The New Seriousness, Part 1

The media both here and abroad is trying to convince us that the worst of the global economic downturn is over. Perhaps it is, perhaps it is not. One of the consequences of the crash is that few people believe the experts and politicians any more. Obama gives us 'hope' for the moment, but in the longer-term, will the current euphoria (which seems to largely consist of banks making lots of money...courtesy of taxpayers) last? I've just seen an interesting article by Alexander Cockburn, which suggests that, to quote a favourite catchphrase of Ronald Reagan, the USA may have seen nothing yet:

The economic news in the near and medium term is ghastly. Retail sales crashed again in March, nowhere worse than in the car market, though electronics and building materials were way off too. They now reckon there'll be just over 2m housing foreclosures in 2009, up 400,000 from 2008. Industrial output is going through the floor at an annual rate of 20 per cent, the biggest quarterly drop since the end of the Second World War. US industry is now running at only 70 per cent of capacity, the worst number since they started tracking this stat in 1967. Job losses are currently running at 650,000 a month.

Wall Street is trying to pretend that the worst is over - no-one believes it. Round the next corner is credit card delinquency and the long-heralded slump in commercial real estate, where vacancy rates are already running at 15 per cent. Capital One, a huge issuer of Visa and Mastercard, just said the annualised net charge-off rate for US credit cards - debts the company reckons will never be paid - rose to 9.33 percent in March from 8.06 percent in February. In other words, Capital One – whose credit card promotions take up hefty space in the mailbag of every US postman – is in big trouble, and under one in 10 of these credit card holders will have a messed up credit rating for several years to come.

Wall Street and its boosters are trying to pretend that indeed the worst is over. The Dow and S&P Index have been rallying for five weeks. Wells Fargo, the huge San Francisco-based bank, second biggest home lender, announced that first quarter net income rose 50 per cent to $3 billion.

No one seriously believes the bank is in anything other continuing huge trouble, and will soon need – so Bloomberg News surmises - $50 billion to settle near-term commitments. The profit figure stems from newly relaxed rules about the valuation of Wells Fargo's assets.

In other words it's thin economic ice from here to the horizon. Robert Reich, now teaching economics at Berkeley and formerly labour secretary in the Clinton administration, wrote a piece recently, titled 'Why We're Not at the Beginning of the End, and Probably Not Even At the End of the Beginning'. There are huge problems with the whole orientation of the US economy. The "free market" outsourcing model has failed. Even at the best of times the US consumers who account for over 70 per cent of all economic activity in the country, don't have purchasing power to keep the whole show on the road, unless they put it on the credit cards which are now maxed out and going into default, or borrow on houses they can't afford.

Amid a hail of well founded criticism from liberal and conservative economists alike, Obama, with Geithner, Summers and Bernanke at his elbow, remains absolutely committed to giving the bankers everything they ask for, trillion upon trillion. As William Black, deputy director at the former Federal Savings and Loan Insurance Corp. during the thrift crisis of the 1980s, recently remarked in an acrid interview in Barron's: "Unless the current administration changes course pretty drastically, the scandal will destroy Obama's administration, both economically and in terms of integrity. We have failed bankers giving advice to failed regulators on how to deal with failed assets. How can it result in anything but failure?"

One consequence of the crisis has been increasing numbers of people questioning how our economies, societies and political systems are run. Reportedly sales of the works of Karl Marx, John Maynard Keynes and Ayn Rand (representing the political 'left', 'centre' and 'right' respectively) have been increasing appreciably since the crisis started to approach meltdown last Autumn. Whatever your opinion of these three, I think it's a good sign. People are once again thinking about the big issues which affect us all. If people are prepared to think and change their opinions there is hope yet. We may be, to coin a phrase, entered a period of 'New Seriousness'.

How the credit crunch and recession helped Britons discover the joy of being serious:
A year ago few of us had heard of quantitative easing or toxic debts - much less had any interest in knowing what they meant. But the credit crunch has changed all that and sparked a keen interest in economics and business. Suddenly, as Michelle Obama pointed out, being smart is cool and the tenor of media debates and dinner party conversations has taken a more serious turn
Gaby Hinsliff, The Observer, Sunday 12 April 2009

A year or two ago, it would hardly have been the stuff of TV executives' dreams: two middle-aged politicians in live conversation about arcane economic theory.

