Economic history reveals monetary and financial crises have been recurring for the past four decades. These are not simply accidental as postulated by mainstream economic theory which assumes that markets are always efficient. It is ascertained that these crises have their origin in a perverse relationship between States and markets as well as the loss of effectiveness of institutions and procedures which were design to regulate the functioning of capitalism.
On 15 August 1971, Richard Nixon's historic speech ended the Bretton Woods system based on fixed exchange rates and convertibility of gold with the dollar at the fixed price of $ 35/ounce. His message could have been written today: "Who gains from the financial turbulence of these months? Not the American worker, not the real economy. Who gain are international speculators who caused this crisis".
For many economists, among which P.Krugman, a flexible currency system is the cause of periodic crises. It creates uncertainty for traders and investors as well as high volatility costs which led to irresponsible behaviour and systemic risks. There are many examples in recent history: the crisis of the lira in August 1992, which led to a devaluation of 30%; the crisis of the rouble in august 1998 which lost 50% of its value followed by a default on its debt; the subprime crisis in august 2007 which led to a massive injection of money from the FED and the ECB but could not prevent the bankruptcy of Lehman Brothers.
These crises are not the product of dysfunctional markets; they are caused by the losing power of States to regulate markets. The structure of capital has undergone radical changes, shifting from productive use towards financial speculation. The financialization of capital accumulation - whereby profit is increasingly generated through financial channels rather than through production and trade - developed over several decades leading up to the financial crises between 2007 and 2010. The consequence of the increased power and dominance of finance is that it has fundamentally transformed the role of States and reduced their margin of manoeuvre, endangering democracy itself.
Financial speculation has just one rule: greed for money. From St Paul to Luther, greed is considered as the origin of evil. Today, it is considered the cause of the decline of American capitalism*. Human greed has not produced shared prosperity but intolerable economic inequality and financial instability. Recent austerity measures to halt the debt crisis nourish that process of dramatic increase of inequality which hits severely poor and middle classes. This perverse trend is not caused, however, spontaneously by the functioning of markets, but it results from concrete political choices in the United States and the rest of the Western world.
These policies were designed to dismantle the legal framework which helped the United States to get out of the great crisis of the 30s, in particular a strict regulation of the financial sector, with a set of norms which provided the banking sector with sound conditions to finance growth. But in the 70s and 80s, those norms were abolished everywhere, leaving entire freedom to markets under the assumption that they are always right. Deregulation became the fundamental norm; it is not that States have lost their economic powers, but the political class in power (including socialist parties) dominated by the ideology of financial capitalism did not consider - also because of vested interests of some of its members - any serious possibilities of controlling the power of money which has become a real plague in our societies. Every country has its own history to tell.
Now, speculation on sovereign debt has forced to introduce austerity policies, certainly not to address large inequalities which become inherent to the system. But, when in the 80s, some Latin American countries could not reimburse their loans, the US intervention (remember the Brady plan) was presented as a kind of assistance to debtor countries in default, while in fact this aid was geared to repay the US and European banks which lent the money. Furthermore, the aid was granted to those countries with special conditions attached to it, in particular rigorous adjustment programmes imposed by the IMF and the World Bank, which led to a decrease in income and slow growth. Is Europe in the same situation, with the same austerity policies? Past experience shows that these policies caused huge disasters to large parts of the population in the countries where they were applied (see the critical analysis of Joseph Stiglitz, who was chief economist at the World Bank).
In fact, economic inequalities, that the subordination of polity to the anarchy of markets has increased, are seriously undermining our democracies - as well as totalitarian regimes - and they are the main cause of social turmoil. The entire world seems in the grip of those who ask for social justice and equity, from the uprisings in most Arab countries to the young protesters ('indignados') in Spain and the riots in England.
But the true revolution which may come from the western world would be to abandon decades of wrong and iniquitous policies and to restore a global governance system based on the Rule of Law. It should aim primarily to address economic and social inequalities as well as a system of fundamental rights, including the right to have a decent job to meet human basic needs. We need a new 'Bretton Woods' system, with effective institutions to enforce a global 'Rule of Law' to create an economic harmony among nations based on equal rights and mutual solidarity. Hopefully, a global authority - building on existing UN institutions- should be created, as indicated by the Pope's latest encyclical letter 'Caritas in Veritate'.
Only in this way Mao's words will have any meaning: " There is great confusion under the sky: the situation is excellent".
* See Jeff Madrick, Age of Greed: the Triumph of Finance and the Decline of America, Knopf, 2011.