Make no mistake, the global capitalist elites know they are in a major crisis and are stumbling around trying to find a way out. The call by Dominique Strauss-Kahn, the managing director of the International Monetary Fund, for countries to spend their way out of recession is perhaps the most dramatic expression of the panic now gripping policy makers. Another cut in US interest rates is also expected to add to the sense of turmoil.
The IMF chief spoke during the closing sessions at Davos, where the most influential world economic and political leaders had gathered for their annual forum. Usually a time for self-congratulation, the mood was, by all accounts, sombre. But it was Strauss-Kahn who had the audience gasping for breath when he summarily abandoned decades of IMF policy to urge governments to allow state spending to plunge into deficit.
Strauss-Kahn told his audience that the intensifying credit crunch was so severe that lower interest rates alone will not be enough “to get out of the turmoil we are in”. It was a dramatic volte face because as recently as the autumn the IMF was calling for “continued fiscal consolidation” in the US, which has a mountainous budget deficit. Strauss-Kahn said: “I don’t think we would get rid of the crisis with just monetary tools.”
The Financial Times report said Strauss-Kahn’s words “rip apart a long-standing global consensus that fiscal retrenchment in the US and Japan is needed to help reduce huge trade imbalances”. It comes as the IMF is due to release new economic forecasts this week which, the IMF director added, would show a “serious slowdown and it needs a serious response”.
In the recent globalisation period, the IMF has insisted on tight budgetary controls, with government spending held in check. Of all the major economies, only the US has got away with large deficits. In the European Union, all countries – including Britain – are expected to work to a fixed formula on government spending. Desperate times, desperate measures. As former US treasury secretary Larry Summers admitted on hearing Strauss-Kahn’s words: “I regard this as a recognition of the gravity of the situation that we face.”
As the IMF and others thrash about for answers, the crisis is deepening. John Thain, the new chief executive of Merrill Lynch, predicted that the problems in sub prime mortgage markets would spread to credit card and consumer loans. “It will be a while before you see a return to normality in the banking system,” he said. Why, the message has even got through to Gordon Brown, the arch-proponent of the market economy, who admitted at Davos: “This is a testing time for the global economy and those of us who believe in free markets, flexible economies and sustainable globalisation(!). We face major insecurities.”
The IMF’s U-turn is the clearest indication that the crisis is spinning out of control and has a momentum of its own. Running up budget deficits is not going to sort out, for example, the real threat of insolvency that is gripping major banks around the world. Brown is right to be concerned. He and New Labour long ago nailed their flag to the mast of global capitalism. Now the SS Market Economy is holed below the water line and all the IMF and others can do is try and rearrange the deckchairs on a sinking ship. They have no answers because none exist – apart from creating sustainable alternatives to the market economy itself, as we outline in our book A House of Cards.
AWTW communications editor