The pathologies associated with the financial sector's dominance over the rest of the economy were on full display in recent days as European policymakers found themselves in impossible positions to please financial markets. Investors seem to be happy when governments impose harsh austerity to shore up confidence that bond issues will be repaid in full, and then unhappy when that austerity produces worsening economic projections. This whiplashing of elected officials and near-total surrender of economic policy to the whims of the financial markets suggests that things have gone too far. It also suggests that any steps toward restoring both financial stability and higher economic growth will necessarily involve reinstituting some of the constraints that conservatives used to deride as financial repression. It is increasingly apparent that after 30 years of financial liberalization, we are today in desperate need of restoring policies that can again incentivize investment capital to move away from the casino economy and back into the real economy that produces jobs and growth. But this, too, will require jettisoning neoliberal policies.
Given the recent replacements of the Italian and Greek governments with others more to the market's liking, it is easy to get swept up in the notion that the bond markets have somehow seized control. As Wall Street investment banker Roger Altman has stated, financial markets have become "a global supra-government. They oust entrenched regimes where normal political processes could not do so. They force austerity, banking bail-outs and other major policy changes.… Leaving aside unusable nuclear weapons, they have become the most powerful force on earth.'"
But citizens must resist this characterization of financial markets as a mysterious, uncontrollable force of nature and the driving force in this drama. In fact, these developments are merely the result of a particular set of policy choices. The circumstances under which financial markets brought about a run first on the debt of Greece, Ireland, and Portugal, and more recently on the debt of Italy and Spain, were created by the ECB's neoliberal policies. Chief among these is the priority of keeping inflation at low levels at all costs. The ECB has also enshrined "central bank independence" in its architecture, which in theory enables the bank to fight inflation without citizens, parliaments, or finance ministries seeking to increase deficits and print money during economic recessions (thus jeopardizing the priority of low inflation). While the bond markets very much like low inflation (it keeps the value of their bond issues from deteriorating before they get repaid), neoliberal policies have effectively subordinated fiscal policy -- even in times of crisis -- to the goal of keeping these markets happy.
Other monetary policy choices and ECB architectural designs exist, and these alternatives deserve consideration today more than ever. The ECB, for example, could have pursued a different policy that focused on promoting growth and employment, and it could have acted to buy troubled eurozone bonds to diffuse the immediate crisis. New thinking in macroeconomics, on display at a remarkable IMF conference this March, has increasingly questioned the single-minded focus on inflation-targeting in central bank policy. There is a growing appreciation for context and complexity and the use of more targets and instruments in monetary policy, but none of this seems to have been absorbed yet by eurozone policymakers. Sadly, the ECB has opted for a deliberate neoliberal policy of lessening the role of the state, and it appears to be using this crisis to underfund governments with a fiscal straitjacket and compel them to drive wages lower and weaken labor generally, thereby guaranteeing a deeper, longer, and harsher recession yet to come.
The policies that today give so much power to the whims of the bond markets are not etched in stone, and history shows that reasonable people can decide to make new arrangements at any time -- if citizens would only mobilize to demand such policy changes. For now, under the current policies, it looks like everybody is going to lose.