March 2009


Neo-Liberal meltdown

By Robert Manne
Neo-Liberal meltdown

JP Morgan and New York Stock Exchange buildings, Wall Street, c. 1930. © Hulton Deutsch Collection - Corbis.

The response to the Prime Minister’s essay

The world appears to be moving very rapidly towards a global depression. No one knows how deep it will go or how long it will last. More importantly, no one knows what long-term effects it will have. The last depression took place in the 1930s. It was responsible not only for untold misery but also indirectly for the deaths of more than 50 million human beings. Without the Great Depression it is inconceivable that the Nazi Party would have taken power in Germany. In 1928 the Nazi Party won less than 3% of the national vote; by mid 1932, close to 40%. In turn, without Hitler in control of Germany, there would have been no World War II. While the earliest of the direct effects of the global financial crisis are already with us, the indirect effects are presently unknowable. What impact will it have on the Millennium Development Goals, the pledge of the countries of the developed world to increase foreign aid to 0.7% of their GDP so that there is at least a plausible chance that a portion of the billion or so human beings who live on less than a dollar a day might be lifted out of poverty? What impact will it have on the chances of radical and binding international agreement over global warming, at Copenhagen and beyond, without which the very future of the Earth is threatened? What other radical impacts might it have which are presently unforeseen and unforeseeable? If the arrival of the astonishing global financial crisis does not now call out in all of us sobriety and seriousness, nothing ever will.

The causes of the global financial crisis are already reasonably clear. The crisis originated in a series of interconnected developments within the American financial sector. From the 1980s a vast market in obscure and opaque financial instruments known as derivatives developed there. The market grew at an accelerating pace. In 1989 it was worth US$2 trillion; by 2002, $100 trillion; and by September 2008, almost $600 trillion. (The annual GDP of the United States is presently about $15 trillion.) This explosion of the market in derivatives depended, in turn, on ideological convictions and political acts. In 1998 Brooksley Born, the head of the Commodity Futures Trading Commission, argued for the regulation of this market. Without it, she argued, the American economy and the global economy were being placed at risk. She was overpowered by the chairman of the Federal Reserve, Alan Greenspan, and President Clinton’s Treasury secretary, Robert Rubin. Shortly after, Congress withdrew from the CFTC the authority to regulate derivatives. At much the same time, as a consequence of a $300-million lobbying campaign by financial corporations, Congress also repealed President Roosevelt’s 1933 Glass-Steagall Act. Its purpose had been to separate the commercial banks, which had become involved in the speculative frenzy of the ‘20s, from the activities of the investment banks. The repeal of the Glass-Steagall Act opened all the American major banks to massive involvement in the derivatives market. More deeply, as Joseph Stiglitz has argued in Vanity Fair, the repeal completed the transformation of American banking culture.

The post-2000 derivatives explosion was also aided by American monetary policy. Greenspan reacted to the bursting of the dotcom bubble by steadily lowering official interest rates. In 2000-01 they dropped rapidly from 6.5% to 3.5%. By 2003 they had reached 1%. Effectively, at least for bankers, as Charles Morris puts it in his book The Two Trillion Dollar Meltdown, money was now free. At this time the explosion in the derivatives market intersected with the explosion in another market, sub-prime mortgage lending, which rose from US$145 billion in 2001 to $625 billion in 2005. On the basis of a housing bubble, which increased the price of houses by an annual 7-8%, borrowers with low incomes and no assets were encouraged by banks and mortgage brokers to purchase houses worth several hundred thousand dollars. Derivative traders saw these sub-prime mortgages as a splendid opportunity. They bundled up the mortgages and created from them esoteric derivatives products – like collateralised mortgage obligations or collateralised debt obligations – which were then sold on in their trillions to investors and pension funds. In an article for Portfolio, Michael Lewis gives a telling example of how the racket worked. Big Wall Street firms took piles of sub-prime mortgages with a BBB rating. They bundled them into new products and divided these products into tranches. The top 60% of these tranches were rated AAA. Lewis’s informant, Steve Eisman, who made his fortune by ‘shorting’ the corporations and the products involved in this trade (that is, gambling on their failure), kept asking himself: How is this possible; why is this allowed?

