Well before the financial collapse, the party formerly known as New Labour (under Blair) signed up to and embraced the agenda of neo liberal capitalism and made its own. Basically neo liberal capitalism aims to restructure government institutions and regulatory bodies so that they embody the logic of the market and see their primary objective as the creation and policing of conditions for the competitive operation of essentially private markets.
The only real spat that New Labour had with George Bush, was when he brought in protective tariffs for the US Steel industry something that would had directly impacted on some of New Labour’s wealthy comrades in arms and fellow travellers. One result of this neo liberal capitalism was that most states in the world ended up with fatally weak redistributive mechanisms, weak financial regulation and a culture of excessive overpayment within banking and financial operations.
In developing countries like China, India and Brazil led to an increase in investors who were seeking opportunities to invest outside of their economies. The US and other financial systems had been deregulated (in the 1980’s); this allowed a virtual explosion of new financial packages to attract internal and overseas investors. The key problem with this was that these new financial packages basically repackaged risk, and sold in a way that much of the risk was pretty much hidden from investors.
One of the largely overlooked side-effects or consequences of the effective abandonment of financial regulation was the explosive growth of investments that aimed to make money out of money which had little or no link to the productive economy. It has been estimated that around 90% of financial transactions had little to do with generating goods, products and services and actual jobs.
What made things worse (potentially) was that even the ratings agencies themselves failed to understand the potential risks that were involved in this process, so the investors stood little change on their own, and a potential financial disaster loomed. The final problem came when the US home mortgage bubble, which had been aggravated by deregulation, was fed by a rapid unsustainable growth in home purchases inside the USA (simular events took place simultaneously in Ireland, Spain and elsewhere).
This led to a growth of debt and decline in savings. When property prices crashed, homeowners were unable to borrow more money against the value of their properties to pay of their debts. The property collapse hit the securities market, which had grown massively on top of home mortgages, as a result some serious financial players, went bust or were propped up by governments using tax payers money.
As a result of the financial collapse is that those institutions that have survived have effectively become risk averse and won’t lend funds to existing or new businesses, thus making the recession worse. What may make things worse for all of us is that all of the Westminster focused political parties have bought into the free market driven economy, which was largely a product (in the UK) of the experience of the winter of discontent (1978 – 1979).
Even though a largely unregulated banking activities brought us the world wide recession / depression there is little talk of effective financial regulation and no assertively expressed alternatives to it. The Westminster elites abject surrender to the City’s money men leaves the most vulnerable in our society at the mercy of the free market, over the twenty years before the crash the rich have got richer (and have continued to do so) and the lower paid have been left with little option but to borrow.