A review of the Financial Crisis and the Shadow Banks; Neoliberalism will prevail.

No stopping the modern day financial pioneers.

i.

Introduction.

In this paper I will argue that the financial crisis of 2007- present and the emergence of the shadow banking system, a parallel and unregulated system of banking, are not simply the evil doings of neoliberal deregulation espoused since the 1980s. Before considering the claims that the financial crisis and the shadow banking system are the products of a prevailing neoliberal orthodoxy and that financial crash has been to Friedmanism what the fall of the Berlin Wall was for authoritarian communism (Klein 2008), it is necessary to clarify a few keys issues. Firstly, this paper will consider the historical and theoretical underpinnings of neoliberalism as a modern philosophical theory of economics and the market. The paper will then attempt to paint a picture that illustrates how the financial crisis unfolded as well as shedding some light on the nature of shadow banks and the role they played in the crisis of 2007- present. It will then be appropriate to consider the claims that the crisis has sounded the death knell for neoliberalism. Finally we will consider life for neoliberalism post-crisis. ii.

Neoliberalism a theoretical analysis.

Neoliberalism, which advocates the withdrawal of the state and free market superiority (Pesendorfer 2009, p.5), has extensively shaped the Wests economic policies over the last 30 years. It is as Edward Fullbrook (2005) suggests, the ideology of our time. Neoliberalism, so long a matter of academia, jumped from the books and into reality in the latter half of the 20th Century. Heralded as the key to reinvigorating the stumbling economies of the West, it has long since championed privatisation, deregulation and liberalisation. It was in the 1980s that neoliberalism established itself as the dominant economic prescription, responding to high-inflation (and the) high-unemployment traumas of the 1970s developed world (which) proved impervious to, and indeed came to be seen as created by, Keynesian notions of macroeconomic demand management. (Urban) Neoliberalism was the remedy for Keynesianism. As a result of the embedding of neoliberalism into the economic policies of the West, we have seen the disembedded market economy (Ataka and Gonoi 2009, p.10) become the established economic paradigm. Those on the right cherish the efficiency of the market to self-regulate and selfcorrect, clinging devotedly to the notion that neoliberalism holds that prosperity flows from market forces. (Urban) Thorson and Lie rightly observed that

neoliberalism is, basically, the belief that states ought to abstain from intervening in the economy, and instead leave as much as possible up to individuals participating in free and self-regulating markets. David Harvey (2005, p.2) notes that supporters of neoliberalism maintain that the maximum reach of the state should be as guarantor of the quality and integrity of money. It must also set up those military, defence, police and legal structures and functions required to secure private property rights. The roots of modern day neoliberal thinking can be traced back to the classical liberal ideas of the father of modern day capitalism, Adam Smith, the great spokesman of laissez-faire and the minimalist state. (Walter, 1994) It was Smith who trumpeted for limited government and who championed the ability of the rational self-interested homo economicus to prosper in an environment of unrestrained competition. The revival of classical liberalism however by a number of prominent economists saw the birth of neo-classical liberalism or neoliberalism in the late 19th and early 20th Century. Which as Thomas Lemke notes, derives from the former, takes it a step further, and gives it a more radical form. (2001, p.190) Of those prominent economists Ludwig Von Mises of the Austrian School, had an uncompromising devotion to the free market, (Rothbard, p.375) and staunchly opposed every form of statism. His steadfast view of the market stemmed from his perception of the natural world and his preference for an environment in which individuals can act freely as opposed to being subjected to overbearing governmental coercion. He believed that a free market was the key to market efficiency, social efficiency, strong development, affluence and growth. State interventionism according to Von Mises was the road to disaster, with social struggles, war, poverty and a regressive society the only rational outcomes. Nobel Laureate Friedrich Hayek, pupil of the esteemed Ludwig von Mises passed comment on socialism, the antithesis of neoliberalism in his esteemed publication The Road to Serfdom. He noted that there can be no doubt that most of those in the democracies who demand a central direction of all economic activity still believe that socialism and individual freedom can be combined. Yet socialism was early recognized by many thinkers as the gravest threat to freedom.(The Readers Digest 1945) Perhaps it was the close proximity to the radical and horrific acts emanating from the rise of National Socialism in Germany which shaped his penchant for the free market and to fight against socialist and collectivist thought. However it has been the Chicago School of thought led by Milton Friedman (Friedmanism, see Klein) which has been the most influential throughout the 20th Century and early 21st Century. The Chicago Boys much like the Austrian School emphasize the efficiency of market competition, the role of individuals in determining economic outcomes, and distortions associated with government intervention and regulation of markets. (Palley 2004) Perhaps the most appropriate label for a neoliberals view of the market and the economy is as social Darwinism (Ruff 2005). A free for all and survival of the fittest, unconstrained by external forces which pushes individuals to be ever more efficient and effective. As Thomas Lemke (2004, p.206) notes with regards to social Darwinism and the Chicago School, neoliberalism is a political reality that tries to render the social domain economic and to link a reduction in (welfare) state services