In essence there are two answers to Eisman’s questions. The systematically phoney evaluations of the derivative products and the corporations which dealt in them, pocketing substantial fees with each contract, arose as a result of a straightforward but fatal ratings-agency conflict of interest. The profits of the agencies derived from the Wall Street banks and investment businesses they were supposed to rate. The continuation of their own very healthy profit growth relied on their willingness to turn a blind eye. Yet the fraudulent behaviour of Wall Street rested on another, even deeper, kind of blindness: the ideological blindness of the regulators. Most important here was the regulator-in-chief, Alan Greenspan, the most enthusiastic derivatives cheerleader, who believed with regard to derivatives (and everything else) that the invisible hand of the market was an infinitely more reliable and intelligent guide than any regulatory action by the state. The richest financier in the United States, Warren Buffett, famously argued in his 2002 Berkshire Hathaway annual report that derivatives were “financial weapons of mass destruction”. (This, incidentally, did not prevent him, as Edward Jay Epstein pointed out in Vanity Fair last month, from dealing in derivatives worth billions of dollars or from holding a 20% stake in one of the main derivatives accomplices, Moody’s ratings agency.) To this point of view, time and again, Greenspan replied in the following way: “Derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so.” The failure of the regulators to regulate eventually required the coining of a new term: de-supervision. Concerning de-supervision, James Lieber in the Village Voice tells a fascinating story. One of the engine rooms of the derivatives market was the London-based financial-products arm of the (later bailed-out) American insurance giant AIG. In 2000, the chief legal officer of AIG asked the head of insurance regulation in New York whether he would like to audit their business. The New York regulator politely declined.

It is obvious whose interest all this served. Before the recent crash, the average taxable income of the top 15,000 American income earners was US$30 million; their annual income in total, US$441 billion. In the mid 1970s the wealthiest 1% of Americans owned approximately 20% of national assets. On the eve of the financial collapse they owned some 40%. Very many of these people derived their income and their wealth from the financial sector. In 2008, even after the sector had begun imploding, the executives of the Wall Street corporations that were eventually rescued by taxpayers rewarded themselves with US$18 billion in bonuses. Vast riches had apparently come to be seen by this predatory class as an entitlement.

The end of this story is well known. By 2008 it was clear the sub-prime mortgage market had crashed. The derivatives market went with it. Most derivatives were suddenly seen for what they had always been: “toxic waste”. Wall Street was in panic. Like most of the major banks and investment houses involved in the derivatives-market frenzy, Lehman Brothers was effectively bankrupt. On 15 September the firm admitted this. But unlike the other bankruptcies acknowledged at this time, it was not bought up by a larger corporation or bailed out by the Bush administration. Almost overnight, American credit markets froze. By now, however, the derivatives market was fully globalised. It had sucked in very many of the major banks and investment businesses in the developed world. The most toxic product of all seems to have been the so-called credit-default swap, which allowed the risk for defaults on debt payments to be transferred time and again between institutions. As inter-bank trust collapsed, global credit markets also froze. In an attempt to unfreeze them, the world’s banks and investment businesses were given some US$13 trillion in taxpayer-funded bailouts and guarantees. So far, even this has not worked. Economies around the globe quickly passed into even deeper recession than in 1973-74. Forty per cent of the value of global stock markets evaporated. Industry after industry contracted. Massive unemployment loomed. There was widespread talk now of a new depression. With extraordinary rapidity, the collapse of the US$600-trillion derivatives market had brought the global economy to its knees.

It is strange but nonetheless true that, thus far, the most impressive Australian essay on this crisis and its implications was the one written by the prime minister during his holiday break, published last month in this magazine. As Kevin Rudd argued, the global financial crisis was of such moment that eventually it might be clear that it had closed one era of history and opened another. Since the end of World War II, within the international political economy there had been two 30-year eras. The first rested on two compromises – between capital and labour and between the state and the market – which seemed to have solved the underlying problems of capitalism: eliminating booms and busts and both inflation and unemployment. This era had been guided by the spirit of the economist John Maynard Keynes. A new era began with the elections of Thatcher and Reagan. It promised universal prosperity on the basis of the systematic contraction of government interventions in the management of economies, and the global expansion of free markets. This era was presided over by the spirit of the key economists of the Austrian and Chicago schools, Friedrich Hayek and Milton Friedman. Following standard nomenclature, Rudd called this 30-year period the age of neo-liberalism. Just as stagflation had killed off the era of the Keynesian compromise, so now, in Rudd’s view, it was almost certain that the global financial crisis would bring the neo-liberal era of Hayek and Friedman to an end.

