“As things stand, the banks are the permanent government of the country, whichever party is in power.” (Lord Skidelsky, House of Lords, Hansard Citation, 31 March 2011, c1359)
Everybody agrees that the next financial crisis is about to hit us …. bringing another economic crisis in its wake. The general view is that if we were able to prevent meltdown in 2008 by throwing money at the banks, this time the money will be more difficult to find. Unlike the last time, the OECD economies are stagnating, unemployment is high and there’s already much public anger about cuts, joblessness and bankers’ bonuses. 
Perhaps we should remember that in 2009, neo-liberalism was pronounced dead and buried. It was thought that a new, more thoughtful era was being born. It most certainly didn’t happen. Instead, European countries became more narrowly nationalistic and xenophobic, while the US gave the world the Tea Party. So there is good reason to believe that, as in the 1930s, economic crisis may strengthen the right more than the left. That’s one reason that progressives need to sloganise less (eg, it’s all due to greedy bankers) and think more about underlying causes.
Some ‘experts’ will tell you that the coming crisis is all about bad sovereign debt, unlike the previous crisis caused by bad mortgages. While these may have been factors, they are certainly not the full story. The two crises are more similar than they may appear at first sight. If one is looking to join up the dots, the basic argument would go something like this.
The roots of the 2008 crisis lay in the growing structural weakness of the financial sector such as deregulation, the growth of shadow banking, the multiplication of opaque financial products, the spread of the bonus culture and the sheer political power of Wall Street.  When the credit crunch eventually erupted in the wake of the Lehman Brothers collapse, it turned a US recession into a deep economic slump (one that doubtlessly would have been deeper had the government not bailed out the banks.) By means of the bailout, too, the cost of financial catastrophe was shifted from capital to labour.
In the US, the poor lost their houses, jobs and short-lived unemployment benefits. In much of Europe where social protection is stronger, a combination of increased social transfers and collapsing tax receipts blew a large hole in public finances. With negative growth and growing government deficits, public indebtedness grew. Echoing populist politicians, the credit rating agencies (CRAs) downgraded sovereign debt, thus creating a vicious circle by making it harder and more expensive for ‘Club-Med’ governments to borrow on the private market.
The Eurozone (EZ) countries were particularly hard hit because of the euro’s lopsided architecture; eg, no central Treasury and a Central Bank focussed entirely on fighting an inflationary battle which hasn’t existed for a generation.  Moreover, a neo-mercantilist Germany remained obstinately blind to the deep-seated problem of trade imbalances within the EZ.
By 2010, although growth resumed briefly in the larger economies as a result of earlier economic stimuli, the writing was on the wall for the countries of the EZ periphery. Greece, the only peripheral EZ country to have had a truly serious public finance problem, was locked out of private financial markets while EZ leaders dithered.  Ireland and Portugal were eventually forced to follow suit. Given the danger of spreading contagion, Germany (after much hesitation) agreed to setting up the European Financial Stability Facility (EFSF), albeit undercapitalised and politically sclerotic. 
Today, because European banks hold a vast quantity of high-yield but insecure sovereign debt, and because a chain of other banks (including US banks) have lent them a lot of money, a sovereign default—say, in Greece, which is now almost certain—would have a disastrous domino effect. Over the past few months, the price of bank shares has been falling, the banks’ wholesale funding market has grown more fearful, and banks are starting to dump assets at knockdown prices. Austerity and fiscal retrenchment have amplified this danger since stagnation or negative growth makes economies more, not less, vulnerable.
EZ sovereign bonds are as toxic today as CDOs (sliced and diced mortgages et al) were yesterday. Why? Basically, because if Greece defaults tomorrow, no-one quite knows how quickly and widely the dominoes will tumble. A carefully negotiated default backed by a huge and fast-acting EFSF might save the day—just as jointly backed Eurobonds might have six months ago—but given the absence of a firewall, the fallout from Greece might set Europe ablaze as other sovereigns come under attack. Equally, current financial austerity means that a financial meltdown will spread to the real economy more quickly—with devastating effects.
What should progressives be saying? Far more than what they’re saying at the moment, that’s for sure. For one thing, the financial sector needs more than just regulation; it needs a large measure of public sector control—that’s right, the n-word: nationalisation. Finance is a public good, far too important to be run entirely for private bankers. At the very least, we need a large public investment bank tasked with modernising and greening our infrastructure; for the private sector, we need a return to the plain-vanilla banking which gave us post-war prosperity.
What else? We need an end to the bonus culture as well as a progressive tax system that works—not one that is increasingly unfair and regressive, and that allows fat-cat individuals and corporations to stash away undeclared millions in Switzerland or the Caymans. 
Finally, instead of trashing the Eurozone and going back to a dozen minor currencies fluctuating daily; let’s have a Eurozone Ministry of Finance (Treasury) with the necessary fiscal muscle to deliver European public goods like more jobs, better wages and pensions and a sustainable environment. A Tobin tax is vital to help fund a renewed social settlement. At least Europeans would feel they get some tangible benefits for their money. And while we’re at it, why not have and ECB which can act as lender-of-the-last-resort like a proper central bank?  Planning for such changes cannot be put of much longer; it must start now.
I shall start voting for a progressive party again when I hear its leaders offering long-term solutions based on serious analysis.
2 See Nouriel Roubini and Stephen Mihm (2010), Crisis Economics, New York: Allen Lane
3 See Irvin and Izurieta: http://epw.in/uploads/articles/16386.pdf
5 See Muechau, http://on.ft.com/qi7ZIw
7 See Nicholas Shaxson (2010) Treasure Islands: Tax Havens and the Men who Stole the World, London: Bodley Head.
8 See Palley, T (2011): “Monetary Union Stability: The Need for a Government Banker and the Case for a European Public Finance Authority”, Düsseldorf: Institut für Makroökonomie und Konjunkturforschung Working Paper. 02/2011. <http://www.networkideas.org/alt/jul2011/Monetary_Union.pdf>.