and security systems to the increasing call for personal responsibility and selfcare. Regardless of the intellectual divergences that separate the Austrian and Chicago School as well as other neoliberal schools of thought, these bodies are ultimately underpinned by the same adoration for free unfettered markets.

iii.

The Global Financial Crisis of 2007- present.

Guy Verhofstadt (2008, p.4) graphically captured the gravity of the financial crisis when he observed that 2008 may well go down in history as a pivotal year: like 1989, when the Berlin Wall fell and the Iron Curtain was torn open; 1944-1945, when World War II ended.All momentous events that marked the end of an era and at the same time heralded a new epoch in human history. Whilst the likes of Raghuram Rajan spoke of the impending doom of the financial crisis, George Bush spoke for the majority when he expressed the view in his recent auto-biography that he had been blindsided (2010, p.470) by the financial crash. Certainly few saw the out of control 18 wheeler coming towards the US housing market in the spring of 2007 and unquestionably it was the collapse of the US sub-prime fuelled housing bubble that triggered the financial crisis. The shockwaves went global soon after. Ultimately unleashing a series of events that have resulted in colossal national fiscal deficits, sovereign debt crises and hugely controversial public expenditure cuts. Four years on from the collapse of the US sub-prime housing bubble and Greece and Ireland are now nothing more than protectorates and Spain, Portugal, Italy and more recently Belgium are all sitting in the balance. Whilst the collapse of the housing bubble triggered the crisis it merely exposed wider deficiencies in the market. Gillian Tett (2011) has observed the continuing confusion that still lingers with regards to the causes of the financial crisis and resultantly she noted that the anger keeps pestering, like a boil that cannot be lanced. Indeed Tett pointed out that there has been no shortage of culprits to blame, including politicians, regulators, bankers, mortgage brokers, economists and the credit rating agencies. One thing is clear however, neoliberals state unequivocally that it was the US governments fault, especially Fannie Mae and Freddie Mac. (Wessel 2010) Another point of certainty is rather chilling. As a result of the collapse of the US housing market in 2007 the world witnessed the near collapse of a number of high profile financial institutions both in the US and UK. This forced the governments to step in to sure up and bail out the banks and financial institutions with billions of dollars of tax payers money. As Hans-Werner Sinn (2009) noted, The US banking system (was) bankrupt and (had) to be rescued with state money. Ultimately what started as a crisis in the private sector has now perverted the public sector. This was seen graphically in the UK with the collapse of Northern Rock, a shadow banking institution, the bill for which was footed by the tax payer. Moreover, the financial crisis has truly illustrated the extent to which global financial markets are interconnected and so delicately interdependent. Never has the old adage that when America sneezes, the rest of the world catches the cold, hit home to so many. Ironically that famous saying originated from the aftermath of the Wall Street Crash in 1929 (Spain, 2008). However, its the recent return to a more tatist stance, the revival of Keynesian economics of pre-1980 and the reappearance of the invisible

hand in response to the financial meltdown with fiscal stimuli and the flippant bank bailouts that has put the infallible neoliberal orthodoxy to the question on both sides of the Atlantic. The fact that these banks that were too big to fail were bailed out at the expense of the tax payer has triggered much debate around and for some sounded the death of neoliberal economic policies.

iv.

