Diary of a Sutton Councillor

Financial Crisis or Free Market Success?

From a purist perspective the free market experiment can be judged to be a success, as we are now seeing the financial system in the process of self regulation; or perhaps self-correction is a more appropriate term. Financial institutions have extended extreme levels of credit with insufficient security; house prices have inflated unsustainably, and there has been over reliance on the continuous rise in equity values. Like the house of cards it is the market has overreached itself and is now collapsing down to a more stable equilibrium.


On the other hand the system has failed; as Governments are afraid to bear the full brunt of the downturn and feel obligated to step in and protect us all from the expected fallout of the crash. So what has in fact happened under the free market system is that the banks, the traders, the fund managers and the wealthy have all been allowed to reap uninhibited the vast rewards of the boom period, but now they are facing the opposite end of the scale their losses are to be capped, the effects mitigated by a Government bail out. And who in the end who will be their saviour? The taxpayer, the average family, you and me.


Yes the G7 recovery plan may also protect us – the taxpayers, from the extremes of the crisis, but as with the rewards of the free market, the pain too will be unfairly distributed. So the traders may have to forgo their bonuses for a few years, and downsize their city penthouse for a modest semi. The wealthy CEO may need to reign in his early retirement plans, and the wealthy sell off their private plane or yacht. There may be redundancies in the city and those affected will need to readjust their lifestyle and expectations. But compare that to those people who are already on the breadline and can downsize no further. What of the worker with retirement looming who has seen the value of his pension halved and an old age of financial hardship waiting? The prospect of job losses with uncertain bank savings is terrifying for families. The small business may go bankrupt as the bank refuses to extend the overdraft and creditors default on payments.


Yes all taxpayers will have to bear the burden. But in Britain where the least well off pay a greater proportion of their income in taxes than the wealthy, and the tax bills of the super rich are an obscenely small percentage of their overall income, once again the greatest burden falls on those who received the least benefits of the experiment.


The premise of the free market is that the rewards would eventually filter down from the wealthy to the average taxpayer. We have now had a long enough period from the Thatcher years to evaluate whether this has been the case. There have been a number of recent reports that point out that the gap between rich and poor has actually widened. In Britain we still have unacceptable pockets of poverty and deprivation, including here in Sutton. But in the meantime the rich have got even richer, leaving the rest of us still clinging to the lower rungs of the ladder.


However there has been incredible economic growth, money is out there to be made and in the Western world we have innumerable luxuries at our fingertips. So what has been the trickle down effect from the rich to the ordinary? Unfortunately I believe that it has been greed and envy. Rather than sensible aspirations it has led to the “I want it and I want it now” generation. We see what the rich and famous have and we want some of it. We have been brainwashed through advertising and celebrity culture to aspire to things we didn’t realise we needed. We have been tempted by subterfuge and marketing to believe that we too can be beautiful and happy as long as we spend enough money. We have been encouraged to consume, consume, consume, and to do so we have needed to take advantage of the easy credit that has been offered to us. It is this vicious circle of greed and consumerism that has caused the market to inflate to an unsustainable peak.


What I have been pleased to witness over the last few years is a public beginning to reject this vacuous lifestyle. Even before the crisis some people have been choosing to downsize, opting for lifestyles that are more about quality of life. The harm our consumerism and wastefulness is having on the planet has become more widely accepted and acknowledged. The rise in organic farming, growing your own food and rejection of excessive packaging all show that people are looking for a different way of living. A cultural change has been brewing and this financial crisis may be the turning point. We are now being forced to examine our way of living and ask ourselves just what is really important.


The free market experiment has failed because it has proved it is necessary to regulate the financial markets, but the interventions have not been applied fairly. ‘Light’ regulation has benefited the well off, the financiers, but not the average taxpayer. The trickle down effect has been toxic, and I suspect when disassembled may prove to have had more insidious consequences than we realise.


But the meltdown may in the longer term be a good thing. A new financial model will have to be prepared, and people will be forced to tighten their belts and start to live within their means. Once we have weathered the storm the future may contain a lot less bling, but we might all be the happier for it.


October 13, 2008 - Posted by | Opinion

1 Comment »

  1. I agree with all of this –

    (But the meltdown may in the longer term be a good thing. A new financial model will have to be prepared, and people will be forced to tighten their belts and start to live within their means. Once we have weathered the storm the future may contain a lot less bling, but we might all be the happier for it.)

    However, will the CEOs live within their means.

    There are a lot of angry people out there that have done the right thing – saved, not spent more than they earnt, lived within their means. Now they see greedy unapologetic CEOs getting bailed out – the new economic model must make it pay to `do the right thing`.

    Comment by John | October 13, 2008 | Reply

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