After the Great Complacence- Introduction and Chapter 1: A Brief Summary

Engelen et al.’s ‘After the Great Complacence: Financial Crisis and the Politics of Reform’ (2011)

When drafting a book about how finance caused the financial crisis, the authors became increasingly troubled about the way that other authors were framing it. Instead of simply identifying what went wrong or who was to blame, Engelen et al. wanted to provide a third kind of revisionist story which identified the crisis as an elite debacle associated with failed interventions. Therefore, this book attempts to frame the financial crisis in political terms, as part of a much larger current problem about how and why the democratic system of political competition is not working to articulate alternatives and solutions.

The opening of the first chapter asks ‘how and why was the crisis an elite debacle?’. The chapter aims to make a case by framing the ‘miscalculation by policy elites and the catastrophic consequences for the public at large’, in order to explain why a new politico-cultural approach is required for present-day capitalism.

The opening section looks at the pre-2007 story of the Great Complacence, which is the name given to this period when ‘central bankers, regulators, and senior economists in international agencies repeated the same reassuring but ill-founded stories about the benefits of financial innovation and the ‘Great Moderation’’. This follows the undermining of public regulation of finance which started in the 1980s during the Thatcher and Reagan revolution. This era reflected a general belief that financial markets must be left to their own devices in order to improve their robustness, efficiently allocate capital, and give the best social outcomes. However, the technocrats’ claims in the 2000s were based on little evidence.

It goes on to describe how ‘econocrats’ at the top used their authority and credentials to transfer the assumptions of neoclassical economics into stories for ordinary people about the advantages of financial innovation and deregulation. They use Ben Bernanke, the Chair of the Federal Reserve, as an example of this type of elite technocrat.

The problem was that in the lead up to the crisis, the econocrats’ misguided information was not prevented, firstly, by the public who during a time of economic prosperity thought their stories seemed plausible. Towards the end of the 20^th century, finance had been democratised in the sense that increasingly more ordinary people were becoming consumers of savings and credit products. Experts were able to express, and endlessly repeat, their pro-finance arguments in a way that the masses would agree with.

Secondly, central bankers and economists receive very little, if any, punishment for their misjudgments, despite the huge consequences that they may place on society. This signals loose standards of performance, competence and accountability within the elite financial professions.

The latter section of the chapter investigates the nature of the crisis after 2008 in order to justify terming it a ‘debacle’. Engelen et al. mainly justify it for loosely three main reasons:

1.    It was the same financial institutions who were telling pro-finance innovation stories before the crash, who had to humiliatingly calculate the disastrous costs of the crash immediately afterwards. What Mervyn King and Ben Bernanke a few years earlier had been calling a ‘beneficial process’, had now caused huge national debts. 
2.    These technocrats had ‘failed in their duty as public servants, which was to protect citizens from the predations of capitalist business which privatises its gains to the benefit of employees and owners and socialises its losses at the expense of taxpayers and public service consumers’.
3.    This disaster is not one that can be easily fixed. This particularly resonates when reading the book five years after its writing, when the economy is still recovering from the crisis.

The authors criticise the UK and the US for failing to deliver reform. In order to prevent future crisis, the power of these elite actors needs to be reduced and alternative policy solutions need to be developed in order to insert a system of democracy into the financial system. However, they are not ignorant to the fact that constituting this reform is very difficult.

A quote which I think particularly summarises the authors’ overall argument is:

‘The central twentieth-century achievement of the high-income societies was, one way or another, to use democracy to secure mass social welfare in various post-1945 settlements. The twenty-first century issue we now face is whether we can use democracy to control and redirect the finance sector’.