The Shadow Banking System the once celebrated progeny of neoliberalism.

It can be said unequivocally that the risky and speculative activities of the shadow banking industry that securitised, sliced and diced and gambled heavily with mortgages, credits cards, pension funds and other modes of exotic investments played a major role in the financial crisis. (Gorton and Metrick 2010, p.1) Nobel Laureate Paul Krugman (2009) shares this view and claimed that the shadow banks were at the core of what happened. In order to understand the role the shadow banks played it will be necessary to understand the origins and the nature of shadow banks. Traditional depository banks have been around since time immemorial. The shadow banking system however is an altogether different creature and a relatively new phenomenon that operates in parallel to traditional banking institutions. Vanessa Finch (2009, p.19) has observed the incremental changes that have occurred in recent years with the emergence of the securities and derivatives market signalling the advent of new capitalism. She aptly noted that the world of credit haschanged dramatically in the last decade or so (and) in the global world of new capitalism, credit has become a commodity that is traded across the world in ever more complex packages of debt. Often labelled as casino banking, this roll of the dice namesake perhaps reflects most pertinently the function, not the form of these non-banks. The emergence of shadow banks can be attributed to the need to meet the credit demand of an increasingly consumerist society as well as the need to escape the traditional banking sectors tight regulatory environment. In recent years as the Wests economies have grown so the standard of living and the demand for credit have increased exponentially. Resultantly the traditional banking industry has often struggled to meet the extensive credit thirst of society and in the words of Gorton and Metrick (2010, p.6) the traditional banking business model became unprofitable. The increasing regulation of traditional banks also explains the materialisation and rise of the shadow banks. There was as Charles Goodhart (2009, p.176) noted there was a switch of business from the regulated to the non-regulated sector in an effort to get around existing accounting rules and regulatory capital requirements. (Davies 2010, p. 47) Nouriel Roubini (2008) writing in the Financial Times points out the differing forms of shadow banking practises. Because of a greater regulation of banks, most financial intermediation in the past two decades has grown within this shadow system whose members are broker-dealers, hedge funds, private equity groups, structured investment vehicles and conduits, money market funds and nonbank mortgage lenders.The innovative and industrious brains of Wall Street and London operating within the traditional banking domain exposed loopholes and gaps within the system creating novel and exciting investment strategies that would allow them to operate outside the traditional regulatory architecture. Furthermore, such was the advanced nature and sophistication of these investment mechanisms that regulators often felt that an unfettered self-regulating market was the most appropriate

environment in which to allow these exotic forms of wealth creation to operate and develop. The degree of regulatory oversight, capital requirements and protection that shadow banks enjoy indeed represents the fundamental difference between the two parallel systems. As Buiter (2008) notes that shadow banks are functionally very similar to banks but are barely supervised or regulated. The US and UK government have learnt harsh lessons in the past, and as a result has constructed a relatively stiff regulatory infrastructure around the traditional banking system, although watered down in recent years. Traditional banks found themselves under the glaring beat of

regulation and within the last twenty or so years the shadow banks have seemingly sprung up in the regulatory shadow that the regulators have cast over the traditional banks. Fig. 1: The popular portrayal of the shadow banking system as an evil-doer. Safety nets, in the form of a lender-of-last-resort, capital adequacy requirements and other kinds of checks and balances are a pertinent point of difference. It was this last chance saloon lending option that acted as a cushion for many of the traditional banks in the wake of the crisis as it eased depositors apprehensions and prevented a run on the banks. There were two key problems however. Firstly, many of the largest traditional commercial banks had become heavily intertwined in business dealings with the shadow banking system as they traded in mortgage securities and other illiquid assets. The second problem was that with many of the larger commercial banks, banks which appeared on the face of it solely traditional depository banks, were in fact a hybrid commercial/shadow bank. In order to boost liquidity often traditional banks would branch out into shadow bank trading, thus housing shadow banking operations within the edifice of a traditional bank. It is clear that the tale of the shadow banking industry and its place in the financial crisis is a dark one, and the story must create lessons for the future. Paul Krugman (2008) spoke of the scale, importance yet vulnerability of the shadow banking system, as he made it clear that the idea that these investment vehicles were omnipotent, selfregulating, omniefficient beings was a myth and they need the same protection as afforded to normal banks. As the shadow banking system expanded to rival or even

