Ben Chifley was right all along about the banks

In 2006, I wrote:

The most forbidding of economic crises - with a variety of themes, aspects and complexities - seems to threaten just a short distance down that road from where we are now. If and when it arrives, a turmoil and misery to put the Great Depression of the 1930s to shame could afflict the American economy and the American people - and persist perhaps for a decade or more. (America’s Suicidal Statecraft: The Self-destruction of a Superpower)

American - and global - acceptance of that prediction came slowly and painfully; but most now acknowledge we are in a deep global depression, not a passing cyclical recession, and that it is a depression of transformative dimensions.

It will require not just reform at the margin, with stronger financial regulations, but will compel recasting our entire economic and financial system - the fundamental dogmas on which the system has been based as well as the corruptions which they have nourished.

The problems we face are of our own making. They are neither a cyclical inevitability nor a judgment of the gods. So, the solutions too are in our own hands; but those solutions will require us to transform our recent thinking, personality and culture, and construct an entirely new economic and financial environment. In concept, it will be a reformation as deep and comprehensive as we contrived for the economy after World War II; but it will be even more complex and the penalties for failure could be even more dire; socially, politically and strategically.

At the heart of both our problems and our solutions are the banks or, more generally, the banking and non-bank financial institutions - the “financial services industry” as it is often grandiloquently called.

Those problems have been building for 40 years, since Richard Nixon’s attempt to curb inflation in 1969 and the closure of the International Monetary Fund (IMF) “gold window” in 1971. They blossomed under the free-market, small-government ideology of the 1980s. As our focus on the real economy shifted, in the last 20 to 30 years, to a gathering mania for massive, complex speculation and debt, our problems spiralled out of control.

The collapse of such a bizarre system, with its Ponzi-like features, was always inevitable. The only questions were when, and how calamitous, the mania would become before the financial house of cards tumbled down. We now know that manic illusion persisted so unconscionably long that, when widely identified collapse began around 2008, the entire global economic, social, political and strategic status quo was already gravely endangered.

Even now, realisation is incomplete. The United States has put its own superpower status gravely at risk but awareness of this and its implications is still shadowy. Stimulus packages, bank bailouts and aid for homeowners may be tempting but, alone, they pathetically underestimate the character and magnitude of what is necessary.

We must, moreover, reverse “the emphasis of the economic overlords … to bailout private capital at virtually any cost”. Rather we must proceed quickly - a feature most governments acknowledge - but with great care:

1. to implement what I have called “soup-kitchen” programs; and
2. to restore a stable, well-managed global economy as rapidly as we can.

The stimulus packages, tax cuts, aid to homeowners and, in some measure, even bank and auto-industry bailouts may be seen as “soup-kitchen” measures: they cannot resolve the underlying financial and economic problems. At the multilateral level, they may be compared with the work of the United Nations Relief and Rehabilitation Administration after World War II. Such a multilateral effort might be relatively easy today, provided of course that the major countries - let’s say, the Group of Twenty and more - work together harmoniously and effectively.