Six myths about the financial crisis

A comfortable, corporatist consensus is building up about how to deal with the financial crisis. Led by Alistair Darling and his French and German counterparts at the G20 finance ministers’ summit on the weekend, this consensus is essentially that the financial crisis “proves” that global free market capitalism has “failed” and that everything is the fault of overpaid greedy bankers unshackled by morality or law-makers and egged on by mega bonuses to ever more spectacular risk-taking. The world apparently needs nothing more than to close down the “casino banks,” ban dangerous speculative innovation and return to a sort of updated, over-regulated, post-war corporatism in order to recreate the happy days of the 1990s. The following six myths about the financial crisis demonstrate why this is the wrong approach.

MYTH 1: THE “EXPERIMENT” WITH FREE MARKETS HAS FAILED
The idea that the era of financial liberalisation is over seems to betray a rather dramatic failure of perspective. The last 18 months have certainly been painful. But the losses pale in comparison with the huge wealth creation of previous decades. World real GDP grew by around 145 per cent from 1980 to 2007. 

By every conceivable measure the citizens of countries able to profit from this growth have higher life expectancy, cleaner water, better healthcare, higher standards of literacy and more freedom. The “experiment” with free markets has been an almost unqualified success. 

The American Nobel laureate Gary Becker has calculated that even if the recession turns into a depression with a GDP fall of 10 per cent then the net growth in GDP from 1980 to 2010 would still be 120 per cent or about 2.7 per cent a year – a real per capita increase of nearly 40 per cent. 

Even in this worst case, this is a “failure” that the citizens of the many countries unable fully to benefit from global capitalism would probably be happy to settle for.

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Posted by: Amy Nightingale