surpass conventional banking in importance, politicians and government officials should have realized that they were re-creating the kind of financial vulnerability that made the Great Depression possibleand they should have responded by extending regulations and the financial safety net to cover these new institutions. Influential figures should have proclaimed a simple rule: anything that does what a bank does, anything that has to be rescued in crises the way banks are, should be regulated like a bank. The misery of Northern Rock that was splashed across the news in the UK for weeks on end only hinted at the scale of the disaster to the layperson. Martin Kellaway rightly observed the failings of Northern Rock plc which had a business model of using securitisation to fund long-term mortgages, had a liquidity problem and in September 2007 sought a special central bank lending facility to deal with its liquidity problems. After the failure to find a satisfactory private sector solution it was nationalised in February 2008. (Kellaway 2009, para. 5.9) Raj Patel (2009) looked upon the crisis, financialisation and the ensuing events with a little bemusement. He noted that the great unwinding of the financial sector showed that the smartest mathematical minds on the planet, backed by some of the deepest pockets, had not built a sleek engine of permanent prosperity but a clown car of trades, swaps and double dares that, inevitably, fell to bits. Thus this narrative has attempted to illustrate the emergence and scale of the shadow banking system as well as its role in the crisis. Securities and derivatives, once highly celebrated innovative tools of a modern finance system, (Pesendorfer 2010, p.10) are now the focus of much criticism. The West has learnt the hard way of the systemic risk that these financial innovations pose. For many neoliberalism is to blame for the shadow banking sectors activities and it is generally accepted that it was the Wests neoliberal policies (that) played an active role in market creation. Pesendorfer (2010, p.10) As a result, neoliberalism and the shadow banks, neoliberalisms once celebrated progeny, are on shaky ground. v.

An Indictment of an ideology? (Klein 2008).

Books, journals, magazines and articles are abound with talk concerning the parallels between the Great Crash of 1929 and the financial crisis of 2007-present. Appropriately Dieter Pesendorfer (2010, p.4) suggests that the crisis of 2007-present is exactly the specter of 1929. Nonetheless it is well documented that neoliberalism played a major role in spawning that recession (the Great Depression), especially in its opposition to the regulation of financial transactions and the economy in general. (Ritzer 2010, p.123) Such suggestions that neoliberalism played a major role in the todays financial crisis likewise proliferate the media platforms, journals and texts. Expressions of contempt towards key economic policy makers by respected economists are the accepted. Karl Socher rightly captures the popular sentiments towards the cause of the crisis. He acknowledged that critics claim that the current financial crisis has been caused by neoliberalism and its too far reaching deregulatory policies. Furthermore the UN Report (2009) by the Commission of Experts chaired by Joseph Stiglitz reported that the current crisis comes on the heels of a period of time when many political leaders and economists espoused deregulation. The Report continued and contended that the sheer magnitude and pervasiveness of this crisis is a profound refutation of that vision (which is sometimes referred to as free-market fundamentalism or neoliberalism). Likewise Naomi Klein (2008) proposed that since

neoliberalism was unleashed upon the markets by Ronald Reagan and Thatcher we have seen a policy of liberating the forces of greed, to discard the idea of government as regulator, of protecting citizens and consumers from the detrimental impact of greed. Even Alan Greenspan who promoted deregulation and spoke of the ability of the market to self-correct has taken a step back. Indeed the I found a flaw confession of Alan Greenspan has become one of the most iconic statements surrounding the events post-2007. A once steadfast proponent of free market rhetoric, Greenspan has had to acknowledge the flaws of the pre-2007 neoliberal deregulatory environment. Undoubtedly London and Wall Street and their unquestionable neoliberal orthodoxy have taken a battering from the financial crisis. These once omniscient epicenters of global finance that lived by the belief of an all-powerful market now find themselves in a state of shaken disbelief much like Greenspan and his fellow zealous neoliberals.

vi.

