The greatest challenge of the current global financial crisis is the seeming impossibility of comprehending and managing its diversity. Indeed, the way problems are proliferating appears almost uncontrollable. Plans to meet the crisis, in country after country, have been revamped and restructured time and again. The old models about how to understand the economy have had their day. Across the globe, governments are facing fundamental decisions about the future nature of their economies and societies.
The sub-prime crisis in the early summer of 2007 developed first into a financial crisis and ultimately into a recession. New economic problems soon rushed in to add to the existing ones: energy and food prices rose and then fell like a yo-yo; the dangers of climate change became ever more clear; and the mal-distribution of global political power demanded action.
The recent social unrest in Greece, Latvia, and Lithuania has shown that political stability is now vulnerable even in the European Union. Indeed, around the world, from Mexico to Indonesia and even China, the social fabric is being stretched to the point of fraying. This anxiety is reinforced by the general lack of funds among large groups of people who had nothing to do with creating todayâ€™s crisis but are bearing the pain of it.
These social anxieties are not being addressed because financial-sector bailouts, stimulus packages, and help for distressed industries with strong lobbies are testing many governmentsâ€™ financial limits. That the advocates of unconditional privatization are now crying out for state support would be cause for cynical laughter if the danger were not as big as it is. For the brutal question governments must now face is this: is there an alternative to the Icelandic crash course?
In the past, when state economic decision-making reached such an impasse, wars and/or revolutions were the inevitable result. As we face the type of turning-point decisions not seen since the darkest days of the 1930â€™s, can we avoid such an outcome?
If we are to avoid the worst, fundamental change is not only necessary, but unavoidable. So politicians everywhere must do their duty and exercise responsible leadership. A combination of steely calm and bold experimentation is the only way that political and social harmony will be preserved.
To make the European Central Bank a lender of last resort for all of the euro-zone countries, for example, would give distressed European governments some added breathing space. But it will require global monetary reform of a fundamental order to right the imbalances between surplus and deficit countries, between happy savers and those who lived beyond their means, and between rich and poor.
Achieving this will not come without suffering. Some of those who brought the world to this perilous point with their toxic financial instruments and unscrupulous speculation may even turn out to profit from these reforms. So be it: a moral, and perhaps legal, reckoning must await the return of economic growth.
As governments move into uncharted territory, they will need to question themselves constantly. All assumptions will need to be assessed and reassessed, starting points found and re-found, and new tools developed and perfected. The mechanics of the welfare state will need to be strengthened; public policy must stop deferring to the financial sector, regardless of the need for bailout packages.
As governments embark on their necessary and bold experiments, they must remember to take their citizens with them. For, unless these experiments in economic rejuvenation are transparent, they will lead to domestic political fights. There is a wide difference between pragmatic and opportunistic politics, and governments had better keep this distinction in mind in the months and years ahead.
That domestic transparency and pragmatism will need to be carried over into international economic diplomacy. For, unless todayâ€™s global imbalances are redressed, the next crash will be upon us before we have recovered from this one.
Todayâ€™s globalized markets need rules that take into account the public good in every country and region of the world. That much is clear. But the decision we are actually faced with is much more fundamental: global monetary and economic reform, or war and revolution. Twenty years after the world supposedly reached the end of history, we are instead at another historical turning point. Either we will write this history ourselves, or we will suffer through a dark era that could have been avoided.
This commentary is copyrighted by Project Syndicate.