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The FIRE Economy: New Zealand’s Reckoning - By Jane Kelsey

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The FIRE Economy: New Zealand’s Reckoning

By Jane Kelsey

Introduction - An Extract

The global economy imploded in 2008 and confirmed a stark reality. Entire nations and billions of people are captives of an unstable and amoral economic system powered by finance, insurance and real estate – FIRE. [1] New Zealand included.

‘The FIRE economy’ is a metaphor for the fundamental shift in global capitalism since the 1970s. Finance has replaced industry as the driver of wealth creation in affluent countries – a transformation known as financialisation. Neoliberal ideology, rules and institutions acted first as the midwife and then as the guardian of this new economic order.

The Global Financial Crisis (GFC) showed the world’s richest countries, notably the US and the nations of Europe, that the globally integrated economy they had created, and from which they have prospered, could also bring them to their knees. Faith in the neoliberal ‘orthodoxy’ that shaped and sustained them seemed shattered. The fallout was fast and furious, and quickly spread to many other parts of the world.

A cursory look might suggest that little has really changed. Neoliberalism remains deeply embedded in most countries. The finance industry is resurgent and those who profit from it are unrepentant. Conservative parties with pro-market and pro-austerity mandates have been elected to govern some of the countries hardest hit.

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Appearances are, however, deceptive. Confidence in the FIRE economy has faltered since the GFC and the hegemony of the neoliberal model is in decline. Core tenets of neoliberal ideology are being repudiated, even in institutions like the International Monetary Fund (IMF). Social inequality and poverty in and between countries are now recognised as symptoms of a sick system. Popular unrest in Europe has intensified, and new political parties from neo-Nazi fascists to the socialist left have gained ground. There are credible predictions of further crises.

The United Nations Conference for Trade and Development (UNCTAD) warned in its flagship Trade and Development report for 2014, six years after the GFC erupted, that the ‘world economy has not yet escaped the growth doldrums in which it has been marooned for the past four years, and there is a growing danger that this state of affairs is becoming accepted as the “new normal”’. [2] That ‘new normal’ is not sustainable.

The world is entering a period of transformation equivalent to the epochal shift to Keynesian interventionism from the 1930s and the neoliberal revolution from the late 1970s. [3] We are in the interregnum. The old orthodoxy is unstable and fragile; a new one has yet to be born. It remains to be seen how this plays out, how much resistance it will encounter, and whether alternative approaches can really break through the barriers designed to protect neoliberalism and the FIRE economy from just such a transformation.

Kiwi complacency

While the GFC has plunged rich countries like the US and England and later Spain and Greece into turmoil, New Zealand seems to be basking in the belief that it has survived the crisis pretty much unscathed. The standard Kiwi narrative treats it as a northern hemisphere affair, triggered by greedy American bankers and profligate European governments. The story goes something like this.

In today’s globalised world there was bound to be some collateral damage from other countries’ post-crisis recessions, but our financial system was shown to be basically sound (mainly because the Australian banks that own ours are sound). [4] Governments on both sides of the Tasman responded promptly and effectively. Temporary interventions provided fiscal stimulus and bank guarantees steadied the ship, staving off a more serious recession. Stability was restored. Each country then resumed business as usual, regardless of their governments’ political hue. Helped by exports to China, future prospects looked positive, even rosy. [5] Exuberant commentators went so far as to hail New Zealand as the ‘rock star’ economy of 2014. The strong centre-right vote at the 2014 election suggested confidence in the status quo or, at least, that the belief in TINA – there is no alternative – still prevails.

Before the 2008 election, as the GFC began to erupt, business journalist Bob Edlin observed how the country’s leaders seemed ‘curiously phlegmatic about global financial upheaval and its economic implications’. Their offerings ‘amounted to little more than tweaks of programmes that have brought us to where we are – a standstill’. No one was ‘peddling a cyclone-shelter or rebuilding programme’. [6] Nothing has changed since then.

Couldn’t happen here?