The response rampant regulation.

The general perception is that better financial regulation might have prevented the crisis, especially if it had addressed its core determinants. (Barrell and Weale 2010) The managing director of the International Monetary Fund Dominique Strauss-Kahn (2010) in his Speech delivered at the Inaugural Conference at the Institute for New Economic Thinking likewise underlined the extensive regulatory failures. Moreover Roger C. Altman (2009) has contended that this crisis reflects then greatest regulatory failure in modern history. The words employed by Altman seem to reflect the prevailing regulatory rhetoric that commands that the failings of the pre-crisis neoliberal consensus were regulatory and supervisory failings and that there is now a need for substantial amount of financial regulation. It now seems to have been recognized (even by those who pushed for deregulation) that there is a need for more, or at least better, regulation and enforcement, especially in the arenas of finance. (UN Report 2009) Accordingly financial regulation is on the agenda. At European Level, the driver behind European cooperation and integration, President Barroso of the European Commission, engaged Mr. Jacques de Larosire soon after the crisis unfolded to produce proposals that could reshape the European regulatory landscape. Many including Christian Kellermann (2008) argue that Europes financial regulatory structure is inadequate with regard to both the level of integration and the size and importance of European financial markets. Michel Barnier, the Internal Market Commissioner has set out plans to create a single market for financial services that will suitably underpin that Single Market. Accordingly are soon to see the implementation of the European Systemic Risk Board for macroeconomic supervision as well as 3 micro-prudential supervisory bodies, including the European Securities and Markets Authorities. In addition The AIFM Directive will soon govern over Europes exotic forms of wealth creation. Similarly America has seen the enactment of the Dodd-Frank Act as well as the Volcker rule which bulks up the US financiak regulatory environment considerably. Likewise at global level the G-20 has been instrumental at coordinating a global response to a global crisis and much has been achieved.

vii.

Concluding remarks - End the jihad on neoliberalism and the shadow banks.

At one end of the spectrum exists unbridled free-market capitalism and at the other exists state centred socialism, destroyed in the West upon the fall of the Berlin Wall. It was Alexis de Tocqueville who appropriately wrote that democracy and socialism have nothing in common but one word, equality. But notice the difference: while democracy seeks equality in liberty, socialism seeks equality in restraint and servitude. Such a viewpoint, written nearly two hundred years ago reflects pertinently the concluding remarks of this paper. While the financial crisis has exposed some substantial failures within neoliberalism, claims that the crisis has sounded the end for neoliberalism and a return of the state are erroneous. Tony Blair (2010) illustrated in the concluding chapter of his recent autobiography that the return of Keynesian state intervention and bank-bailouts following the onset of the financial crisis was the correct short term response. Thus this paper seeks to conclude, as The Telegraph noted, that the post-crisis expansion of state powernever works in the long run. (The Telegraph, 2008) Thus neoliberalism and its offspring, the shadow banks shall prevail. Individualism, entrepreneurialism, and foreign direct investments are the only long term solution and these factors will offer the key to a steady recovery and long term growth. Citizens of Western democracies cannot be constrained by an overarching centralised state and I believe that the government has no role to play in the advanced 21st Century economy. Indeed governments are no better at stimulating demand than they were at installing telephones or building cars or, as we shall soon see, running banks. (The Telegraph)Tony Blair (2010, p. 668) appropriately remarked that the role of government is to stabilise and then get out of the way as quickly as is economically sensible. Ultimately the recovery will not be led by governments but by industry, business, and the creativity, ingenuity and enterprise of people. Thus whilst such intervention at the onset of the crisis was correct, allowing the state to become the overarching governor of the economy would be to seriously retract the ability of the economy and the nation to remain flexible, dynamic and cutting-edge. A Government led economy would stifle efforts of the financial sector to make an exit from the crisis and would surely lead to a deeper and more prolonged recession. While Tony Blair agrees that there should be a regulatory overhaul of financial services as well as extensive supervision at national and global level he makes it known that there should not be a wholesale attempt to predict every potential crisis and construct rigid rules in advance to prevent it. To abandon traditional neoliberal market principles and moving to a more leftist approach would be to flatten out the financial industry, push out innovation and it would mark a return to the stagnant economies of the 1950s, 60s and 70s. Such a turn would be highly damaging and in nobodys interests. Total unconcern towards risk seen in the days before the crisis should not be succeeded by a total abhorrence for risk in these times of recovery. The mortgage drought seen post-2007 has been damaging as banks have jumped to the polar opposite of their pre-2007 position which is neither sensible nor productive.

