Fixing Global Finance

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Martin Wolf, Yale University Press, £18.99

"To have had one crisis may have been a misfortune," says Martin Wolf, commenting on the financial meltdowns of the neoliberal era, "[but] to have had 112 was surely the result of extreme carelessness." For a top Financial Times journalist and a leading advocate of neoliberalism for two decades, he can be disarmingly honest: "The banking industry is evidently a disaster not merely waiting to happen, but in fact happening all the time, and all around us." Quite.

His mission, of course, is to find ways of saving capitalism from itself. His focus is the huge global financial imbalances that have come to characterise the system since 2000. The US has been absorbing around 70 percent of the world's current account deficits. In other words, it has been borrowing and consuming vastly more than it has been producing.

On the other side of the equation are the "emerging market economies", running huge current account surpluses, accumulating vast foreign currency reserves, and lending on a massive scale to the US. Above all, argues Wolf, there is China, "the titan of reserve accumulation", and a country that is "now playing a unique dual role in the world economy: it is both the largest exporter of capital (as Britain was in the late 19th century) and a fast growing emerging giant (the role played by the US at that time)."

The scale of the shift is awesome. The emerging market economies had turned a 1999 collective current account deficit into a $544 billion surplus by 2006, stacking up foreign currency reserves of $2.65 trillion in the process, amounting to what Wolf calls "the biggest recycling operation in history". This is in large part a response to the debilitating crises of the 1980s and 1990s.

Wolf is unequivocal that "the age of financial liberalisation became the age of crisis" - the worst in the history of capitalism. First, finance capital flowed to Latin America and Asia, where developing economies ran big deficits, became heavily indebted, and then faced a series of crippling financial panics. The economic cost was huge. The taxpayer bill in Indonesia in 1997 and in Argentina in the early 1980s was more than half the total national output in each case.

Burnt finger caution now informs policy-making in BRIC countries (Brazil, Russia, India, China) and elsewhere. Wolf charges them with destabilising global finance by running "savings glut" economies that have transformed the US into "the world's borrower of last resort" - a situation "neither sustainable nor desirable". He calls on the emerging market economies to increase domestic capital accumulation, enlarge their home markets and thus restore balance to the global trading system.

This is rather like asking a burn victim to relight the stove. And it shifts attention away from the pathological condition of US capitalism. The writing of the book predates the crash of October 2008, so the focus is less the global debt bubble than the huge financial imbalances. It is easy to be wiser now. Even so, Wolf clearly lacked the prescience of Keynesian critics of neoliberalism like Dan Atkinson and Larry Elliott (in Fantasy Island and The Gods that Failed). Scanning distant horizons, he failed to notice the cliff edge.

Why has the neoliberal era been one of "financial imbalances" and bubble and crash capitalism? Underlying the credit crunch and the crash is a long-term tendency for the rate of profit to fall, leading to underinvestment in productive industry and relatively slow rates of real growth. This has been compounded by the neoliberal assault on the working class, which has reduced wage levels and depressed consumer demand. Capital has therefore flowed into financial speculation, and workers have got into debt to buy houses and maintain living standards. Late capitalism has become a debt junkie. The neoliberal boom has been a product of a "permanent debt-economy".

One irony of Wolf's health cure for the system is his suggestion that emerging market economies need to develop their own financial services - notwithstanding his admission that "even the most sophisticated financial system is capable of excess".

This can now be rephrased: the most sophisticated financial system is the one most capable of excess. Under neoliberalism Western banks became gigantic engines for generating fictitious capital, selling paper titles to assets that did not exist, and building pyramids of promises to pay on top of black holes, creating a bubble of speculative frenzy and inflated values on a scale without historic precedent.

Wolf's study is an honest attempt to analyse some of the imbalances of finance capital in the neoliberal era. But it fails to recognise the underlying pathology of the system, or to predict the coming cataclysm. Consequently, its attempts to apportion blame do not convince, and its modest prescriptions for reform seem hopelessly irrelevant now.