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Twelve years ago, the Great Recession of 2008 -- and especially the political response to it -- went far towards destining us to live in the world we have today. The fact that today ordinary people in most nations around the world are experiencing declining prospects for their future (fewer well-paying jobs, lower standards of living, stagnant wages, etc.), can by and large be traced straight back to how the leaders in power during the Great Recession and immediately afterwards handled the Recession.
The facts that Donald Trump rose to power in the United States, that Europe's leftist parties are almost everywhere suffering defeats, and that neofascism is on the rise worldwide -- from India to Brazil and from Brazil to Hungary -- are largely attributable to how such people as Barack Obama dealt with the Great Recession twenty years ago. Mr. Obama was and is a remarkably good man, but he put his faith and confidence in the wrong economic policies -- as did leader after leader around the world.
Here is a relatively short excerpt from a New York Review of Books article that is very much relevant today:
The New York Review of Books said:The historian G.M. Trevelyan said that the democratic revolutions of 1848, all of which were quickly crushed, represented “a turning point at which modern history failed to turn.” The same can be said of the financial collapse of 2008. The crash demonstrated the emptiness of the claim that markets could regulate themselves. It should have led to the disgrace of neoliberalism—the belief that unregulated markets produce and distribute goods and services more efficiently than regulated ones. Instead, the old order reasserted itself, and with calamitous consequences. Gross economic imbalances of power and wealth persisted. We are still experiencing the reverberations.
In the United States, the bipartisan financial elite escaped largely unscathed. Barack Obama, whose campaign benefited from the timing of the collapse, hired the architects of the Clinton-era deregulation who had created the conditions that led to the crisis. Far from breaking up the big banks or removing their executives, Obama’s team bailed them out. None of the leading bankers whose fraudulent products caused the economy to crash went to jail; criminal prosecution took a back seat to the stability of the system. Obama’s tepid program provided just enough stimulus, via a modest public-spending program and cheap unlimited credit for bankers, for a slow recovery. But the economic security of most Americans dwindled, and the legitimacy of the system was called into question. One consequence has been the rise of the far right; another is Donald Trump.
In Europe the aftermath was worse. Fragmented into twenty-eight member states, the EU could not pursue even the minimal policies of Obama. Germany had already spent some E1.3 trillion on the economic integration of the former DDR and was in no mood to underwrite the recovery of the entire continent. Germany insisted that the struggling countries had to practice austerity in order to restore the confidence of private financial markets. In a deep recession, even orthodox economists at the International Monetary Fund soon recognized that austerity was a perverse recipe for economic recovery.
But the German demands dictated policy for the continent. In addition, the European Central Bank (ECB) had neither the formal powers nor the political consent of its national masters to become a lender-of-last-resort, as the Fed has been in the US since 1932. After the crash, the Fed kept interest rates down and made credit easily available to the financial industry, which prevented the collapse from becoming a general depression. The US government took on debt to pay for services without having to raise taxes (a policy known as fiscal stimulus), and it could extend credit to keep markets liquid. But Europe, because of Germany’s worries that these policies would lead to inflation, had no way to extend credit to struggling nations or to raise money through the sale of bonds, which would have allowed the ECB to provide debt relief or to invest in public services.
The political result was the same on both sides of the Atlantic—declining prospects for ordinary people, animus toward elites, and the rise of ultra-nationalism. In the US, there is at least a left-wing opposition in waiting, with a coherent explanation for what went wrong and a progressive alternative to Trumpism. Progressives have been gaining influence in the Democratic Party, and it’s possible that a neo-Rooseveltian left that supports financial regulation, public investment, and redistribution will come to power in 2020.
Not so in Europe. Parties such as the German Social Democratic Party, the British Labour Party, and the French Socialists disgraced themselves as co-sponsors of the neoliberal formula that brought down the economy. The European left today is weaker than at any time since World War II. As of November 2018, there is just one EU member nation with a left-wing government and a working majority in the national parliament—Portugal—and it is a tricky three-party coalition. In Greece, the radical left-wing party Syriza ostensibly leads the governing coalition, but its sovereignty has been crushed by Athens’s minders in Brussels; today Syriza’s policies are indistinguishable from those of the center-right. In nation after nation, the main opposition to the party of Davos is neofascism.
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