Banks undoubtedly have the potential to help society recover with a little less risk aversion.

Hans-Werner Sinn (2009) pointed out a pertinent reason for the failing of the shadow banks. He observed that because they were allowed to conduct their business with only tiny amounts of equity capital, people take risks because Without equity, there is no liability, and without liability, people gamble. However the shadow banking industry has a bright future and it should and will be a key facet of the UK and US financial system. Dixon and Beales (2009) rightly remark that it is a question of liquidity and capital reserves. Governments should not try to supervise them directly, but that they should monitor how they borrow to leverage their investments. This will prevent the excessive speculation and allow shadow banks to continue. On the same note Blair observes that the shadow banking practices and novel financial instruments should not be crippled by oversight. These sophisticated instruments should be intelligently supervised and allowed to operate to their potential as they can contribute to sensible wealth creation and a recovery from the crisis. Credit default swaps and derivatives are not in themselves a bad thing.properly used and understood, they can be immensely helpful. (p.668) a. Neoliberalism with a measure of ordoliberalism for health.

More importantly, it is well documented that the theory of neoliberalism propounded by scholars is not always at symmetry to reality. Thomas I. Palley (2004, p.4) observed that neoliberalism has departed from its theoretical rhetoric. (and) in practice, policy has not been applied as pure neoliberal theory would suggest. David Levi-Faur (2008, p.207) adds to the increasing commentary on the matter and remarks that there are wide gaps between the dominant narrative on neoliberal deregulation and the emerging realities of a regulatory explosion. Encouragingly Pesendorfer (2010, p.6) picks up on the theory v reality divergence and exalts that it is exactly the contradictions between theory and practice that might allow neoliberalism to recover from the current situation. This discussion embraces the claims made by Pesendorfer (2010, p.1) who furthermore suggested that we should not expect a too radical change but a more moderate reformulation of neoliberalism in terms of its ordoliberal conceptualisation. On that note it was contemporary ordoliberal Hans-Werner Sinn (2009) who suggested that perhaps America needs Walter Eucken, the father of ordoliberalism. The same could be said for the UK economy and perhaps a neoliberal market economy with a healthy measurement of ordoliberal pragmatism is the future. Ordoliberals, perhaps a more sensible and pragmatic school have an anti-naturalistic conception of the market (Lemke 2001, p.192). They believe that a small dose of political intervention is required to keep everything in order. Perhaps like a referee in a rugby match, one needs a cool head to ensure that the basic rudiments of the game