So it is perhaps a sign of how times have changed that broadcasters are now fighting for the rights to screen a lengthy US-style televised debate between Kenneth Clarke and Peter Mandelson over how to tackle the recession.

The two camps are still locked in talks over a date and a favoured channel, but the fact that a duel between the business secretary and his cigar-chomping rival over investment banking models could be regarded as big box office suggests something has shifted.

The recession may not have killed the cult of celebrity, as the media circus around Jade Goody recently proved, but there are glimmers of a new mood of intellectual seriousness. As the economic crisis brings once dry and dusty mathematical concepts to life, could being clever - or at least economically literate - now become, as Michelle Obama recently put it, "cooler than anything in the world"?

"Five years ago it was a conversation stopper," says Professor John Beath, president of the Royal Economic Society, about his profession. Now everyone wants to talk to him - although he admits that "they usually want to ask me about what's going to happen to house prices or interest rates".

Predicting the shape of recession - a gentle U? a sharp V? a deadly L? - is now a staple of dinner-party conversations. And while a year ago an inability to load an iPod was the mark of a philistine, now understanding quantitative easing confers more social credibility than being on Twitter.

According to Google Trends, which tracks global passions by recording which phrases internet users are searching for, at the peak of the emerging credit crisis in August 2007 more people were looking up "sub-prime" (as in lending) than "Kate Moss" (as in the supermodel whose love life dominated that summer's tabloids).

Such serious times have made stars of those able to explain them, from the BBC's business editor Robert Peston - mocked at first for his clumsy broadcasting style, now admired for his banking scoops - to Vince Cable, the Liberal Democrats' slightly nerdy treasury spokesman.

The latter's shrewd judgments on the recession have inspired jealousy among colleagues, a Facebook group called Cable the Able and even wistful talk of Vince merchandise. He will rub shoulders with novelists and Radio 4 stalwarts at next month's Hay-on-Wye literary festival to promote his book on the crisis, The Storm.

Hay's invitation to Cable, and to other surprise guests such as Howard Davies of the London School of Economics and the Financial Times global markets editor, Gillian Tett, reflects the flurry of heavyweight economic books being rushed out by publishers anxious to meet readers' cravings for an explanation of why their worlds are imploding.



Gillian Tett

Tett's book, Fools Gold, which blames unfettered greed for destroying the markets, is the culmination of years spent in relative obscurity battling to get coverage of the arcane derivatives markets in which she specialised and in which the global meltdown began. "Three years ago, writing about CDOs [complex financial instruments] did not compete with Fern Britton's gastric tummy band," she says, dryly. Now she has been crowned Journalist of the Year at the British Press Awards, a gong she hailed as a turning point for her "rather geeky" specialism.

She argues we can no longer afford not to understand what she admits is a field that many still find baffling and offputting: "You need to understand how money goes round the world, or you don't understand the world."

For those of us still baffled by credit swaps and deflationary pressures, however, there is some consolation. Professor Beath argues that beneath the complex mathematical formulae of higher economics lie familiar human desires we are all capable of understanding: "Many of the basic ideas in economics - especially those that would allow you to have some understanding of what the Bank of England is doing, why speculative markets like housing have behaved in the way they have - are to do with demand and supply and the role of expectations that people have. They are not technically difficult."

Which is why some of his colleagues are now trying to use the interest generated by the crisis to bring their message to the masses.

When a group of economists set up a website in June 2007 designed to bring complex ideas within the reach of anyone who could follow an average Financial Times editorial, they did not expect to make much of an impact. Then came the sub-prime scandal, the collapse of Northern Rock and the global credit freeze - and voxeu.eu sprang to life. One article last week on how the world economy is suffering as badly now as it was in the 1930s got 36,000 hits in three days.

And it was to Vox that the government turned to recruit 50 bloggers who could report live from this month's G20 summit in a way that was immediately accessible the world over.

Romesh Vaitilingam, a member of Vox's editorial board, credits the increasing interest in his subject not just to the credit crunch but on the emergence of people such as Sir Nicholas Stern, whose report on climate change for Gordon Brown showed how economics could help save the planet. "It's partly the nature of what's going on in the world, but more and more economists are now willing to stand up and be counted," Vaitilingam said.

