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With unabashed glee, many commentators over the past week have again predicted the end of capitalism, some even suggesting a worldwide depression.  It’s the capitalist system that’s at fault, they yell, none can point to a single example anywhere in the world as a model.  They have no success stories to report.

The last few weeks have seen billions of dollars written off as many of the financial instruments in the US, and now elsewhere, have been caught out, overstretched bad loans and reckless lending has been exposed due to the collapse of the US housing market. 

Why will this not be like the Great Depression?  The biggest difference is what policy-makers have learnt.  The President of the US Federal Reserve Bank, Ben Bernanke, did his economic thesis on the Great Depression.  Maybe a trillion has been spent to hold the system together.  At the time of the Great Depression, there were few effective government-owned central banks, there was little global economic co-ordination.  Indeed, international trade collapsed by 50% in a few years as governments put up tariffs to try and insulate themselves, and indulged in a destructive cycle of competitive devaluations to vainly try to control global market share.  This deepened and prolonged the Great Depression from which the twin tyrannies of the last century emerged;  fascism and Communism.

No nation is talking of jettisoning its trade obligations under the World Trade Organisation, the system is holding firm, lesson learnt.  Democracy responds, in the 1930’s Franklin Roosevelt emerged with a new deal.  A powerful central bank, new organisation to pick up mortgages, now Freddie Mac and Fannie Mae, the twin mortgage giants that were recently rescued.  Central banks everywhere have pumped more money, liquidity, into the system to avoid panic.  As Roosevelt famously said in the US ’s most darkest economic times, “All we have to fear is fear itself.”  It is about confidence. 

Roosevelt would have been impeached as a socialist for less than what the Bush Administration has done.  His Administration is guilty of inactivity despite warnings that there was a fault line in the financial sector that has cracked.  Talk of transparency sounds glib and a cliché.  But it’s real.  Out of this destructive chaos will come creative chaos as new entities emerge picking up some good, low cost, high value assets. 

It’s cold comfort for thousands who are losing their homes and jobs.  A recession is when your neighbour loses his job, a depression is when you lose yours.

The last 10 years have been most successful in economic history, lifting millions out of extreme poverty worldwide.  Economic gains made from liberalised capital flows now equal or exceed those from liberalised trade.  Few jobs are lost and many gained because of open trade and financial markets, yet even in the US , more people think trade costs jobs despite all the evidence to the contrary.  The lesson of the Great Depression was that government needed to intervene to protect the virtues of the market.  To ensure there was prudent disclosure, proper competition and that global markets needed regulating through agreements and the WTO.  Central banks were necessary to even economic cycles and police adventurers who took, as they always will, advantage of existing conditions.  Government has a role to ensure social security in times of stress and uncertainty, and to invest in common goods such as skills and infrastructure.  Rebuilding must be done in a way that produces both economic and social confidence.  There has to be a sense of fairness, of equality of sacrifice. 

In a classic analogy, political economist Albert Hirschman once lik ened attitudes toward widening income inequalities during economic change to the response of drivers stuck in a traffic jam.  After a lengthy period in which all cars are stopped, one lane typically begins to move forward.  When it does, even those drivers who are still stuck in the other lanes are usually relieved.  They infer that whatever obstruction was blocking the road ahead has dissipated, and they assume that soon their lane too will begin to move forward.  But if time passes and they remain stuck, while those in the one lane keep moving ahead, their newfound optimism eventually gives way to yet greater frustration that is all the more intense if there is no practical way to change lanes, that’s when politics can get nasty.

If the stunning greed and bad judgement of some of the CEO’s and corporations means the most responsible walk out with very few scars and big payouts, workers who lose homes and jobs will be enraged, creating a populist opportunity for politicians to feast off.

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