World 'asset' markets have now lost over $50,000,000,000,000. U.S. stocks lost $11,000,000,000,000 in market value alone.
This virtual wealth was counted on by big and small investors and lots of pension funds. The losses as well as the current government interventions will bring a sea-change in the attitudes and opinions of people all over the world. It is likely to change political systems.
The FT's Martin Wolf is looking into what changes might be in the cards:
What will happen now depends on choices unmade and shocks unknown. Yet the combination of a financial collapse with a huge recession, if not something worse, will surely change the world. The legitimacy of the market will weaken. The credibility of the US will be damaged. The authority of China will rise. Globalisation itself may founder. This is a time of upheaval.
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Remember what happened in the Great Depression of the 1930s. Unemployment rose to one-quarter of the labour force in important countries, including the US. This transformed capitalism and the role of government for half a century, even in the liberal democracies. It led to the collapse of liberal trade, fortified the credibility of socialism and communism and shifted many policymakers towards import substitution as a development strategy.
Wolf see several fields where attitudes are already changing and will further change:
- Inequality in pay will be fought as governments will cut top incomes.
- Marginal tax rates for the wealthier will rise.
- Pensions will go back from privatized models to government administered pay-as-you-go systems.
- There will be more political control over national markets and less global free wheeling.
- Emerging markets economies will be hit very, very hard and are likely to see big political troubles.
- The 'west' and especially the U.S. will lose influence in the rest of the world as the credibility of its policies and policy makers will be questioned. China's model will likely shine in comparison.
Wolf ends with a warning.
These changes will endanger the ability of the world not just to manage the global economy but also to cope with strategic challenges: fragile states, terrorism, climate change and the rise of new great powers. At the extreme, the integration of the global economy on which almost everybody now depends might be reversed. Globalisation is a choice. The integrated economy of the decades before the first world war collapsed. It could do so again.
On June 19 2007, I concluded an article on the “new capitalism” with the observation that it remained “untested”. The test has come: it failed. The era of financial liberalisation has ended. Yet, unlike in the 1930s, no credible alternative to the market economy exists and the habits of international co-operation are deep.
Yes, liberalization is over. And I also see no credible alternatives to market economies. Supply and demand can be balanced best through free exchange of goods in well regulated markets.
But will the market economy be seen as having been the problem at all? I believe that instead the political system that led to neglect the regulation of market economies will be blamed and lose credibility.
The 'western' political system is representative democracy. It has several deep flaws like its tendency to bend under lobbying or, more general, the ability of corruption to influence the outcome of its political processes against the will of the people.
There are certainly alternatives to this form of government. Some are more authoritarian up to totalitarian. Some are more direct-democratic or consensus based.
Current working alternatives to the standard 'western' model of representative democracy are the Chinese meritocracy and the Swiss system which has significant elements of direct democracy and consensus decision making.
Several countries hurt badly by this downturn will move away from representative democracy and try alternatives. The process already seems to start in some eastern European countries. Many of
those experiments will end up in totalitarianism, turn out badly and eventually crash. But some better models may
evolve too.
What would be your favorite model of political system to live in?
And the more important question, how do you plan to get there?