The Institute of Ideas, a thinktank which specialises in questioning the status quo, hopes to capitalise on that willingness next month with a public meeting in London at the Battle of Ideas festival hosted by the Royal College of Arts. The institute has assembled a clutch of eminent economists with instructions to explain and defend their arguments in public, in terms that ordinary people can understand.

The idea was born, says a spokeswoman, out of frustration that ordinary Britons seemed to have been left out of a debate polarised between a remote political elite and protesters throwing bricks through bank windows: "The economy is not a force of nature; it's created by people and by society. It's not just about Barack Obama and Gordon Brown, or bashing bankers, which doesn't really get us anywhere. It's about saying that as the public we can understand it and we have all got a stake."

Tett goes further, arguing that the public now has a duty to work out what has been done in its name. "If you as a consumer just buy crap food and don't ask what's in it, what it's doing to your body, how it's being produced, that is a real derogation of responsibility," she says. "Not asking questions about how money goes round the world, who controls it and if it's sustainable is a derogation too."

And that, she argues, means going beyond demonising bankers, since it is impossible to understand exactly what went wrong in the markets without accepting that they are peopled by human beings as vulnerable to misjudgments and mistakes as anyone else.

It is at this new frontier of economics, where rational theory meets the wilder urges of human psychology, that the lessons of the credit crunch are now being learned.

When Andrew Oswald was a schoolboy growing up in the 1970s, the backdrop to his life was recession. And it was watching the nightly news of soaring unemployment and threatened deflation that triggered his curiosity.

He studied economics in an effort to make sense of it all. Three decades later, Professor Oswald is a leading academic whose work links economic theory with behavioural psychology to help explain why markets sometimes act irrationally. And now he is watching a new generation of teenagers experience the same spark of curiosity about the powerful forces reshaping their world.

There has been a 15 per cent rise in applications to university to study economics this autumn and next, and the Royal Society of Economics reports growing interest at A-level and GCSE. Oswald is optimistic that they may be driven by more than hopes of landing jobs in the City. "In my generation we studied economics because we were very concerned about the events of the period," he says. "But the students I have taught at Oxford and Warwick, I am afraid 90 per cent of them are motivated by money. I hope in five years' time that will change. Perhaps this [crisis] will reinvigorate the purer intellectual concerns which I think drove my generation more."

Oswald's work has long attracted political interest, from Downing Street down, because of its focus on the economics of happiness: how much money do we need to feel better about our lives? Does winning the lottery make us happier? Oswald has assigned financial values to events such as marriage and bereavement, to assess how much money might have a comparable emotional impact.

But his current focus is on the psychology of crowds - or markets, as they become in the City - and how that affected the crash. He argued in a recent lecture that economists had failed to allow for herd thinking, which saw even highly economically savvy individuals within banking swept along with the crowd.

Analysts who warned the bubble was unsustainable were apt to get fired; financiers whose bonuses depended on relative performance compared with their peers were highly motivated to emulate their peers, rather than standing back and questioning whether they should be getting involved with the risky new financial instruments emerging.

Similarly, homeowners took out mortgages that they could not afford so that they could pay excessively inflated house prices rather than be left behind by a crowd all apparently reaping the benefits of a property boom. "A tremendous herd-like fever gripped the country over the last five years: people forgot common sense," says Oswald.

"We have assumed super-rationality and forgotten that occasionally the herd takes over, to everyone's detriment. In a world where you are rewarded according to relative performance, it is rational to behave rather like sheep in a field and to cluster together for safety.

"Very often that is a rational thing, but occasionally for the group it is a disaster. The interplay between psychology and economics is going to get more and more important, and the crisis will probably help sharpen that interest."

Similarly Beath argues that crowd psychology can help to explain why consumers do not always respond logically to "rational things to do with prices or incomes", a key concern for the chancellor of the exchequer, Alistair Darling, as he finalises a budget which must attempt to restore consumer confidence.

What our neighbours buy and do can have a profound effect on our spending patterns, which is not always allowed for in strict economic models, Beath points out. He cites the work of US economist Robert Frank who has argued that many Americans were lured into unsustainable debt by trying to keep up with richer neighbours - at a time when the incomes of the wealthy were increasing much faster than those of the middle class, widening the gap between them to levels that could not be bridged.

Tett, who trained as a social anthropologist before becoming a journalist, has a similarly sociological approach to her work. For her PhD thesis she lived in a remote mountain village in Tajikistan, observing rituals and ethnic conflicts. She tackled the City in the same way. "I went into the community and tried to see how the bits fitted together and see what was driving the financial village."

