When Lehman Brothers Holdings Inc filed for chapter 11 bankruptcy protection on this day two years ago, the "credit crunch" had been under way for well over a year. Few economists had predicted a major financial crisis prior to 2007. But by September 2008, it didn't take a genius to know that any major upset in the financial markets would see them implode, nor any courage to say so publicly. The only surprise, perhaps, was that the Bush administration should allow a major financial institution to go bankrupt in the middle of a liquidity crisis and expect this not to push things over the edge.
The sheer amount of "toxic debt", as it gradually began to surface, did stun me. It was also the main reason I didn't have high hopes for a fundamental reform of the international financial system from the start. Just as (many) banks were "too big to fail", the crisis was "too big for real change". To really get to the bottom of this enormous mountain of bad debt would have required an orderly process of writing off and restructuring the debt, and thus co-ordinated intervention by states and international organisations at a massive scale, even if only for a limited time period.
It would, in fact, have required something along the lines of temporary nationalisations of core financial players. The political feasibility of this option was zilch. The much smaller and much more passive role this left for states was to bail out banks more or less unconditionally, leave them to make money off dealing in debt, and to finance stimulus packages to (try to) avoid the worst of the recession.
But passive states are no match for the active lobbying power of global banks. And so, the fact that a private financial crisis fast became a public finance crisis, further strengthening the hand of the global financial markets, has not come as a surprise. As Simon Johnson, a former chief economist of the IMF, told the BBC World Service, the Basel III agreement of 12 September is a victory for the banks. Higher capital requirements have not prevented financial crises in the past, as those familiar with the 2004 predecessor of Basel III know full well. What really matters is what is not in the agreement, namely anything that would tackle not just a potential liquidity crisis, but reckless risk management.
What I had not seen coming was that a majority of those called upon to pay the bill for the crisis (including its deepening of the economic recession) would be almost as hostile to the state as the banks themselves. I had not expected that public support for deficit cutting would be so solid, and that even such a conservative argument in favour of state intervention as Keynesian deficit spending would hit quite such a wall of vilification.
I agree that the working person has no reason to expect anything much from the state as it stands, and that we have to thank political classes of all political colours just as much as the bankers for the current mess. I also think that the reasoned argument for deficit spending in a crisis is less straightforward than the plainly incorrect idea that state debt = household debt = irresponsible. And that relying on state deficits in lieu of longer-term political solutions is not a good idea.
What I find more difficult to stomach is left anti-statism that discards any argument involving a more expansive role for the state on the grounds that this means dozing "on planet 1945". It doesn't. Defending, today, state deficits, means two things only: that there is such a thing as national accounting balances that were as valid in 1945 as they are now. And to keep the door open to reconquer "the state" rather than simply accept that it can't be.
You don't have to be a Keynesian for this. In fact, you probably must not be. It is easy, in the current climate, to demote "the state". But if "the state", however feeble, crisis-ridden and marked by past failures, is no longer the place from which to start, what is?
- This article first appeared on Comment is Free