRST GLOBAL CRISIS”
Lecture at the PartySchool of the Central Committee of the
Communist Party of China
(Bejing, November 19 2009)
0.The title of this lecture is: “The causes and political effects of the first global crisis”.
It is an honor for me to present this lecture in so eminent a political forum as the PartySchool of the Central Committee of the Communist Partyof China.
But for me, it will be an even greater honor to hear your thoughts and answer your questions. Indeed, I am here in China at the moment particularly to learn.
The title of this lecture is challenging, and for this reason, each day while I was preparing it, I called to mind Confucius’ words of warning, that: “we should examine ourselves three times a day”.
In this lecture, I will speak of crisis:
-from my point of view, and particularly from the perspective of “old” Europe and very old Italy; and
-I will try to enter into the spirit of the age that all of us are living in.
Crisis is a word that comes from the ancient Greek and means a break with continuity, or discontinuity.
This crisis has not lasted for just a “weekend” and it has been no “garden party”.
It has been – and is – a real paradigm shift. And not just an economic paradigm shift, but also a political one; not just in a material sense,but also in terms of ideals.
The world is not – and will no longer be – the same as it was before. It is up toall of us, together, to make it a better world.
In fact, all of us, together, have a rendez-vous with our destiny.
I conceived of this lecture as triangulated by 3 points:
- what caused the first global crisis? What were its origins?
- what stopped it?
- and what do we do now?
1.What caused the first global crisis? What were its origins?
1.1.It all started in Europe, with the fall of the Berlin Wall.
And it has gone on for 20 years – the period stretching from 1989 to 2009.
These 20 years have changed the shape and pace of the world.
Certainly, what we are experiencing is a phenomenon that was already “in progress”, which was already underway at the beginning of the 20th century, in America as much as in Africa and Asia.
But it is only since 1989 that the pace of change, at first intense, suddenly took off.
Never before in human history has there been so intense a change in so short a space of time.
Certainly, the geographic discovery of Americain the middle of the last millennium broke the old closed order of Europe, eroded the foundations of the feudal system, and gave birth to new religions and new methods. But it was, in any case, a phenomenon that then went on to inhabit a long period of at least two centuries.
In contrast, the economic discovery of Asia has not unfolded over the usual longue durée – that slow pace of transition that spans more than one human generation. On the contrary, it has taken a minimum amount of time, a period within the lifespan of every human today, namely: 20 years.
1.2.And what years they’ve been!
November 9, 1989: saw the fall of the Berlin Wall, signaling the end of an artificial division of the world that had lasted for half a century;
April 15, 1994: marked the signing in Marrakesh, Morocco, of the World Trade Agreement establishing the “World Trade Organization” (the WTO), and enshrining a new global geopolitical vision witha level playing field for trade;
December 11, 2001: saw China become a member of the WTO;
the summer of 2007: heralded the beginning of the first global financial crisis;
and now, it’s November, 2009.
The process that has unfolded over these past 20 years has been based on a mix of 5 key factors:
a)a geopolitical factor: with the fall of the Berlin Wall, and the shifting of the fulcrum of American political power from the Atlantic to the Pacific;
b)a technological factor: with the spread of the use of information technology;
c)an economic factor: involving a carve-up of the world market which saw Asia producing low-cost goods and America buying them on credit;
d)a financial factor: with the emergence of techno-finance which, by using the fluid magic of new – bank-issued and virtual – money, enabled the instantaneous “miracle” of globalization; and
e)an ideological factor combining all the preceding factors: “marketism”, the last totalitarian ideology of the 20th century, which saw the political apotheosis of the market.
For centuries in Europe, national politics was dominated by the catch-cry: “Liberté, Egalité, Fraternité”.
Globalization deceived us into thinking that the old motto could be replaced by a new one: “Globalité, Marché, Monnaie”, inscribed on the pediment of a new temple to the market-god.
When seen in these terms, the cause-and-effect relationship which has developed between globalization (the cause) and the crisis (the effect) becomes apparent.
Without question, globalization could not have been halted, and, beyond the shadow of a doubt, has been – and is – essentially a positive phenomenon.
But the speed and way globalization has been achieved could perhaps have been a bit more sensible, a little more drawn out over time.
Maybe then we could have avoided the crisis.
But what we are faced with, and what we have to deal with, is the reality – the concrete structure of our existence.
