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The end of neoliberalism?

September 8th, 2008

Measured by the dollar amount involved, the nationalisation of the mortgage guarantors Fannie Mae and Freddie Mac, announced today by the Bush Administration, is the largest in history. No less than $5 trillion of assets and obligations have been taken over by the US government in one hit.

Of course, that debt had long been regarded as having an implicit government guarantee and the companies involved were quangos (in the original sense of quasi-NGOs) rather than genuine private firms. Fannie was a government agency privatised in the 1960s, and Freddie was created to provide competiion for Fannie. So even though the US government will now guarantee virtually all new mortgages, this is more an admission of existing reality than a big step towards socialism.

While the quasi-governmental status of Fannie and Freddie was always problematic, this wasn’t the reason for their failure. Rather, they were pushed to accept increasingly bad loans made by the private sector. And when their difficulties became acute, the most satisfactory solution, under normal conditions, would have been to formalise the government guarantee of the existing loan book, then put them into run-off mode, writing no new business. But given the failure of the private sector, that would, mean, in effect, making it impossible for anyone to write a mortgage contract.

The fact that the credit crisis has reached this point marks the failure of the central claim of the neoliberal program, namely that private capital markets, free from intrusive government regulation, can enable individuals and households to handle the risks they face more flexibly and efficiently than a social-democratic welfare state.

In the boom that created this crisis, every part of the financial system (retail banks and mortgage businesses, major Wall Street banks, the financial engineers who designed new securitisation assets, investment funds, ratings agencies and bond insurers) had a major role to play. All have failed miserably, even though most will get to keep the rich rewards they received when things were going well.

Further update As various commentators point out, the failure here is one of actually existing neoliberalism. The “unknown ideal” of a perfect free market system remains pure and unsullied by empirical experience.

More seriously, the significance of the event is not in the marginal change in the status of Fannie and Freddie from quasi-private to quasi-public, but in the abandonment of the pretence that the normal operations of financial markets are capable of cleaning up the mess they have created, even with the liberal helpings of public money that have already been dished out.

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  1. gerard
    September 18th, 2008 at 06:49 | #1

    BBB I think the problem is that you think the meaning of ‘neoliberalism’ is the same as the meaning of ‘capitalism’, and that to the extent that any place is not like North Korea you can put the difference down to ‘neoliberalism’.

    But that’s not what it means. You are pointedly avoiding discussion of the entire “New Right” ideological project. I’m not surprised, since it is pretty much indefensible.

  2. September 18th, 2008 at 13:19 | #2

    gerard (@ #152)

    Indeed, it appears that whenever the claims of neo-liberalism are challenged by critics informed by more recent research on the subject, its proponents soon make themselves scarce. Check out what Naomi Klein wrote recently in One Year After the Publication of The Shock Doctrine, A Response to the Attacks published earlier this month:

    When I wrote the book, I fully expected to get hit back. Yet for eight months following publication, there was an eerie silence from the ‘free-market’ ideologues. Sure, a few dismissive reviews appeared in the business press (http://www.naomiklein.org/articles/2007/10/business-press-unrequited-love) . But not a word from the Washington think tanks that I name in the book. Nothing from the University of Chicago economics department. Even The Economist magazine, which used to attack me gleefully and with great regularity, never mentioned the book in print. An American television producer, who was trying to find an opponent to debate me on-air, confided that she had never been turned down so consistently. “They seem to think if they ignore you, you’ll go away.”

    Klein’s experience seems somewhat similar to our own on this thread, where so many of those, who have, in the past, so stridently pushed their ideological barrow, have also fallen silent.

    However, don’t hold your breath expecting this to be reflected in the reporting in the major newsmedia.

    … which brings me to an article:

    Media contempt for facts in NSW electricity privatisation debate

    …I recently published on our web site. The teaser is:

    Analysis of the reporting of electricity privatisation initiatives in New South Wales brings disturbing confirmation that the major Australian newsmedia does not accurately report essential facts on issues of vital concern to us. Indeed, it often acts as a conduit for propaganda against our best interest.

    If you think the questions the article raises are as serious as I do, please take heed of the concluding paragraph added by my good friend Sheila Newman (who removed all the rough edges from the article):

    You can help by distributing this article.

  3. September 18th, 2008 at 15:13 | #3

    Some may be interested to know that the article mentioned above has also been published on webdiary.

  4. gene
    October 21st, 2008 at 01:18 | #4

    What gets me is the absolute non mention of the biggest regulation and subsidy of them all, what enables neoliberalism to operate in the abstract and totally removed from everyday realities way that they do, the control of the money supply. Link the damn thing to a real value and any economic system has to operate within some semblance of the real world no matter how loose the other regulations and how generous the subsidies are. Or, if the rest of you were bright enough, you would remove your otherwise well meaning nations from the iron fist of the Federal Reserve and make us Americans accountable for our leaders general lack of concern for anything other than profits for the privledged. It would be the best thing for not only the rest of the world but the working citizens of the US also.

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