By Nathan Tankus, a student and research assistant at the University of Ottawa. You can follow him on Twitter at @NathanTankus
While most people did not recognize it at the time, the financial crisis really began in 2007. By mid to late 2008, events seemed to be moving blindingly fast. The public and popular media woke up to the significance of what was before an insular event that a relatively small group of people had been analyzing.
Since then many people, including the writers of this blog, have been watching events intensely. It is common among these critical observers to think (and to have thought) that the semblance of stability that was brought about by early 2009 couldn’t be sustained, either domestically or internationally. I think this reasoning is correct. However that thought in and of itself doesn’t tell us when things will fall apart. For over four years now, we’ve watched as our oligarchs played this dangerous balancing act, staying just one inch away from disaster.
The terrifying thing is, it’s quite possible they can keep this going for a while longer. Cyprus may signal a death blow to the Euro, it may even signal a quick unraveling. Or it could be another Dubai World, an event that seemed to signal a major turning point but now seems like a momentary blip on the radar (not to say it isn’t important. Yves’s initial hypothesis that the untested nature of the Islamic bond market will be a major problem ahead could well be proven correct).
Policymakers have a lot of firepower they can deploy in response to nasty surprises. No matter how many mistakes they make, short of major popular resistance, complete collapse can often be prevented. That’s the nature of oligarchic power. No matter how late in the process it is, resources can always be mustered in an effort to patch up problems. When you get representatives from all the relevant organizations in a room on very short notice, as we’ve seen with the rolling Eurozone crisis, the ability to put a quick fix in place impedes dealing with the underlying issues. For instance, Wolfgang Munchau of the Financial Times has argued that the success of the OMT has actually worsened the banking crisis. By ameliorating the most pressing symptoms of the crisis, that of widening government bond yields in weaker countries, it protected key interests while dulling the political impetus to attack the issue more fundamentally.
Moreover, the authorities’ emergency responses can make the underlying situation worse. Our modern world is a complex, interconnected system, and stopping a leak at one point often just increases the pressure elsewhere. Moreover, it doesn’t remove the ill effects of the problems that have been set into motion. The weekend meeting at the Federal Reserve immortalized in Too Big To Fail wasn’t exactly for the common man. So it isn’t surprising that the top 1% has showed strong income gains since 2009 while everyone else, on the whole, is worse off.
This is maddening for those of us on the outside, because it means we have to carefully watch every change and tear our hair out hoping for a half decent resolution while being driven crazy by the stupidity/evil of decision makers (in some ways Bush was telling a profound truth when he declared he was the “decider”). Further, it’s terrible politically because as the core elements of mainstream political parties continually fail to respond to the growing rot, the extremists gain influence and power because they are willing to offer solutions, or even acknowledge something is wrong. Further, the lingering feeling the population shares that the crisis isn’t over is very useful for preventing needed reforms. Yves has aptly described how “too big to fail” is really banks holding a guns to their own heads and saying “do what I say or we’ll shoot”. What has gotten less (but not no) comment is that banks (and politicians) have been fond of accusing reformers with shooting the patient. Apparently the banks are perfectly healthy and have no problems, unless we institute basic reforms or even enforce the law.
The long, drawn out nature of this crisis is more terrible and causes much more suffering then a quick failure to contain events. Had the Euro failed wholesale in 2009 or 2010, it is very possible that a tremendous amount of human suffering may have been avoided. Had the American banking system quickly and unambiguously fallen apart, our situation might be completely different. Instead we get this painfully slow ship cruising relentlessly towards an iceberg. We’re used to movies, where the director starts at just before the climax and always makes sure to let us see the resolution. However, this isn’t a movie. It could be years before a breakdown comes that finally can’t be kicked down the road and requires major institutional change. Or it could be days.