Europe is leaderless. Its major figures cannot agree amongst a very narrow range of options to resolve a looming banking crisis. American leaders do worse than nothing. They impose austerity amidst massive contractions in private consumption and investment, even though public borrowing has never been cheaper. The ruling class is just not up to the task of governing during real economic turmoil. There is a reason for this, and it is connected to the economic conditions our rulers are called to manage. The past twenty years produced a ruling class used to manufacturing crises, but unsuited to the management of a real one.
The implicit social contract of the post-Cold War period, which underwrote the suspension of class conflict despite stagnating wages, has been uninterrupted debt-financed consumption. American households borrowed to buy cheap imports and expensive houses; the Europeans did the same, with the periphery buying German exports. The condition for this implicit bargain was a belief in the Great Moderation, and especially in expert management of risk, which allowed for a safe, but massive, expansion of financial activity and instruments – which itself was the condition for the expansion of debt-financed consumption.
Rising above this arrangement was a depoliticized form of rule: technocratic management by experts. It was thought that there were no fundamental, or even major, conflicts of interest in the global economy. At least there were none that could not be managed by the right group of experts possessing the requisite knowledge, and by minor regulatory changes at the margins that would set aright the relevant economic incentives. The managerial ethos of this period, though it went in the US with acrimonious culture wars, produced rulers who believed this order would continue to tick over so long as economic issues were depoliticized and handed over to the experts – heads of central banks and the math geniuses whose magic formulas for ‘risk-management’ lay at the heart of the financial instruments that we now know massively increased systemic risk. So long as this system appeared to be working, the ruling classes could continue to develop their depoliticized modes of international decision-making and technocratic ethos.
We know at least part of the economic problem this has created – massive overleveraging, or indebtedness, which is now leading to deleveraging, or efforts to pay back debts. This reduces private demand, which leads potential investors and lenders to park surpluses in cash and T-bills, rather than invest in new products that can’t be sold. But there is an analogous process happening in the political sphere. The ruling class, as it turns out, took out a massive loan of its own – a commitment to a particular political style, based on transforming economic and social conflicts into technical problems resolved in depoliticized national and international venues. This political system was relatively stable only if the implicit bargain, of increasing debt-financed consumption and growing social inequality, remained stable. That is to say, a certain kind of politics – of rulers and decision-making processes – has depended just as much on the free flow of credit as the economy.
The kinds of persons fit to rule that kind of a system are not ones able to deal particularly well either with increased pressure and conflict at the national political level or with the need to whip the very experts – bankers, central banks – they have primarily relied upon into line. This form of political rule is, in the language of economics, pro-cyclical. It exacerbates the problem by increasing unpredictability and attempts to flee from political problems. From Obama’s head-in-the-sands hope that consensus on austerity measures, to the frantic dithering of Sarkozy and Merkel, we are seeing a massive political ‘deleveraging.’ The political debt of the last twenty years is being called in – riots, general strikes, occupations – and nobody has a clue what to do. These are leaders prepared for one kind of rule, forced into another, and incapable of adjusting.