The purpose of Rudd’s essay was to show why this was so and also why its happening would be to the eventual benefit of humankind. Neo-liberalism was founded on a faith in the capacity of the free market to bring order and prosperity. Far from creating either, the freedom allowed the financial markets in the United States had proven so lethal that almost overnight it had destroyed a considerable part of the global economy. No one could believe any longer in the magic of unregulated markets or in their self-correcting capacity. In the emergency following the collapse, almost no one doubted that both robust state action at home and an unprecedented level of governmental co-operation internationally were immediately required. Neo-liberalism could now, Rudd argued, be seen for what it had always been – a flawed philosophy justifying indefensible levels of inequality and rationalising greed.

The era of neo-liberal philosophical hegemony in the sphere of the political economy was almost certain to be replaced by a new era of what Rudd tentatively called social democracy. Its role in national politics would be to restore the balance between state and market and to resume, without apology, the quest for social justice, a notion that the neo-liberals, following Hayek, had sought to anathematise. Its role in international relations would be to forge a new era of co-operation in the management of the global economy and to deepen commitment to the struggle against global poverty. In the domestic sphere, the first priority was to stimulate the recessed economies with a cautious return to the demand-management policies of Keynes. In the international sphere, the first priority would be the creation of a new regulatory framework for the operation of financial markets. If social democracy failed now in the task of preventing capitalism from cannibalising itself, there was a real danger of a return of the kind of political threat that had been experienced during the Great Depression, of a drift to the radical extremes of Left or Right.

Rudd’s essay was not without weakness. Apart from mentioning that global warming was the greatest case of market failure in history, the kind of failure neo-liberals were ideologically pre-programmed to discount, Rudd (for painfully obvious reasons) failed to assess the likely impact of the global financial crisis on prospects for international co-operation over climate change. This is hardly a side issue. It will determine the future of the Earth. To some extent, too, it seems clear that Rudd had exaggerated his differences with neo-liberalism. In Australia, a considerable part of the neo-liberal program was implemented by the Hawke and Keating governments: the near-complete reduction of tariff protection, the floating of the dollar, financial-market liberalisation, privatisation. Because such policies were implemented by Labor and because Rudd actually supports them, he describes them not as neo-liberal but as “economic modernisation”. This is misleading. Such policies come out of the neo-liberal textbook, sometimes known as the Washington Consensus. Rudd’s essay would have been stronger if he had distinguished between those parts of the neo-liberal policy agenda he supports and those parts he opposes. It would also have been stronger if he had acknowledged that neo-liberalism has had an uneven impact on policy formation across the globe. Even if you set aside the difficult matter of defining the policy implications of neo-liberalism – on certain questions, like monetary policy, even Hayek and Friedman disagreed – it is obvious that there is no real-world case in which the impact of neo-liberalism has not been influenced or diluted by national political cultures. Because a great deal of the neo-liberal program was implemented in Australia by the Hawke and Keating governments, it did not lead, except at the margins, to the unravelling of the social-welfare state. On the other hand, because neo-liberalism in the United States was for the most part implemented by Republican administrations, some items of the neo-liberal agenda were emphasised over others. Republican presidents ignored the problem of balancing their domestic budgets. They were always keen to cut the taxes of the wealthy.

Despite these weaknesses, however, the core of Rudd’s argument was solid. For 30 years policymakers and elite opinion throughout the Western world, and especially throughout the English-speaking world, had maintained a suspicion of state intervention and regulation and a faith in the superior wisdom of the market. The market faith had for 30 years served the interests of the wealthiest segments of society. The global financial collapse of 2008, which was rooted in the radical deregulation of financial markets, had proven the falsity of that faith. In the crisis, both domestically and internationally, everyone had immediately turned to governments in the search for a solution. As a consequence of all this, a new era was in the process of coming into being where the claims of both the market and the state, and of both economic efficiency and social justice, would need to be honoured. The era of neo-liberalism was over. The new era had not yet found its name.