As a result, she thinks, she got an overview of the financial system enabling her to identify trouble brewing in the derivatives market early - which is more than many economists did, as Oswald acknowledges. "Economists in my view have to take some of the blame. We didn't understand the world as well as many economists thought," he says.

And if even economists still need to get smarter about the financial earthquake that has engulfed the world, that suggests the rest of us have a lot of dumbing up to do.
The credit crunch gurus

Vince Cable, deputy leader, Liberal Democrats
No one fully understands the scale of the complex but extreme economic crisis we face or has any simple "silver bullet" solution to it. The problems are partly international - the "credit crunch" - and partly national.

The latter is a legacy of a long period of economic growth built on debt-financed household consumption and a grossly inflated bubble in house prices. Both of the international and homegrown problems are difficult; together, they are potentially lethal. This crisis could drag on for a decade.

Robert Peston, BBC business editor
The moral authority - that America can lecture the world on the best way to run their economy - has been shot to pieces. And that will have a profound impact on, the way countries run their economies, because if you live in a developing economy, you're just going to say, 'We're not going to take any lessons from you!'

Gillian Tett, assistant editor, Financial Times
Behind the vast numbers and the alphabet soup that mark out the credit world lie human beings, social organisations and incentive schemes. During the past decade, most banks have mishandled human management. But hard lessons can now be learnt. It is to be hoped that the next generation of managers will learn not just what has gone so wrong, but also what did not go quite so badly wrong at the few banks that are now emerging as survivors.

Be an instant expert: What to say at the dinner table to show off your knowledge

On the risk of a depression
"It's terrifying how stock markets are crashing faster now than in 1929. But we reacted faster this time. Is our memory of the 1930s all that's stopping history repeating itself?"

On printing money to inject more cash into the economy
"Of course, they don't actually print the money any more. It's created electronically now." (The Bank of England buys securities from banks and just adds extra zeroes to the accounts).

On the reprinting of J M Keynes's 1936 book, The General Theory of Unemployment, Interest and Money
(For left-wing dinner parties): "I prefer the original, don't you? Paul Krugman's new foreword oversimplifies ... "
(For right-wing dinner parties): "As Margaret Thatcher liked to remind us, economics is too important to leave to economists."

On bankers
"They're not evil people per se. But when the psychology of crowds infects the market, what do you expect?"

On interest rates
"I'm sure you're delighted with your tracker mortgage but the smart money is on long-term fixed rates - the real value of sterling's headed down."

A Crisis of Legitimacy?

Just a thought...

To keep this blog ticking over I'll putting up a few a few pieces, loosely connected by a theme, which I've put up on Facebook in the last couple of months and should have really posted here.

Yesterday evening I was thinking of putting a couple of articles up connected to the theme of how the economic downturn (perhaps that's putting it mildly) has challenged, or might challenge the hegemony of the unholy alliance of Big Business, the Political Class & Mainstream Media which has dominated Britain and other Western countries in the last couple of decades. Then I saw this today:

Britain loses faith in economy: Global poll shows UK least likely to trust politicians, banks or markets
Julian Glover, The Guardian, Wednesday 14 January 2009

British economic confidence has been shattered by the financial crisis, according to a unique international poll published today. It shows that people here are now less likely to trust banks, the stockmarket or the government's economic management than people in comparable nations.

The research, carried out by WIN, an international network of pollsters including ICM in Britain, used professional polling techniques to assess public opinion in 17 countries, including the major G8 economies as well as China and India.

On most measures, British people emerged as among the most pessimistic of the 14,555 people questioned around the world.

Remarkably, confidence in the banking system appears lower in Britain - 4.2 out of 10 - than in bankrupt Iceland, which polled 4.6.

While around a third of citizens in developing economies such as India and China say the economic situation in their countries could improve in coming months, more than three-quarters of people in Britain expect it to worsen.

Pessimism here is slightly deeper than in competitors such as France, Spain and Germany, and equal to Japan.

British people are also less likely than average to think that their government can manage the situation, despite Gordon Brown's bank interventions and fiscal stimulus.

Asked to rate their trust in the government's management of the financial situation, British people award the government 4.5 out of 10, below the worldwide average of 5.2 and just ahead of Iceland on 4.4.

