It is now generally agreed that liberalisation and inadequate regulation of finance is to blame for the global financial crisis. The inadequate liberalisation of the financial sector allowed rampant greed and excess in global financial markets. Liberalisation was not confined to finance. The free market ideology that motivated financial liberalisation spread to all aspects of our lives. We were told that States were not as efficient as markets. Developing countries were convinced to reduce the size of their states. They privatised State assets and outsourced the provision of State services.
An important outcome of the shifting role of the state was increased inequality within countries and between countries. The financial sector grew in power and influence globally. A larger share of domestic and global income was directed into financial institutions. There were huge changes to global culture as a result of liberalization and the declining responsibility of the state around the world. Many workers’ incomes depended not only on their wage but also the performance of financial markets. They invested in pension funds that invested in financial markets, earned shares through employee share ownership plans and bonuses. Some even bought financial assets such as unit trusts as part of their saving plans.
The middle class and rich were even more dependent on the performance of financial markets. Many in management earned a large part of their incomes from bonuses. The wealthy often keep most of their assets in portfolios of financial assets. They have money managers and invest in hedge and equity funds. A large proportion of the population became concerned with the performance of financial markets. The growth of the multibillion dollar global business media industry is an expression of the huge culture change. Today we know more about the daily performance of Wall Street stocks than we know about the health of our neighbours.
When it was harder for people to access credit they saved more and consumed less. When financial markets grew in power there was a huge shift in attitudes about debt and consumption. Sizes of houses and cars increased. This cultural change is visible all around. The number of home improvement television shows has increased. The size of hardware stores has increased by multiples. We are inundated with car adverts and reviews of the latest cars in the media.
Many countries moved towards increased private provision of healthcare and pensions. Citizens in those countries were left without adequate access to medical facilities. Those people who could afford private healthcare could have access to the finest treatment. Similarly, inadequate or failure to provide state pensions led to the growth of private pension firms. Our monthly savings for retirement and our contributions for medical aid were invested by institutional investors, including pension funds and medical aids.
These funds chased higher returns in financial markets. This behaviour of searching for higher returns was part of the problem that led to the financial crisis. The search for higher returns led to increased leverage and higher levels of systemic risk. Over the past few years the expectation of most people was that financial returns would keep increasing. They were also led to believe that house prices would continue to rise. They refused to believe that financial and housing markets were in a bubble until the bubbles burst.
The cultural shift that developed when free market thinking dominated policy was remarkable. Values and behaviour shifted. Belief in hard work and thrift was replaced by conspicuous consumption, high debt and financial speculation. Everyone wanted a bonus as large as those of Wall Street bankers. The rampant greed and excess witnessed in financial markets were part of a cultural change that affected most of us. We have to think about our behaviour and how we will change to help build a more sustainable future economy.