The response of the Australian political class and commentariat to Rudd’s essay – with exception of Dennis Glover’s perceptive piece in the Australian, on balance strongly negative – has been both fascinating and depressing to observe. Certain key themes emerge. Everyone reading Rudd’s essay should have understood that it was predominantly about the general causes and implications of the global financial collapse, with arguments connected to Australia appended. Very many of the commentaries nonetheless appeared to believe that the essay was mainly about Australia. Janet Albrechtsen, for example, thought that Rudd had written an article “about a conspiracy in Australia of neo-liberals who have left the country financially wrecked”. Malcolm Turnbull thought that in the supposed praise for big government, higher taxes and socialism revealed in the essay, Rudd “was channelling Gough Whitlam”. Peter Costello went further. On Lateline, he summarised Rudd’s argument like this: “The whole global financial crisis is somehow the fault of the Liberal Party.” Rudd “puts the word ‘neo’ in, but he really wants to emphasise that word ‘liberal’”. Not only was the general claim a ludicrous distortion. Was Costello unacquainted with the term ‘neo-liberalism’ or its central place in the contemporary international debate? With Frank Devine, of the Australian, on this question there is no need to guess. “Is neo-liberal a Rudd coinage?” he wondered in his column. “I had not encountered it before.” After reading Devine, I turned to Google. For ‘neo-liberal’ there were four million entries.


The failure to grasp that Rudd’s essay was not primarily about Australia was linked among the journalists to party-political myopia. Michelle Grattan’s report on the Rudd essay, buried on page seven of the Age, opened with the following line: “Kevin Rudd is seeking to discredit Liberal leader Malcolm Turnbull by painting him as advocate of the market fundamentalist neo-liberal philosophy trashed by the economic crisis.” (Astonishingly enough, the Age seemed less excited by the appearance of the Rudd essay than the Economist or the Asian Wall Street Journal.) Crikey’s Canberra correspondent, Bernard Keane, agreed with Grattan. The essay was “most of all ... an exercise in domestic politics, aimed at discrediting, even demonising, the Liberal Party”. Greg Sheridan, of the Australian, was of similar mind. According to him, Rudd did not believe a word he had written in the Monthly. He simply wanted to destroy Malcolm Turnbull. Even as intelligent a journalist as Peter Hartcher of the Sydney Morning Herald thought that Rudd’s essay and his previous arguments against neo-liberalism were predominantly exercises in domestic politics. Prior to Rudd’s leadership bid, Hartcher argued, he had launched an attack on Hayek at a neo-liberal think-tank mainly to win votes from the ALP’s socialist-Left faction. Now he was mainly trying to tar the Liberal Party with the neo-liberal brush. All this strikes me as peculiar. If (improbably enough) Robert Menzies had written a major essay in early 1940 on the failure of the policy of appeasement, would Australian journalists have interpreted that as an attempt to outmanoeuvre John Curtin? It did not occur to these journalists that Rudd could actually believe deeply what he wrote and that he was precisely what he appeared to be: an intellectual in politics struggling simultaneously both to understand and to help transform his world. At least Christian Kerr, in the Australian, accepted that Rudd was an intellectual. For him, however, this was precisely the problem. The mums and dads of Australia were hardly likely to be interested in long-dead Austrian economists.

The response to Rudd’s essay was not only parochial and myopic but also remarkably ill-tempered. Tony Abbott described the piece as “pretentious and self-serving twaddle ... an only slightly more sophisticated version of playground name-calling”; Paul Sheehan called it “an inflated balloon of self-promoting spin”; Peter Costello, “miserable” and “little” – one thing it clearly was not. Paul Kelly accused Rudd of “breathtaking hubris”. More simply, Janet Albrechtsen thought Rudd both “arrogant” and “wicked”. Beyond the abuse, there were attempts to discredit Rudd through arguments ad hominem and through guilt by association. Piers Akerman and Gerard Henderson argued that because his wife had been successful in business, Rudd’s criticism of extreme capitalism and market fundamentalism constituted hypocrisy of the most egregious kind. There was not one word in Rudd’s essay that suggested he was opposed to entrepreneurial activity. In its daily compendium of schadenfreude and spleen, ‘Cut & Paste’, the Australian for its part attempted to discredit Rudd through the company he kept. Rudd was a critic of neo-liberalism. So were Noam Chomsky and Hugo Chavez. What more needed to be said? Neo-liberals have become accustomed to dominating public debate in Australia. It was not surprising that the appearance of Rudd’s challenge was viewed as impertinent and as an affront.

What was more surprising was how thoroughly the meaning of the global financial crisis had escaped our conservative commentariat and political class. For Janet Albrechtsen, Rudd had “conjured up the imagery of crisis”. Conjured? On what planet does she live? For Greg Sheridan, the journalist who had once argued that George W Bush was a political genius on the scale of Winston Churchill, the publication of the Rudd essay on the crisis provided yet another opportunity to enthuse about “the US’s economic and geo-strategic global leadership”. The jaw-dropping lesson that Julie Novak, of the Institute of Public Affairs, drew from the global financial crisis was that the financial sector had been “hamstrung by regulations such as corporate reporting and accountancy standards”. While for Tony Abbott, the global financial crisis demonstrated yet again the need for “lowering interest rates, reducing taxes and cutting regulation” – in short, precisely those measures which in the United States had allowed the market in derivatives to explode.

