Debt Crisis Spells Doom for "Free Market" Consensus

New Labour has led a charmed economic life for the past decade. Britain's ejection from the European exchange rate mechanism in the early 1990s and a unique set of international conditions helped deliver a record that earlier generations of British politicians could only have fantasized about. Whatever other disasters and scandals they could be held responsible for, the economy was always Tony Blair and Gordon Brown's secret weapon: the "longest period of sustained economic growth since records began," low inflation, rapid job creation and a strong boost to public spending, all at the same time. The fact that it has also been a story of rising inequality, stubborn unemployment and ballooning levels of debt - and has depended on the international financial system's toleration of a huge trade deficit to sustain it - has until now barely shifted the perception of economic success. That has been the crucial backdrop to the me-too politics of recent years and the free market consensus that underpins it. It is also, of course, the record that finally propelled Brown into 10 Downing Street.

But there can now be no doubt that such halcyon days are coming to an end. What kicked off in the US earlier this year, in the shape of the sub-prime mortgage lending crisis, has now spread like gangrene across a deregulated global financial system, imposing a vice-like squeeze on the very credit cushion that has hitherto kept the US and British economies afloat. In Britain, it has already led to the collapse of Northern Rock and the first run on a British bank since the Victorian era. But the impact will certainly go much further, particularly in an economy so lop-sidedly dominated by the financial sector. Already, the house price collapse and prospect of mass repossessions is tipping the US economy towards full-blown recession. In Britain, which now has the highest level of personal debt of any industrial country - at £1.4 trillion, larger than national income - the expectation must be that the economy is heading in the same direction. As the full impact of the credit crunch makes itself felt, the house price bubble is bound to deflate further. That in turn will cut demand, bringing with it a painful economic slowdown at the very least.

The central banks have, of course, been busy cutting interest rates and pumping cash into the system to try to achieve the kind of soft landing that saw them through earlier international financial crises, in 1998 and 2001. Yesterday's coordinated announcement of billions in new loans to banks shows both how ineffective those earlier interventions have been and how serious the situation has become. But there are good reasons to believe that even this latest move is likely to prove too little, too late, to turn back the incoming tide. And for the first time since the 1970s, there is a growing risk of stagflation - the combination of recession and rising inflation - which makes sharp interest rate cuts particularly risky from the point of view of neoliberal orthodoxy. International oil, commodity and food prices are all currently on the rise, just at the point when the credit squeeze and emerging first-world debt crisis show all the signs of bringing the boom of the past 15 years to a juddering halt.

That long boom was made possible by the collapse of the Soviet Union and the opening of China (and to a lesser extent India) in the 1990s. The effect was to bring hundreds of millions of educated and low-waged workers into the framework of the international capitalist market - who, as the former US Federal Reserve chairman Alan Greenspan put it, have "restrained the rise of unit labor costs in much of the world." Along with the wider weakening of organized labor, the deregulated expansion of international finance and a flood of cheap imports into the rest of the world, the result has been a corporate profits bonanza and power grab which has shaped the economic and political temper of our times.