are upheld. As such, ordoliberalism which remains loyal to the free market and opposes state interventionism and dirigism (Lemke 2001, p. 196), is simply a less extreme version of neoliberalism. Thomas Lemke (2001, p.193) observed that ordoliberals believe that the state and the market economy are not juxtaposed to each other but that one mutually presumes the existence of the other. Carter Dougherty (2009) optimistically remarked that ordoliberalism and its healthy respect for state intervention through controlling competition, externalities, asymmetric information and market-defection, teaches that state regulations can help the free market produce results close to its theoretical potential. Ordoliberalism supports capitalism but makes it clear that regulation is needed to prevent market failure and argues for a relatively strong state. Few deny the role of neoliberalism and of the shadow banks in the run up to the financial crisis and indeed regulation is needed. In order to increase the transparency at the financial market, the inclusion of Hedge-Funds as well as other investment funds into the regulation becomes necessary. (Socher) Generally this papers supports, in the same tone as Dixon and Beales that shadow banks should be supervised and be subject to appropriate regulation. Accordingly such views on regulation align themselves well with an ordoliberal anti-naturalistic conception of the market. b. Lessons from the past. While many call for bigger government within the financial industry one must not forget that it was foolish state interventionism which was one of the causes of the crisis in the first place. Ostensibly it was the federal governments intervention in the US housing market, in an attempt to increase home ownership, which was one of the root causes of the global financial crisis of 2007- present. While government intervention was not the sole cause of the financial crisis, its role was significant and has received too little attention. (Staff Report 2009) Pre-2007, the US established two government-backed corporations to issue mortgages, the now famous Freddie Mac and Fannie Mae, big earnings were made privately but in doing so exposed the public to tremendous risks. It was the government which encouraged mortgage lenders to do business with sub-prime buyers. As Suresh Goal rightly points out, increasing home ownership was a goal of the Clinton and Bush administrations. It was the subsequent collapse of this once celebrated mortgage tsunami which has brought so much hardship to people and economies around the world. At a time when government intervention in private markets has become alarmingly common, government affordable housing initiatives offer important lessons about the dangers of government efforts to manipulate or conjure outcomes in the market. (Staff Report) As observed earlier in the paper, much has been spoken of the parallels between the current crisis and the Crash of 1929, yet subtle attention to the story of the recovery from the Great Crash may offer lessons for the future. It is also another factor that will allow neoliberalism to recover from the current situation. Much like the post-1929 tale of recovery todays economies are likewise feeling the presence of increasing state intervention. Yet little time is spent considering the lessons that can be learnt the great financial crisis of the 1930s. Many including Paul Krugman have spoken of the possibility of a new New Deal like that implemented by President Roosevelt, yet others have suggested that it was Roosevelts damaging anti-market policies, including anti-competition measures, price and wage setting which prolonged the

Great Depression. Writing in the Wall Street Journal Harold L. Cole and Lee E. Ohanian (2009) stiffly contend that the main lesson we have learned from the New Deal is that wholesale government intervention can - and does - deliver the most unintended of consequences. Undeniably states must refine and redesign financial regulatory systems which permitted excessive risk and excessive debt pre-2007. What we cannot have is the rise of big government as witnessed in the 1930s which according to an increasing number of scholars, prolonged a downturn. c. No defeating the pioneer spirit. Thomas I. Palley (2004, p.3) has again thrown up some unique and weighty observations about the very fabric and roots of American society. He remarked that at the cultural level, America has always celebrated radical individualism, as epitomised by the frontiersman image. He further noted that radical individualism was further promoted by the ideological conflict embedded in the Cold War, which fostered antipathy to notions of collective economic action. The economic rhetoric of free markets, free of government intervention which has prevailed over the last 30 years compliments the pioneering spirit and the Land of Opportunity mentality of Americans. Such imagery of colonialism and individualism is shared by much of the Western developed world. After all it was Europe that civilised much of the world (Thatcher, 1988) including America. Thus financialisation and increasing sophistication driven by human endeavours will continue. John Maynard Keynes will not crush the pioneering spirit of the West and its financial system. Thus neoliberalism, subject to a strong dose of ordoliberalism, remains the answer and the correct economic paradigm for our economies. Yes neoliberalism has shown its weaknesses, however as we have seen it was not simply a problem of the neoliberal market actors. It was also a problem of government and a problem of a greedy housing and credit obsessed, consumerist society. We have all learnt harsh lessons from the crisis, and the financial sector of Britain and the US, the jewels in the crown, should not be corrupted by excessive state interference. That surely would be to go down the path of a prolonged crisis. Excessive intervention would smooth out and push innovation out of the financial world; we should allow the financial industry to right a wrong with sensible and suitable supervision that will give the financial sector the room for maneuver that it requires. We should not want to put a jihad on the whole ideology of neoliberalism and the shadow banks to abandon free-markets and the wealth, opportunities and growth that they provide. Yes the crisis has exposed weaknesses in the edifice but through a revised and conservative regulatory upgrade we should see nothing more than a slight modification of the pre-2007 neoliberal orthodoxy. Collectivism and state planning would destroy individual liberty and economic freedom, the pioneering spirit which drives neoliberalism and the shadow banks will prevail.

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