Global crisis rooted in systemic failure of the financial and political elite

Colin: Another of those rollercoaster weeks on the stock market may have terrified the wits out of investors but it belies sensible analysis of the world’s political economy. Just consider this: did anything really happen on Thursday to make Apple, America’s most valuable company, worth $36 billion more than the day before? A more penetrating look at the very slow recovery of the world’s largest economy points to systemic failure by the financial and political elites. I’m Colin Chapman and welcome again to Agenda with George Friedman.

George, your article on political economy this week was described by a very independent and respected broadcaster as the most cogent review of the current predicament that she has read. Can you put the last three years in perspective?

George: When you think about the problem of the system, it’s certainly an economic crisis, and it’s also a political crisis, but you really can’t think about these as separate problems. These are problems that are intimately linked. The way I look at it, the political and the economic system are constantly interacting. In 2008, one segment of the economic system failed – that was the financial system, a subset of the economic system. In its failure you had both the financial problem but also the political problem that the financial elite lost all credibility. As a result of the failure of the financial elite, the political system came in to stabilize it and to preserve the system as a whole. And so you wound up with the political system coming in, the political elite coming in, and overwhelming the financial elite that had failed. In so doing, however, the political elite also lost a great deal of credibility. They lost credibility because they had, in responding to the financial crisis, seemingly destabilized the entire system by spending both far too much money and failing to basically discipline the financial system by holding those who did it responsible.

Now we can go into an infinite regress about why the financial system failed, and there are many who would argue that the failure of the financial system really was rooted in the political decisions that were made about the cost of money and so on. But these two systems are constantly interacting as are in some countries the military system and so on. And what we have seen here is a dramatic situation in which first the financial system and its elite lost credibility, and then the political system went into gridlock and the political elite lost credibility, until we have in all major countries of the world – the United States, China, the EU – until you have a general systemic problem. It’s not that it’s not soluble, in many of these countries, but you see it in a destabilization going on beneath the surface. In fact, the riots in London are kind of symptomatic of this, of the fact that some elements of society have lost such respect for the elites that they’re prepared to take extreme action.

Colin: Some people, particularly the young, see themselves as victims of actions by those who don’t seem to be suffering any pain. In effect, those who failed pass the pain on to the populace.

George: Well you know, I think there’s a kind of model you could argue that people are deprived of things so they revolt. But it’s much deeper than that. Normally, just because you cut benefits, you don’t have these kind of riots. And many of these rioters were not rioting because they were planning on going to university and weren’t going to get an opportunity to do so. You had a great deal of criminality in this and that criminality is interesting because when criminality starts to look legitimate to large numbers of people, that’s when you have a social crisis. I think it’s a mistake to look at what happened in London simply in terms of “well there were social cuts and so that’s why there was a rising.” That rising couldn’t have occurred if the elites themselves hadn’t appeared to be so corrupted, so compromised, and even one could say, so incompetent. That was the real issue that we faced there and I think if you simply say that if you do social cuts then people will riot, that’s not empirically true. It’s when you wind up in a situation where you no longer know who’s in charge nor do you care, that opportunities are created for the criminal class. Far more interesting, the rioters have been the people in London, some of them, who have justified the riots. I’m not saying that as a moral category, justified or not. What’s interesting is that it is not a universal condemnation.

Colin: Yes, and in Britain you have had scores of politicians exposed for major expense-fiddling, you’ve had solid evidence of a once-proud police force bribed by the Murdoch tabloids. And in the United States you’ve seen congressmen bickering and point-scoring while, to use a cliche, Rome burns. And in China, widespread corruption. The political classes are not exactly heroic.

George: Well I agree that it’s fed up with the system but I really don’t think that politicians fiddling with their expense accounts is a definitive thing – they always do. You really have to distinguish between the constant comings and goings of the system and the silliness of Rupert Murdoch, who in the end turns out to be a very silly man in many ways. You have to not look at that. You have to look at the more fundamental issue. People who were supposed to be experts in finance did inexcusably stupid things and also in the process, profited handsomely. People in the political system who were supposed to hold these people accountable and prevent them from doing these things, failed to do it. I think in most countries we expect our politicians to steal a little money here and there on expense accounts, we expect bickering in Congress – we expect these things. But when the fundamental thing that legitimizes an elite, the financial elite’s ability to manage money prudently, is violated in two ways. First, that they clearly can’t do it. And secondly that they profit from it anyway. And when the politicians’ obligation to stabilize the system and not let people get away with this doesn’t happen, you have serious problems. So I think the problem really starts with the systemic failure of two major elites, not on minor things, not on trivial corruption, but on the fundamental thing that they were hired for. And the fact that they don’t seem to regard themselves as particularly having failed. I mean, this is what creates a crisis I think.

Colin: One final question. These failed elites, the financial and political elites, actually created a myriad of complex financial regulations, especially in Europe and the United States, to prevent what’s happened from happening. The tougher rules didn’t work and there’s little confidence they can fix things up now.

George: Well, the failure of the financial regulatory system and its failure to clear it up is not the cause, it’s the symptom. No regulatory system works if it is not enforced. No reform is meaningful if it is not going to be enforced. The crisis is the perception, not that there was not regulation, but that no one enforced the regulation. The crisis is not that new regulation is not emerging, it’s that they won’t be enforced anyway. I’ll put it this way: this is a crisis in virtue – in the virtue of the political leadership, in the virtue of the financial leaders. There’s expected to be a certain degree of self-restraint and moral probity. You can’t substitute regulations for that, and you can’t worry about whether or not they’re going to be enforced in the future. The heart of the matter is that the integrity, the intelligence, the morality of these elites, have now been called into question. Empirically because of their failure to operate, but also the way they operated. No one at this point is certain that they can resurrect themselves or have new leadership enforced, and this is leading to a deep moral crisis. But it’s not just confined to England, it’s not confined to Europe, it’s not confined to the United States. It’s not even most deeply felt in the United States. It’s in China as well, and in other countries. The issue is: who are these people who are running things, what gives them the right to do so, and if that right does not somehow flow from competence, what does it flow from? So we have a crisis I think, not in corruption, but of sheer incompetence and indifference to incompetence, and that is something that is not necessarily unmanageable, but it’s certainly not a question of getting better regulations.

Colin: George, thank you. And you can read Dr. Friedman’s article, Global Economic Downturn: A Crisis of Political Economy on our website at www.stratfor.com. Thanks for being with us today. Until the next time, goodbye.