In testimony to Congress on 23 October last year, Alan Greenspan confessed to a “shocked disbelief” at the failure of his lifelong market faith. To judge by the initial response to the Rudd essay, among the Australian neo-liberal commentariat and political class that often painful process known as thought has not yet even begun.

Robert Manne

Robert Manne is emeritus professor of politics and vice-chancellor’s fellow at La Trobe University. His most recent books are The Mind of the Islamic State and On Borrowed Time.

There is nowhere quite like The Monthly. We are told that we live in a time of diminished attention spans; a time where the 24-hour-news-cycle has produced a collective desire for hot takes and brief summaries of the news and ideas that effect us. But we don’t believe it. The need for considered, reflective, long-form journalism has never been greater, and for almost 20 years, that’s what The Monthly has offered, from some of our finest writers.

That kind of quality writing costs money, and requires the support of our readers. Your subscription to The Monthly allows us to be the home for the best, most considered, most substantial perspectives on the state of the world. It’s Australia’s only current affairs magazine, an indispensable home for cultural commentary, criticism and reviews, and home to personal and reflective essays that celebrate and elevate our humanity.

The Monthly doesn’t just comment on our culture, our society and our politics: it shapes it. And your subscription makes you part of that.

Select your digital subscription

Month selector

From the front page

Kim Williams seen through window with arms half-raised

The interesting Mr Williams

At a time when the ABC faces more pressure than ever before, is its new chair the right person for the job?

Illustration by Jeff Fisher

Letter from Dunkley

As a byelection draws the nation’s focus to the scrappy suburb of the author’s childhood, a visit reveals the damage wrought by the housing crisis

Exterior of the Department of Treasury, Canberra

Tax to grind

Tax reform should not be centred on what we want, but on who we want to be

Rehearsal for the ABC TV show ‘Cooking with Wine’, March 13, 1956

Whose ABC?

Amid questions of relevance and culture war hostilities, the ABC’s charter clearly makes the case for a government-funded national broadcaster

In This Issue

Illustration by Jeff Fisher.

Sinking sandbanks

Strangers in the night

Robert Forster on Roberta Flack & Leonard Cohen live
Illustration by Jeff Fisher.


Tales of the city

Gus Van Sant’s ‘Milk’

More in The Monthly Essays

Kim Williams seen through window with arms half-raised

The interesting Mr Williams

At a time when the ABC faces more pressure than ever before, is its new chair the right person for the job?

Rehearsal for the ABC TV show ‘Cooking with Wine’, March 13, 1956

Whose ABC?

Amid questions of relevance and culture war hostilities, the ABC’s charter clearly makes the case for a government-funded national broadcaster

Andrew Tate in dark sunglasses flanked by two men, attending his trial in Bucharest, Romania, July 2023

The Tate race

Online misogyny touted by the likes of Andrew Tate (awaiting trial for human trafficking and rape) is radicalising Australian schoolboys

Close-up of smiling Kathleen Folbigg after being acquitted at the New South Wales Court of Criminal Appeal, December 14, 2023

By her own words

How systemic misconceptions around women’s guilt led to a 20-year miscarriage of justice for Kathleen Folbigg

Online latest

Osamah Sami with members of his local mosque

In ‘House of Gods’, Sydney’s Muslim community gets to be complicated

Plus, Barnaby Joyce shines in ‘Nemesis’, Emma Seligman and Rachel Sennott deliver ‘Bottoms’, and Chloë Sevigny and Molly Ringwald step up for ‘Feud: Capote vs. The Swans’.

International Film Festival Rotterdam highlights

Films from Iran, Ukraine and Bundaberg were deserving winners at this year’s festival

Two women on a train smile and shake hands

‘Expats’ drills down on Hong Kong’s class divide

Plus, Netflix swallows Trent Dalton, Deborah Mailman remains in ‘Total Control’ and ‘Vanderpump Rules’ returns for another season

Image of a man playing music using electronics and the kora (West African harp)

Three overlooked albums of spiritual jazz from 2023

Recent releases by kora player John Haycock, trumpeter Matthew Halsall and 14-piece jazz ensemble Ancient Infinity Orchestra feel like a refuge from reality