A social democratic response to the crisis must begin by reasserting the crucial role of the state in risk management. If individuals are to have security of employment, income and wealth, governments must establish the necessary legal and economic framework and enforce its rules. The fact that government is the ultimate risk manager both justifies and necessitates action to mitigate the grotesque inequalities in both opportunities and outcomes that characterise unrestrained capitalism and were increasingly resurgent in the era of economic liberalism.

I might have some differences at the margins, but I wouldn’t dissent from Quiggin’s broad policy approach. Where I would sound a note of caution, however, is his assumption that a restructured economy will necessarily entail a shrunken financial sector. I’m not sure that’s true. As I observed with respect to the recent G20 summit meeting, a note of complacency has crept into discussions of the GFC. There is an apparent assumption that a bit of government prodding to get credit markets moving again, a little more regulation, and a bit of symbolic Wall Street bashing will do the trick. Then business can resume more or less as normal. That assumption, or assumptions like it, are colouring the recent partial revival in equity markets. It’s being driven also by the Obama administration’s actions (and inaction) – controversies over AIG bonuses aside, there’s a distinct sense that whatever Wall Street wants, it will get – including a revival of trading in credit default swaps and other derivatives.

Neo-liberalism may be a rhetorical dead dodo, but the unwillingness of the Obama administration to actually seize the moment of crisis to bring about ‘change we can believe in’ suggests that the practices which led to the current baleful situation may be only in temporary eclipse. In retrospect, the appointments of Tim Geithner and Larry Summers were probably a sign of the times, and more so the thinking that underlay those selections. Gravely disappointing.

But, anyway, the lame duck President made his ritual obeisance to the virtues of American leadership and the glories of the free market. One imagines there’s some personal and political imperative there, but the reality of his governance is better disclosed in the fate of the TARP funds which Treasury Secretary Henry Paulson was given by Congress – it appears that crony capitalism and socialism for the rich is the name of the game according to American blogs such as naked capitalism, Obsidian Wings, firedoglake and naked capitalism again.

But Bush will soon be fading into history, and Barack Obama sensibly declined to act at the summit without executive authority, so what emerged from the G20 is more in the nature of a directions statement for the way forward, as The Big Picture foresaw:

Hopefully, a long term agenda for regulatory cooperation and communication can be set with the next meeting’s agenda decided upon. Far better to talk then not, but no real decisions will come out of this meeting. There will be gnashing of teeth and venting of rage at the mess that excess securitization has created, and the international regulation of and accounting for such derivatives will probably be a focus.

Planet Money looks at what transpired, and links to the text of the communique here. SocProf is right, in my judgement, that we’re seeing the eclipse of the Washington consensus, but the shape of what will replace it is still a work in progress, and some yardsticks to measure the work of the G20 have been provided by the Guardian. Bretton Woods itself was the culmination of some years of intellectual work and economic diplomacy, and if there is to emerge something we might call Bretton Woods II, it isn’t a bad thing that the interregnum in the US presidency implies that decisions won’t be made on the run.

In forming a judgement on what does emerge, I think we as global citizens could do worse than to keep in mind the choice posed by one of FDR’s brains trust in 1932, Adolf Berle:

Between a political organization of society and an economic organization of society, which will be the dominant form?

Elsewhere: Peter Martin has helpfully posted a link to John Quiggin‘s presentation on how the global financial crisis transpired, which should provide some necessary context.

However, I think we can now advance a few hypotheses, however tentative, about what’s occurring – in terms of both political economy and the sociology of knowledge.

The first point I wanted to make is that Bernard Keane is probably right about this:

Government is back, and small government types, libertarians, deregulationists, will have to cop it sweet.

Some aspects of the causation of the global financial crisis have in fact been accurately identified by liberal economists, but the harnessing of them to an increasingly desparate ideological noise machine has diminished their force, and distorted such truth as they have. Here, it’s worth having a good read of Dani Rodrik’s analysis of the causes of the crisis [via The Global Sociology Blog]. As Rodrik suggests, they are multiple and complex. That complexity should give pause to anyone who wants to cherry pick causal factors for a grand narrative, but it also suggests that “free markets rule and evil regulation/government/lefties are at fault” is exposed as a ludicrous claim.

Further, it implies that the dogma associated with market neo-liberalism has to give way to reality, and lies exposed as an ideological rather than a scientific discourse. Here, Joseph Stiglitz is spot on:

This crisis is a turning point, not only in the economy, but in our thinking about economics. Adam Smith, the father of modern economists, argued that the pursuit of self-interest (profit-making by competitive firms) would lead, as if by an invisible hand, to general well-being. But for over a quarter of a century, we have known that Smith’s conclusions do not hold when there is imperfect information – and all markets, especially financial markets, are characterised by information imperfections. The reason the invisible hand often seems invisible is that it is not there. The pursuit of self-interest by Enron and WorldCom did not lead to societal well-being; and the pursuit of self-interest by those in the financial industry has brought our economy to the brink of the abyss.

No modern economy can function well without the government playing an important role. Even free marketeers are now turning to the government. But would it not have been better to have taken action to prevent this meltdown? This is a new kind of public-private partnership – the financial sector walked off with the profits, the public was left with the losses. We need a new balance between market and government.

One of the main reasons why economic theory – in its purist liberal incarnation – has been discarded so quickly as failing to offer any useful policy prescriptions at a time of unprecedented crisis is that it’s part of the problem, and therefore can’t provide the solution.

What in fact we’re seeing is that there are no “natural” or “perfect” markets, and if any can be found lying around the shop, like the credit derivatives swap market with $62 trillion at stake, they’re the vortex of the madness that has engulfed the system’s various “rationalities”. We need to start thinking much more rigorously about the role of states in the creation of the conditions of possibility for these events, and the economic field as a complex set of vectors and forces. I’ll come back to the role of the state in a subsequent post, but I think we need to underline as a starting point in both understanding and diagnosing the global financial crisis the need to put the “political” back into “political economy”.