Neoliberalism Has Been Discredited, but Where to Now?
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The following essay will seek to show how neoliberalism has been discredited with particular focus on the United States, where the impact of neoliberalism has been “felt most purely.1” The Global Financial Crisis, GFC, will be used as the main example of how neoliberalism and its mantra of the market has been discredited. However it will also be the purpose of this essay to outline the broader political and social order that neoliberalism encompasses, making the reader aware that neoliberalism extends far beyond the field of economics. Further to this alternatives to a neoliberal world will be detailed.
Neoliberalism is commonly known to be an economic practise/theory that seeks to minimize the role of government, based on the central tenet that the private sector is more efficient than the public and thus should have greater control of the economy. In this context neoliberalism is understood to be “the repudiation of Keynesian2” economics, which gradually found ascendancy in the economic/political landscape post World War II and was to become to dominant force not only in the United States, but also in the “Anglosphere1,” (Australia, Britain and New Zealand) after the stagflation and oil crisis of the 1970s. Neoliberal policies were claimed to be an extension of Adam Smiths Wealth of Nations and advocated by a group of influential thinkers led by Friedrich Hayek and Milton Friedman through the Mont Pelerin Society, formed in 1947, to keep the liberal ideal alive in an era where communism was seen to be on one side of the iron curtain and Keynesian economic policy on the other.
Neoliberalisms reach though extends far beyond that of just economics, though the two are heavily entwined. Neoliberalism extends deep into the politics of countries, its effects taking potentially disastrous courses for nations, citizens as well as natural environments. Wendy Browns informative piece of work “Neoliberalism and the End of Liberal Democracy,2” sets out the following characteristics as being a part of neoliberal political rationality.
1) The politics of countries, as well as the dimensions of all contemporary existence are “submitted to an economic rationality.2″All decisions made, are made according to the profitability of them. In the case of health care, “setting health care up as a private good for sale rather than a public good paid for with tax dollars.3” Market rationale is imposed on all decisions made, across all spheres of life.
2) “The market is the organizing and regulative principle of the state and society.2” In contrast to laissez faire, essentially allowing industry to be free from state intervention, Brown states that through neoliberalism the state “openly responds to the needs of the market,2” and is legitimized by the success of these measures through economic activity and economic growth. The cost and benefit of all decisions becomes the “measure of all state practices,2” and state actions, including warfare bringing a new light, as Brown states, to Paul Bremers declaration that Iraq “was open for business,2” post Saddam Husseins fall from power.
3) The individual is responsible for themselves and moral responsibility is equated with rational action, through a cost/benefit/consequence analysis, the individual is held responsible for all their own decisions, no matter the personal constraints on ones life, eg: lack of education, poverty, limited social welfare. Rational economic action by the individual “replaces express state rule or provision.2”
The impact then of neoliberalism on the political and social order of the modern world is far reaching. As can be seen by the above, neoliberalism is not just a “bundle of economic policies with inadvertent political and social consequences,2” it is with this in mind that the GFC, focussed on the US, should be understood, combined with the characteristics detailed above.
The GFC has its roots in the burst of the tech bubble of the 1990s. With the stock market in deep decline in 2000 and the United States going into recession in 2001, the Federal Reserve led by Alan Green sharply lowered interest rates to limit the economic damage. The market being the “organizing and regulative principle of the state and society.2” With lower interest rates, mortgage payments became cheaper and the demand for houses began to rise, with millions of current homeowners also taking “advantage of the rate drop to refinance their existing mortgages.4” As demand increased the quality of mortgages went down and subprime loans were created for people with weakened credit histories who had what were deemed to be reduced repayment capacities5. In 2006 the rate of defaults and delinquencies on loans began to rise, but the speed of lending did not. To hedge against risk, banks and other investors across the country “devised a plethora of complex financial instruments to slice up and resell the mortgage-backed securities,4” but it did not work.
In June 2007 two hedge funds that had invested heavily in the subprime market owned by Bear Stearns collapsed and as the year progressed more banks were to find out “that securities they thought were safe were tainted with what came to be called toxic mortgages.4” Over the next year, as the credit crisis began to take hold a wave of sales, seizures and failures of banks, insurance and investment companies was to occur. Most notably the failure of Lehman Brothers6 the sale of Merrill Lynch to the Bank of America7, the take over of Fannie Mac and Freddie Mae “government-sponsored entities that were linchpins of the housing market,4” by the Federal Reserve and the $85 billion Federal bailout out and take over of the insurance company the American International Group.
The fact that so many banks and investment companies in the US financial system were affected by the credit crisis, forced the Federal Reserve on September 18 to propose a $700 Billion proposal that would let the government purchase so called toxic assets from the nations biggest banks in “a move aimed at shoring up balance sheets and restoring confidence within the financial system.4” A fact that was to anger many Americans, but was pleaded by President Bush to be passed through Congress. Measures taken in the United States were not enough to fend off a global crisis though. Banks in England and Europe had invested themselves heavily in mortgage-backed securities offered by Wall Street and losses from these investments and the effect of the same “tightening credit spiral being felt on Wall Street began to put a growing number of European institutions in danger.4”
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