Only Germany and Japan are gloomier, scoring 4.0 and 3.0 respectively in the poll which was conducted before Christmas and published today.

These results may reflect the severity of the British position as much as any particular distrust of the British government, and the ICM data was collected before some more recent government initiatives were announced. But they do bring into question the prime minister's claim that Britain is particularly well placed to weather the economic storm.

Several of Britain's competitors are more optimistic about their government's capabilities. Americans award 6.3 out of 10 overall, possibly as a result of the changed mood in the weeks following the presidential election.

Asked about their personal financial situation, however, rather than prospects for the country as a whole, British people are more upbeat.

Not surprisingly, pessimism about personal finances is greatest in Iceland, and lowest in fast-growing economies such as India. Britain comes 10th out of 17 countries on personal finance: most people here say their incomes will either decrease (25%) or stay the same (48%) over the next 12 months.

The British are more likely than many to think that this could be a good time to buy a house: 28% say so, against 39% who say it is a bad time, which still leaves Britain towards the top end of the international table, seventh out of 17.

However, trust in financial institutions such as banks in Britain is particularly weak, probably as a consequence of the scale of government intervention in banks required since the collapse of Northern Rock.

Britain ranks 16th out of 17 countries for public trust in its banks, just ahead of Germany and well behind countries such as the Netherlands, Spain and France.

Overall, people around the world tend to have a greater level of faith in their government and even in banks than in the stability of the stockmarket, which on average scored 4.0 out 10 for trust after a terrible performance in 2008.

British people are now particularly cautious, giving the markets a score of 3.2, well below America on 4.3.

Overall, British attitudes to the financial crisis are closest to other old-world economies such as France and Germany, as well as Japan.

Canada, Italy and Spain lead a middle group of more optimistic nations, while developing economies such as India are the most trusting and optimistic.

The research draws upon a mix of face-to-face and online polling, and the variation in results may be affected by this, as well as by different sample sizes.

Long-term differences in national attitudes to subjects such as property ownership, which outlast economic cycles, may also have played a part in today's findings.

But the WIN crisis index, which will now be carried out every three months, does suggest that anxiety in this country is consistently greater in Britain than in its competitors.

• The research was carried out online in Britain by ICM in November, with a sample of 1,050. Worldwide data was collected between November and December 2008 by members of the WIN network. ICM is a member of the British Polling Council and abides by its rules.

We English, Scots, Welsh and Northern Irish (not 'Brits', please!) might be more pessimistic than other peoples about the current economic situation, and the ability of our betters to get us out the mess they largely created. However,there is little doubt that people everywhere are wondering whether this is as good as it gets. After years of being told that 'the market' (in fact a corporate bearpit from which Adam Smith and David Ricardo would have looked for exit doors to get out of) should be left alone and throwing taxpayers' money away to prop up those unable to 'stand on their own two feet' was wrong and expensive, the obscene amount of money which have been handed over to large financial institutions and other corporate behemoths in the last couple of years must have caused cognitive dissonance for at least some who acquiesced to the status quo- didn't it?

The ever readable Splintered Sunrise gives his view on the potential crisis of legitimacy from over the Irish Sea (picture as in original post!):



The crisis leaves our leaders without a convenient paradigm
December 4, 2008

Yes, yes, I should be doing more on the economic crisis. If I’ve been reticent, one very good reason is that I’m not an economist and, apart from generalities about the system, I don’t have any easy answers. It’s a little comforting, though, that nobody seems to have any easy answers. The political classes of the world appear to be navigating without a compass, having lost their framework but without acquiring an alternative one. You see this in the way that every government seems to have a completely different recipe for dealing with the crisis. The overwhelming impression is that they’re making it up as they go along.

The latest exemplar of this has been the big plan mooted by Barroso, at the behest of Brown and Sarko, for a massive EU-wide stimulus package. This lasted as long as it took Boss Merkel to say to Barroso, “No you don’t”, on the not unreasonable grounds that Brown and Sarko could come up with whatever plans they liked, but they needn’t expect the German taxpayer to foot the bill. Meanwhile, the Bush administration seems to be nationalising everything in sight, which will shock some leftist analysts but not those of us who always knew that the neoconservatives were never conservatives in the first place, least of all fiscal conservatives, but really big government liberals. Meanwhile again, the Chinese government has launched an enormous Keynesian stimulus plan, having obvious not got the memo about the death of Keynesianism. We’ll see in practice, I suppose, how this works out.

