Crisis of confidence or crisis of structure?

After reading the speech by Brian Cowen at the Dublin Chamber of Commerce (reproduced in the Irish Times this weekend) I was struck by the following paragraph:

“The question of a world recession……a global recession which has occurred because of a crisis of confidence, investor confidence, consumer confidence, and a crisis of confidence in the financial structures, in the financial system which has provided the means by which a functioning market economy has forged ahead with unprecedented growth worldwide for the last decade and more”.

This is interesting for three reasons:

  1. Brian Cowen identifies ‘confidence’ as the causal factor behind the global economic recession not the financial system or reckless banking practices.
  2. There is absolutely no mention of domestic policies (taxation and an inflationary property-price bubble) that made Ireland vulnerable to a global down turn.
  3. The implication that if confidence is restored in exiting financial structures that have provided the ‘means’ for economic growth over the past ten years then everything will be fine.

Brian Cowen goes on to highlight that this problem of ‘confidence’ allied to the devaluation of sterling “exacerbate a difficult situation”. Again, there is absolutely no criticism of a) how financial-capitalism has been institutionalised (i.e. deregulated toward accountancy-financial market outcomes) over the past 20 years, b) the banking cartel-profession in Ireland that facilitated the asset-price bubble or c) the dependence created by the government on unsustainable asset-based taxes as a source of public (citizens) revenue.To assume that the structures of the financial system are fundamentally sound is an abohorrence of responsibility.

If the government wants to steer Ireland out of the current crisis then it has to tackle these three concerns.  Primarily, in the short-term, any genuine attempt at a ‘national recovery’ has to face the question of how the state finances its social expenditure. The current mess in the public finances is the result of conservative fiscal domestic policies not the global credit crunch. The absence of an effective revenue raising mechanism has resulted in a shortfall in revenue, and thus increasing deficits. To maintain expenditure the government must raise taxes. Furthermore, the new taxation system should provide the basis for increasing social expenditure over the coming years. The alternative policy route is retrenchment across the public sector. Taxation needs to be fundametally reformed. However, I sense Fianna Fail will postpone this decision on taxation until after the local and european elections in June.

The global financial system needs to be fundamentally re-examined and the banking sector needs to be fundamentally restructured. These are important truths that need to inform the co-ordinated approach by public policy decision makers over the coming months.  The current crisis can be used as an opportunity for an alternative policy-paradigm that does not make the same mistakes of the past 15 years. Central to this policy-paradigm ought to be an acknolwedgement that the autonomous financial-market cannot be left to self regulate. We need new policies, new structures and new institutions.

The taoiseach was speaking directly to the business community in Dublin so perhaps he avoided such criticisms. This pragmatism would make sense.  The central theme of the speech was ‘sticking together’ and he reiterated his commitment to social partnership. However, this commitment must be matched by a commitment to increased taxation on higher earners if social partnership is to develop an equitable national recovery programme.

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