Emerging from Financial Crisis: A return to “normalcy” without fundamental changes?

Andong Zhu

Guest Blogger, Tsinghua University, Beijing, China

After the biggest, multi-trillion dollar stimulus plan in human history was implemented by the governments of many countries, financial indicators, world trade volume and industrial production all show positive signs. According to a recent calculation by American economist Barry Eichengreen, world equity markets, world trade, and world industrial production all recovered from the trough (50%,20%,13% below the previous peak, respectively) to the current situation (25%,8%,6% below the previous peak, respectively). The latest World Bank forecasts of world GDP growth in 2010 and 2011 are 2.7% and 3.2%, after a decline of 2.2% in 2009.

Stock market indices in several so-called emerging economies, such as Argentina, Brazil and Mexico, have already returned to or surpassed their previous peaks. In China, the real estate market is booming to the extent that house prices in the major cities have surpassed their 2008 peaks to reach outrageously high levels. Car sales in China in 2009 exceeded 13.64 million, 3.4 million higher than in the United States. With these indicators bringing some optimism to markets and policy-making circles, talk has begun about the return to normalcy and the exit strategy for the stimulus plan.

However, this may be excessive optimism. Not all the indicators look so good. According to the International Labor Organization, the number of jobless people around the world climbed to an historic high with nearly 212 million unemployed last year, or 6.6 per cent of the global workforce. In January 2010, unemployment in OECD nations amounted to 46.2 million, or 8.7% of total labor force, with rates of more than 10 per cent in the US and nearly 20 per cent in Spain. Without a real recovery in the labor market, we cannot expect a sustained recovery of household income and consumption, and the whole economy. Therefore，returning to normalcy in the near future may be wishful thinking.

Before the crisis broke, mainstream economists and political elites ignored the warnings of a possible crisis. For example, a 2006 IMF report on the global real estate boom asserted that there was “little evidence … to suggest that the expected or likely market corrections in the period ahead would lead to crises of systemic proportions.” After the crisis the same denial has been evident, with assertions that no one predicted the crisis and furthermore, it is in any case unpredictable.

But the fact is that many heterodox economists did warn of and predict the crisis. Dirk J Bezemer from Groningen University has noted at least 12 analysts did so on the basis of careful reasoning. Of course, it would not be difficult to add many more names to his list.

Then, why should such denial continue, and even be enhanced with the return to business as usual? The continuing political and economic power of finance internationally and within countries has a lot to do with this. It is only too clear that financiers have not been defeated by the crisis, and financial interests continue to exert disproportionate power over political establishments, including in the US.

This is also why such mainstream rethinking as is occurring is only about financial markets. The fundamental reasons, such as the nature of the capital-labor relation, growing inequality, the effects of neoliberal policies, etc., are almost totally excluded from the mainstream reflection. Furthermore, mainstream rethinking on financial market is focused on some relatively superficial issues, such as the need for regulation. Therefore, the current proposed reform of international financial markets also concentrates on these issues, without even considering the possibility of fundamental changes. The old games continue, with the old rules and even the same old players.

But this will not last long, because the crisis is not really over. Eventually, as business and the real economy are unlikely to return to normalcy in the near future, this will hurt the strength, influence and power of the financiers. And this will push the general public to rethink the fundamental reasons of the crisis. So a return to “normalcy” is no longer possible without fundamental changes, which in turn imply that the system will be different from what is now seen as normal!