The cluelessness is evident across the spectrum. While Brown still claims to hove to Friedmanite orthodoxy, his big idea at the moment seems to be to encourage yet more consumer spending, while pump-priming the construction industry. I can’t see this working, for the very good reason that he’s recycling the essential elements of his voodoo economics over the last dozen years. And yet the Tories lack any credibility - a mere six months ago, Osborne was complaining about the onerous amount of regulation in the financial services industry, while Redwood argued that mortgage lenders shouldn’t be regulated at all. And to this day, Rankin’ Dave Cameron seems to believe that cutting interest rates alone will do the business. None of this is very convincing.

On the more prosaic level, we have Éamon Gilmore rowing back from his plan to thoroughly Blairise Irish Labour. Say what you like about the Sticks, they’re good at sniffing the wind.

It’s at times like this that I do enjoy going back to the Austrian economists, whose big beef - that most politicians are economic illiterates - is demonstrably true, and who do have an endearing tendency to say the unsayable. Their view is that the main cause of the crisis is cheap money, which is true, especially when you bear in mind that for the last few years the Fed has been printing dollars on an enormous scale - we don’t know how many, because Bernanke won’t say. These guys reckon the best thing for the economy would be a short, sharp recession, maybe lasting a year or so, where unsound businesses would be allowed to fail and a lot of the bad debt cleared out of the economy. Trouble is, a politician would need balls of steel to go down that road. The sharp and painful dislocations it would bring - especially in terms of unemployment - would look suicidal for anyone hoping to gain re-election.

On the other hand, the Austrians critique government attempts to provide a soft landing on the grounds that it will just prolong the downturn, especially as the underlying causes are not being addressed. There’s something to that, especially if you look at Gordon Brown’s attempt to reflate the housing bubble. I would actually argue the housing market is still grotesquely overvalued and needs to sink a lot further, but Gordon can’t say that. That would fall foul of the Brits’ attachment to the house price cargo cult, in lieu of an economy that makes stuff.

More and more I notice that the Old Right and the unreconstructed left do overlap, at least in terms of diagnosis. It’s when it comes to the cure, of course, that the divergence comes. I still believe that there is a serious role for intervention, and the main task should be to divert the economy away from the parasitic financial services sector and towards rebuilding a productive economy. That’s why the Germans have much stronger fundamentals.

This would be bad enough for the Brits. For an Irish economy that has close to zero industrial base, a massive overreliance on inward investment and a European Commission hellbent on destroying Irish agriculture… it doesn’t bear thinking about.

Not to mention Robbo and Marty on yet another tour of the States, trying to drum up investment for the North. Lord, they do pick their moment.

So what is to be done, to quote Vlad? I realise my own economic worldview is informed by a wide range of sources: Marxism, Keynesianism, Greenery, Libertarianism, Mutualism and Guild Socialism to name a few. I do not have all the answers (who does?) but I hope I sometimes ask and address the right questions and hope to meet and work with people who are prepared to think and just know that the current situation cannot go on and that we can all do better than this.



My concluding piece for this post comes from Larry Elliott, whose work with Dan Atkinson, The Gods that Failed, is a witty and damning critique of those who got us in this hole. This is a recent intellectual call to arms from him:

Wanted: the Keynes for our times. Marxists and greens have critiques of the crisis, but what about the centre-left?
Larry Elliott, The Guardian, Monday 22 December 2008


The financial and economic mayhem of the past 18 months has been a crisis for the right. Nationalising banks that have lent irresponsibly was not part of any laissez-faire script.

The prevailing economic model of the past 30 years has run out of road, just as the post-war social democratic model ran out of road after three (far more successful) decades in the mid-1970s. But it is a non-sequitur to assume, as some on the left do, that the world has changed for ever. This is lazy thinking. Without an intellectual critique of what has gone wrong and what needs to be done to put things right, matters will revert more or less to where they were before the flood.

When the post-war Golden Age ended in the mid-1970s, the right had just such a critique. It was ready because it had spent the past 30 years arguing that demand management would lead to inflation, that the strength of trade unions was eroding profits and that higher taxes to pay for bigger government was starving the private sector of investment. Most of the heavy lifting was done by the free-market thinktanks, which in the title of Richard Cockett's excellent book on the subject, were prepared to "think the unthinkable". These thinktanks were well funded by business and could draw on academics to shape the policies of the Reagan and Thatcher governments.

