December 2008: Survival
The 2008 financial crisis aroused, for the first time in the lives of most people in the Western world, fear that their savings could simply be lost. To governments this brought the jolting political realisation that such a thing could not be allowed to happen, and that drastic measures to save their banking systems were essential. Thus, on 20 September, five days after the United States had allowed the investment bank Lehman Brothers to go bankrupt, UK Prime Minister Gordon Brown pledged: 'When people ask what we will do to sort out the financial system, what we will do to ensure there is responsibility and not irresponsibility, I tell you in three words: whatever it takes'.1 Neither he nor other Western leaders could know at that point how far they would have to go to put out the fire raging through the financial markets. But as they begin to take stock of the extraordinary events of September and October, it is clear that governmental rescue efforts have changed the financial world in important ways. The world's largest insurance company, American International Group (AIG), belongs to the US government; so too do the Federal National Mortgage Association (FNMA or 'Fannie Mae') and the Federal Home Loan Mortgage Corporation (FHLMC or 'Freddie Mac'), which together hold or guarantee more than $5 trillion of American home loans; the US, British, Swiss and Dutch governments have purchased stakes in large commercial banks; official guarantees of banks' deposits and debts have been massively expanded in many countries. Taxpayers in capitalist countries now have a significant interest in many financial companies, some of which, at least for the time being, have in effect become part of the public sector.
The most extraordinary and sobering revelation of the crisis was that the modern world's financial system could seize up and cease to function. The strains had been evident for some time. Well before the crisis came to a head, central banks had been very active in the money markets, acting in effect as intermediaries between banks which did not trust one another's credit even for short periods and refused to lend to each other. The provision of credit by banks to other banks is the foundation of commerce. Without it, normal trade transactions cannot occur and companies cannot obtain the regular funding they need to operate. These efforts by the authorities to maintain banking liquidity were insufficient. The fall of Lehman Brothers caused a sharp further deterioration of trust, and the interbank lending market dried up completely. There were also signs that the contagion could spread to previously unaffected and safe investments such as the $3 trillion parked in American money-market mutual funds. The danger of a total collapse of the international financial system - and thus of trade and all ordinary business - became clear and present. Only then did governments step in to address the systemic problem.
Once they did, the world was wiser, if poorer. But had it been fundamentally changed? Had the death-knell of free-market capitalism been sounded, or was it just a question of tightening financial regulation, navigating through the economic shoals, and sailing on as before?
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