And we must acknowledge, philosophically, that it is precisely through the vehicle of globalization that Marx’s prophecy – “ancient national independence will give way to global interdependence” – has come true.
1.3.Indeed, I believe that a philosophical – and therefore political – analysis may enlighten us.
Understanding today what has happened will help us avoid any further crisis.
We have entered a new global world, but still have the legal and political structures belonging to and typical of the old world.
The market has become global, but law has remained local. This is why a dramatic divide has emerged between the economic and political spheres, and between reality and the rules.
Herein lies the origin of the crisis.
Because this divide between the market and the rules is incompatible with the very structural building blocks that have typified capitalism, which, over the course of its history, has not shunned but rather presupposed the existence of rules.
Yet, with and within globalization, the emerging and most dynamic elements of “new” global capitalism have developed outside the rules, and therefore outside the classic capitalist mould.
In particular, they have developed:
a)outside traditional legal “systems”, taking form and substance in parts of the world where business operators were presented with legal regimes that had only the form but not the substance of genuine jurisdictions; and in addition,
b)outside the legal models that have historically typified and shaped capitalism; in particular:
-outside the limited liability company model; and
-beyond the reach of codes which, whilst allowing some degree of laissez faire, still on the whole envisaged and regulated typical transactions.
This was how the “new” – atypical – capitalism developed. The capitalism of “hedge funds” and “equity funds”, creditderivatives, “shareholder value” and the “short-term” focus.
It was forgotten that the function of the limited liability company is not only to create value for its shareholders, but also to create value for its employees and, thus, for the company as a whole.
And it was forgotten that speculation may form a part – but is not the be alland end all – of capitalism.
This is how the “new” elements of capitalism went beyond its original and properlegal and ethical boundaries.
This is how finance went off the rails and developed not within the realm of law but of the opposite – the non-legal realm of “anomie”.
This is how the new global mega-banks were built up like pyramids without a supporting base.
This is how financial transactions were drawn up as if in illegible hieroglyphics.
This is how what should have eliminated risk in the market actually created it – and on an uncontrolled and uncontrollable scale.
To sum up, this is how monetary sovereignty, the power to utter currency, a sovereign power and thus historically the province of states, was transferred from the political sphere to the market.
And finally, this is how the old prophecy of Goethe – that “the winged bills fly higher than fantasy can imagine” – came to pass; a fact we’re now paying the price for with the crisis.
2.What stopped the crisis?
2.1.The crisis, which was created by and within the market, was halted by the political sphere and governments.
In particular, governments adopted 3political approaches to combat the crisis:
a)by the mere fact that they (re-)entered the economic arena, a field it was formerly thought should be monopolized by the market, they sent out a crucial message of confidence to the people;
b)they introduced specific intervention policies which targeted the real economy. In particular, they turned to classic Keynesian public investment policies or, as an alternative and/or in conjunction with the latter, they formulated new or postmodern policies aimed at “boosting” consumption; and
c)they implemented direct intervention policies, particularly in the banking and finance sector.
The policies adopted in this area to date in the West, in the two-year period since the beginning of the crisis, have been varied and disjointed, and have included injections of liquidity, interest rate moves, tax cuts, decisions to let companies fail, and finally, bailouts of entire sectors.
It would be – indeed, it is – unkind to level any criticism at these policies at this juncture.
But “ex post” (and truth be known, as far as I'm concerned it was evident even “ex ante”), it is clear that different choices could have been made.
In particular, it was possible:
a)to not save – using public monies – the entire banking and financial system, defined inherently as indivisibly “systemic”, and hence, by definition, requiring rescue in its entirety as a matter of general and public interest; but rather
b)to save with the public purse – in the biblical spirit of sabbatical segregation and in line with the bankruptcy logic underpinning the so-called “Chapter 11” – only that part of the finance sector linked to the real economy, whilst leaving deviantfinance outside the scope of public bailout measures, so that the associated cost would be borne by the business operators who generated it.
In reality, a very different policy approach was taken.
In the old “New Deal”, after the 1929 crisis, public money was used in the direct interest of the people, for public interventions.
In 2008, public money was instead used to rescue almost all banks and almost all bankers.
2.2.Thus, in 2007-2008:
-the public purse injected an enormous amount of liquidity into the banking and finance system; a liquidity which, however, precisely because of the manner in which it was provided and to whom, did not filter through – except in part – from the banks to businesses, remaining predominantly in the hands of the banks themselves; and
-the public sector transferred amounts corresponding to enormous masses of private debt onto the public balance sheet.