The contrast with today is striking. There has been no equivalent of a Chicago school for the left to provide the intellectual justification for more interventionist government. There has been scant evidence of the left-of-centre thinktanks tugging New Labour back as it moved steadily over the past 15 years towards the acceptance of market-based solutions to almost every problem. And with the exception of Jon Cruddas, Vince Cable and a handful of other members of the awkward squad, there has been no real interest in alternative thinking at Westminster.

That is why the government is ideologically bereft as it tries to manage the crisis. Labour has control of the banks but wants to give it up as quickly as possible. It wants the banks back on an even keel financially but it also wants them to slash their lending rates so borrowing returns to the levels of last year. The thinking, such as it is, amounts to the hope that with lower interest rates, tax cuts, and a few tweaks to financial supervision the clock can be turned back to July 2007.

This was not Thatcher's approach in 1979. Instead of exhorting the trade unions to behave better next time, she used the Winter of Discontent to impose statutory controls on their activities. Capital's Winter of Discontent has been much longer, much more widespread and much more damaging than the events of the winter of 1978-79, but the response has been far less robust. Indeed, this is shaping up as a missed opportunity of catastrophic proportions.

At this stage, it should be said that the non-mainstream left has been active since the Berlin Wall's collapse heralded the era of market fundamentalism, and both the Marxists and the greens have a critique of what has gone wrong and what needs to be done now. And these critiques deserve to be taken seriously. After all, it is easy to imagine Marx surveying the events of the past 18 months and concluding that the new global economic order created since 1990s was capitalism's last roll of the dice, and that the imbalances, the debt mountains and the eventual freezing up of the banking system were all symptoms of an irreparable system.

Growth fetish
The greens say this is where you get to if you make a fetish of growth. Living beyond our means not only results in higher levels of debt and balance of payments deficits, but is symptomatic of a reckless disregard for the carrying capacity of the planet. Attempting to re-invigorate an economic model built on ever higher levels of consumption is wrong.

So, the Marxists have an explanation and the greens have an explanation. Where, though, is what we might call the traditional left - the democratic socialists, the Keynesians, the non-revolutionary wing of the progressive movement. The answer is that during the 13 years of Tony Blair's leadership of the Labour party, it was pretty docile.

There could be a simple explanation: the arguments traditionally put forward by those who believed in managed capitalism, the mixed economy and regulated markets have been found wanting. By a process of social Darwinism, the ideas promulgated by the free-marketeers at one end of the spectrum, and the Marxists and the greens at the other have survived because they make more intellectual sense.

Alternatively, there may just have been a colossal loss of nerve on the left, which trickled down from a leadership demoralised by four election defeats and which saw embrace of the market as the way to political success. The control-freakery of Labour's high command meant they were not open to ideas from maverick MPs, academics or leftist thinktanks; access to ministers meant thinking not the unthinkable but the boringly predictable.

This has had unfortunate long-term consequences. The ability of mainstream progressives to develop a critique of the neo-liberal world order is illustrated by the development NGOs, which felt less obliged to cosy up to policymakers and, from the mid-1990s onwards, attacked the Washington consensus. All sorts of radical ideas were floated: that free trade might not always be good for vulnerable economies; that there was a role for an activist state in development; that privatising health and education would lead to more sick people and fewer children in school.

The crisis thus presents a golden opportunity and a threat to the left. The financial meltdown has morphed into an economic downturn of brutal severity; on the other hand, the window of opportunity will be brief, much time has been lost and there is not a lot of money around to fund blue-skies thinking. US academia at least has Joseph Stiglitz and Paul Krugman; there is, sadly, no sign of a British Keynes for the 21st century.

Scholars, politicians and thinktanks have little more than six months to come up with ideas to influence policy before and after the election. They should concentrate on a few areas.

One would be finance, where the argument should be moved on from the need for faux-Keynesian fiscal policy to what Keynes actually stood for: permanent and tough controls on the financial sector so policymakers could pursue goals of social welfare and full employment. That means nationalising the banks, credit controls and action against tax havens - as a bare minimum.

A second would be housing, where the notion that the private sector will build enough homes for almost two million families has been blown out of the water. The government should be buying up land from stricken construction firms and organising a house-building programme of its own.

