The scare regarding European finances seem to be on hold right now. But Europeans seem to have taken the recovery for granted. While Spain was forced into a Greece-style austerity package, Hungary's government thought talking about Greece-style meltdown is a good idea and paid the price. That, however, did not stop Britain's David Cameron keep stoking up the fears of Britain defaulting at some future date, all to ramp up support for his political agenda of cuts in public spending. As long as the public takes him seriously but investors don't, this is okay: But at times like this, neither outcomes can be guaranteed. Japan's new Prime Minister, Naoto Kan, is also invoking Greece to talk to his domestic audience, possibly with more justification than David Cameron; but he too will be queasy that investors don't take him at the face value and head home.
The biggest risk, however, comes from Europe's rightward lurch. This invariably happens, because right-wingers usually play on fear and do well in uncertain times. However, there are two dangers of right-wing politics at this time. First, as demonstrated by Germany, this means assuming that one can run a country as one should run one's home, and sneering at unfortunate neighbours and trying to push them out. The German strategy put the whole Europe project at risk, created divisions which will return to the agenda again on a future date. Second, as demonstrated in Britain, a right wing government too cosy to financiers may put too much emphasis on reducing the risks [of default, by cutting spending] and think too little of the life-support requirements that the economy may need at this time [and attendant social and individual pain]. This may unsettle the middle class consensus that kept capitalism in its place, and in the absence of an alternative, may start pushing these societies towards the extreme edges.
Raghuram Rajan, rather improbably in University of Chicago now, makes the point about social consensus in his new book, Fault Lines. His thesis is that the unsustainable housing loans were allowed to spread because these were handed out as sops to poorer people as American society got more unequal, mainly to maintain this social consensus. This indeed sounds about right in Britain too, where mortgages are the principal instrument to keep people in line [how many people have told me that they can't walk out of the clutches of a terrible employer because there is a 'mortgage to pay']. This social consensus, and resulting compliance, is more important for functioning of our societies than it seems: The other side of the story will be millions of people giving up hope and stopping to work, and heading to depression clinics [one would assume that the revolutionary fervor is all but gone now]. If we look closely, most of the work that gets done, the innovations that make our lives better and the businesses that employ most of the workforce, come from these mortgage-bound, college tuition fee burdened people; we would not want them check out any time soon.
In summary, it seems that we are in fact heading for a deeper economic crisis just when we were getting ready to declare victory. There is no easy answer why we let this happen, after the shocks and warnings of the last two years. However, going by the fact that the solution so far hinged upon spending an enormous amount of money to keep the old system going, time has come to reassess whether the system itself is the problem.
Which indeed seems to be the case. The efforts to recovery looked like, to borrow a phrase from Alan Cooper's book, the inmates are running the asylum. Once the banks grounded us all, our response was to hand them over our money [and, by implication, trust] and let them run away again. We can return to that question of consensus yet again. There seemed to be a consensus among the politicians and the financiers, and the response to the crisis has been - take more money but don't change how we work. So, the whole recovery thing actually sunk us deeper in the mess, not resolving any of the issues that created the crisis in the first place.
Which is, as Mr. Rajan talks about, inequality. For the economic wheel to go around, everyone must be compensated rightly in proportion of their contribution. We have moved a bit from Marx's labour theory of value, but the question of fair and sustainable compensation remains at the core of this crisis. We have somewhat agreed that we must maintain the current system, which perverts the rules of the market by imposing the inverted terms of trade between the investors and the producers: This is the first problem we need to solve.
Indeed, it is not an easy problem to solve. The whole banking system stands on the inverted premise that I am talking about. Banks are defined as 'places which lend you money if you can prove you don't need them', which is a bit stupid and absolutely correct at the same time. This money-begets-money allow a range of speculators and middlemen affect the economic balance between the producers and the money men, thus subverting the market determined reward structure and eventually undermining the central premises of the capitalist economy itself. This is what got us into trouble in the first place. Our problems are not going to go away till we master the courage to confront this.