In reality, by doing this, the situation has only been temporarily changed. The marketplace has certainly been brought back into line by timelypolitical intervention. That is how we’ve bought time.
But we must not waste the time we’ve thus gained. We cannot waste it in the delusion that all the problems have now disappeared.
We cannot let ourselves do this for two reasons.
Because aberrant financial practices have not yet been reined in, other than in the name of lip service.
And because public debt may be more stable than private debt, given that governments have sovereign powers and a medium- to long-term timeframe at their disposal. But we must not forget that whether it is private or public, debt is always debt.
In summary, I repeat that the causes, effects and risks of the crisis are still essentially with us:
a)financial market prices have returned to pre-crisis levels – not so the real economy. Derivatives are once again growing at a dizzying rate, a sign that speculation is back in force with no holds barred.
The word is that it’s “Business as usual”. Precisely! The old greed and stupidity are making a comeback; and
b)every 8 seconds, 1 million euro of new public debt is issued, squandering today the future of our children.
2.3.Time has always been strategic and it has never been more so than now.
The time we have bought should be used first to think and then to act.
In the time we have gained, the economy and society can – we all hope – certainly bring about some positive outcomes.
Fear has been dispelled by hope, people have regained confidence and there is a shift in paradigm – for the better – underway.
For too long, it was thought that trees grew from the top and not frombelow. Now it is clear that this is not the case, nor can it be so.
Wealth is not produced through finance, but through labor. The return to the real economy, to manufacturing and construction, is a positive sign.
We’re seeing a return to the working classes. And along with this, there is a return to the family and spiritual values, that were previously overshadowed by the totalitarian ideology of “marketism”.
In this positive scenario, the continuation of global trade may restore prosperity; the new technologies that our laboratories are devising may bring new wealth. The recovery of the economy may ward off the ever-looming specters of both protectionism, which crushes hope, and inflation, which destroys the savings of households and states.
In summary: there are two driving forces at play – finance and the real economy. The hope is that the pace of the latteroutstrips that of the former. Fear would result from the opposite outcome.
In either case, we can – and must - do more.
In order to bolster confidence, so that good may triumph over bad, there is also a particular need for a new political order.
3.What do we do now?
3.1.In the fall of last year, at the height of the crisis, despite not having fought a war, we were at risk of experiencing all the destructive effects that have historically accompanied warfare: a collapse of confidence, blocked monetary flows, stock market crashes, a fall in world trade, a risk of protectionist reactions, and negative and destructive flow-on effects on workers and their families.
The miracle came in the shape of the G20, an early experimental form of a new and necessary global “governance”.
But nothing is perfect and everything is “a work in progress”.
Clearly, the G20remainstoday both unwieldy and, in particular, unbalanced. Unbalanced because it does not embody adequate representation for Africa and the Arab world.
But nevertheless, the G20 has been – and is – crucial.
3.2.G7-G20.
The G7-G20 ratio signals much more than a mere increase in the size of the diplomatic forum, with the G20 containing 13 more countries.
The transition from the G7 to the G20 points particularly to the difference between two worlds: the old world and the new world.
Just 10 years ago, the G7 countries controlled around 80% of global wealth and were united by three codes: a singlecurrency code, the dollar; a single linguistic code, English; and a single political code, Western democracy.
This is no longer the case. The G7 now controls only 50% of the world’s wealth; there is no longer a single currency code, because other currencies have taken their place alongside the dollar; there is no longer a single linguistic code, because other languages and cultures have appeared on the scene; and there is no longer a single political code, because other political forms are in peaceful dialogue with Western democracy.
3.3.The gong was sounded first by the attack on the “Twin Towers”, and then by the financial crisis.
The truth is that the old colonial order, even in its latest postmodern form, has finally and suddenly come to an end.
The truth is that, after two centuries, the “core-periphery” relationship has finally and suddenly – suddenly because in historical terms, 20 years is a mere blink of an eye – come to an end.
The notion of one party having omnipotence over everything has ended.
The newest and most dynamicforces in both the economy (the largest growth in gross domestic product in the world) and demography (the youngest segments of the worldpopulation) are in fact emerging outside the old G7 countries.
Emboldened by their new vitality, huge parts of the world are freeing themselves from the force of gravity which, directly or indirectly, and for at least two centuries, drew them in the single direction of the center.