Finally, there needs to be a vision of the good society, the world the left wants to create. The free-market right has one. The Marxists have one. The greens have one. Unless the social democratic left has one - and can articulate it fully - it is finished.

larry.elliott@guardian.co.uk

Scrambling around the Memory Hole

John Hurt as Winston Smith in the Ministry of Truth in the film of '1984'.

Well, not exactly bits and pieces no-one knows about, but some interesting quotes I've come across over time that in the last few days I've got around to collating. Drop them into essays and conversations as and when you see fit!

"Anyone who talks of the literature of political science risks being suspected of irony. Few political scientists write books that give their readers pleasure....fewer yet have written anything that is likely to endure....Since the second world war the academic study of politics has been dominated by an effort to replicate the methods and success of the natural sciences, The chief result has been a new genre of unreadable books." John Gray 'How to dish the Whigs' New Statesman, 27/6/97, p.45.

"Law and governments may be considered in this and indeed in every case as a combination of the rich to oppress the poor and preserve themselves the inequality of the goods which would otherwise soon be destroyed by the attacks of the poor, who if not hindered by the government would reduce the others to an equality with themselves by open violence." Adam Smith, quoted in Class War (1992) Unfinished Business (Stirling: AK Press), p.42.

"...the fancied or real insecurity of capital, when not under the immediate control of its owner, together with the natural disinclination which every man has to quit the country of his birth and connection, and intrust himself with all his habits fixed, to a stange government and new laws, checks the emigration of capital. These feelings, which I would be sorry to see weakened, induce most men of property to be satisfied with a low rate of profits in their own country, rather than seek a more advantageous employment for their wealth in foreign nations." David Ricardo, quoted in Michael Woodin and Caroline Lucas (2004) Green Alternatives to Globalisation: A Manifesto (Pluto Press), p.8.

"I sympathise, therefore, with those who would minimise rather than with those who would maximise economic entanglements between nations. Ideas, knowledge, art, hospitality, travel- these are the things which should of their nature be international. But let goods be home-spun whenever it is reasonably and conveniently possible, and above all, let finance be primarily national." John Maynard Keynes, quoted in Larry Elliott and Dan Atkinson (1998) The Age of Insecurity (Verso), p.229.

"As far as Trotskyism is concerned, in part it involved a recognition of very ugly things that were happening in the Soviet Union. But it never, by definition, involved any real critical analysis of those developments. After all, who was Trotsky? Trotsky was Lenin's associate. Whatever he may have said during periods when he didn't have power, either prior to the revolution or after he was kicked out, when it was easy to be a libertarian critic, it was when he did have power that the real Trotsky emerged. That Trotsky was the one who labored to destroy and undermine the popular organizations of workers in the Soviet Union, the factory councils and soviets, who wanted to subordinate the working class to the will of the maximum leader and to institute a program of militarization of labor in the totalitarian society that he and Lenin were constructing. That was the real Trotsky- not only the Trotsky who sent his troops to Kronstadt and wiped out Makhno's peasant forces once they were no longer needed to fend off the Whites, but the Trotsky who, from the very first moment of access to power, moved to undermine popular organizations and to institute highly coercive structures in which he and his associates would have absolute authority, with absolute submission of the working population to these leaders. That was the essential doctrine of Trotskyism in power, whatever he may have said before or after." Noam Chomsky in James Peck, ed., (1988) The Chomsky Reader (Serpent's Tail), pp.40-41.

"The people who write that kind of stuff never fight; possibly they believe that to write it is a substitute for fighting. It is the same in all wars; the soldiers do the fighting, the journalists do the shouting, and no true patriot ever gets near a front-line trench, except on the briefest of propaganda-tours." George Orwell, (2000 [1938])Homage to Catalonia, (Penguin), p.209.

"I think we overestimate the value of American money and American aid to other nations. No people can make over another people. Every nation must solve its own problems; and whatever we do can only be of slight assistance....A nation that comes to rely on gifts and loans from others is too likely to postpone, the essential, tough measures necessary for its own salvation...it is almost a subsidy to the business of investment bankers, and will also undoubtedly increase the business to be done by the larger banks." Republican Senator Robert Taft, in attacking the creation of the World Bank in 1945. Quoted in David C. Korten (1999) When Corporations Rule the World (Earthscan), pp.167-68.