The Deadly Embrace

Editorial - Debt and Financial hypertrophic

The Deadly Embrace

by Luigino Bruni

published on Avvenire on 7/08/2011

logo_avvenireThe downgrade, expected by the markets, of the U.S. rating by Standard & Poor's from AAA to AA + (first time in history), adds a tile to the mosaic that is  being compose these days. We do not yet have a clear picture of what is happening to our economic system, but what we can now have a glimpse of is that we are facing the biggest crisis of the capitalist system, a crisis that began in the fall of 2008, still in full swing, not knowing whether how and when it will end.

The collapse in the autumn of 2008 revealed a new fact: it is no longer possible to separate the real economy from finance, since in the era of globalization the real economy is also financial, a crisis in financial markets is also a real crisis (employment, GDP), and vice versa. That is why this crisis is also a failure of economics and of us economists (including Obama's advisers) for using outdated tools to describe the world and suggest recipes.

But the storm we are experiencing these days is telling us something new: it is no longer possible to separate the economy from the geo-politics and from the policies of individual states. Among the collapse of financial markets, Obama's political problems and the affairs of the Italian government, the weakness of the European political system is their close relationship that one cannot find where the Market ends and where Politics begins. We will be able, then, to come out of this momentous crisis only if we learn together to look at finance, economics and politics in a systemic manner and in a global perspective but very attentive regionally (see Greece). Finance grew up as a good plant that, in the absence of pruning and care, is invading the whole garden.

Today, the annual volume of securities traded in financial markets far exceeds (between 8 and 10 times) the world's GDP, a volume that in the last 15 years has increased by more than 40 times. The question we must ask ourselves, including the experts,  is why we have witnessed this inert and bloated hypertrophic growth of speculative finance, without stopping from time to time to assess, at various levels (economic, political, social, ethical) if the path embarked in the nineties were taking us on impassable and dangerous trails.

This hypertrophy of finance narrows in a deadly embrace with the exorbitant private and public debt of the economically advanced world of economy. We must never tire ourselves of repeating that the problem of this crisis is excessive debt, private (in 2008) and public (now), due to large bailouts of banks and funding of expensive wars.

If we do not reduce the average debt of the West (and of Japan, another patient) we will not emerge from this crisis. Also because in these days where everyone talks about growth we must keep in mind that the capitalist economy has already grown bad in the past twenty years (thanks to financial innovation), with serious environmental and social consequences. The growth rates of years prior to 2008 cannot be proposed again, both for economic reasons (no question), but also and above all for ethical and environmental reasons. Otherwise we would discover the error of those who have diabetes that try to increase the physical activity, while continuing to eat sweets as before the diagnosis: we seriously care about globally changing the way of life and making sacrifices, an ancient and unpopular word, but always crucial when history becomes serious.

The individual and collective crises are always ambivalent: we can come out better or worse, and the outcome depends mostly on us, from our view of the world. A deadly mistake to avoid during crises is to not take seriously the signals that come from outside. Financial markets should not be demonized, they are telling us something important. First of all we have underestimated the crisis in countries such as Greece, Portugal and Ireland: structural and global financial crises are very serious things, even if they are of small states, because it can be a child who shows that the king (the euro) is nude.

A second signal-message that is coming from this crisis is the urgent need for serious and deep reforms, especially on pensions and reduced waste in public administration. Reforms that require a national policy still does not see beyond the partisan differences: this lack of responsibility is grave, because the moment we are experiencing is perhaps the most serious after the season of terrorism. Finally, this crisis will be a happy fault if it will make us give birth to a market economy other than the hyper-financial capitalism we have created, because we are paying the increases in economic well-being with the coin of vulnerability and insecurity of all but especially the most vulnerable (people and countries).

That's why we must all follow with great attention and responsibility what happens in these days: the fate of financial markets and the holders of securities are not the only ones involved, but the quality of the market economy that will emerge from this crisis, and therefore freedom, rights and democracy.

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