This complacency is deeply disturbing. Neoliberalism has not served most New Zealanders well. Nor, in other than a hedonistic sense, has financialisation. Structural poverty and deep inequalities of wealth and income have transformed the social landscape. We have a shallow economy that depends on FIRE, farming, post-earthquake reconstruction and immigration. Periods of sustained economic growth in the 2000s have been fuelled by cheap credit. As a consequence, households, farmers and the country sit on a growing mountain of debt. Trading in property has become the main source of easy wealth, creating repeated incipient property bubbles. We have most of the preconditions that have been identified as triggers for a crisis. [7]

A former Reserve Bank of Australia governor, Ian Macfarlane, is under no illusion there will be further crises. In 2008 he pointed to at least eight financial crises that impacted on Australia – and hence New Zealand – in the three decades before the GFC. [8] Five were banking crises, and three involved excessive and risky lending in the property sector. Some affected New Zealand much more severely than the GFC. However, it was the depth and contagion of the latest crisis that Macfarlane says made it the most significant internationally and invalidated the model of the deregulated financial system.

New Zealand is much more at risk than Australia because successive Labour and National governments have located this country at the pure end of the neoliberal spectrum. For years it was known as the Wild West of financial markets. [9] Adjustments during the 2000s were still premised on light-handed risk-tolerant regulation. Even since the GFC, governments and their advisers have continued to position New Zealand as an outlier, ignoring doubts in other countries and international institutions over the wisdom of letting financial markets rule.

Without some fundamental changes, New Zealand risks sleepwalking into a social, economic and political catastrophe. No one knows how or when that might happen. The tipping point could be another massive offshore crisis. [10] Or it could be self-generated, as it was in Iceland and Ireland, if we fail to heed the warning signs. [11] There is much to learn from Iceland’s successful post-crisis strategy of intervention, redistribution and capital controls, [12] and from the tragedy of austerity economics in Greece, Spain and Ireland. [13]

Time to act

Waiting for Armageddon is hardly a progressive strategy. It makes much more sense for New Zealanders to confront the country’s challenges now and begin to shape a socially progressive alternative than to battle over models in the midst of a crisis. While it is true New Zealand’s fate will inevitably be caught up in the unfolding of international events, Kiwis can influence how those global dynamics shape our future.

Changes of this magnitude do not happen overnight. They require fertile intellectual, as well as social and political, conditions. Viable alternatives take time to gestate and will always be contested. Reform ideas have been floated here and internationally, but they generally lack a coherent alternative vision beyond a revival of Keynesianism. [14] Nor is there any systematic analysis of what barriers need to be overcome. Over three decades, neoliberalism has become deeply embedded in complex ways that will be very hard to circumvent, let alone undo.

The FIRE Economy contributes to the debate about how we can achieve a socially progressive post-neoliberal world. By focusing on the contest between the forces of paradigm maintenance and paradigm change, it reveals a fundamental contradiction facing contemporary neoliberalism, not least in New Zealand: the state and society are locked into a governance regime and a financialised economy that are dysfunctional but hard to dismantle. Identifying these barriers to transformation is a prerequisite to making change possible.

Two decades after my book The New Zealand Experiment was published, [15] this new book offers a realistic assessment of where that experiment has led us. It reveals New Zealand’s vulnerability in a globalised FIRE economy; how the neoliberal framework of policy, regulation and institutions heightens those risks; the techniques that have been used to embed that framework; and the challenges we need to address. It is not so presumptuous as to offer a blueprint for the future. But it does identify where future work needs to be focused, and how a socially progressive transformation can happen.

Copyright © 2015 Jane Kelsey. Extract from Kelsey, Jane, The FIRE Economy: New Zealand’s Reckoning, 2015, Bridget Williams Books, Wellington, Introduction, pp.9–12, http://www.bwb.co.nz/books/the-fire-economy.


1. There is no neat boundary between the three. Sometimes the ‘financial sector’ refers to finance, insurance and the mortgage and similar financial instruments associated with real estate. At other times they are treated as quite distinct commercial activities. This book uses the terms as they are discussed in the relevant literature on the topic under discussion.

2. UNCTAD, Trade and Development Report 2014, UNCTAD, Geneva, UNCTAD/TDR/2014, p.II.

3. Karl Polanyi, The Great Transformation: The Political and Economic Origins of Our Time, Beacon Press, Boston, 2001 edn.

4. Reg Birchfield, ‘We’re Playing Aussie Rules’, New Zealand Management, June 2011, editorial, www.management.co.nz/articles/cover-story-we%E2%80%99re-playing-aussie-rules.

5. John Quiggin and other prominent commentators on Australia’s neoliberalism analysed the Gillard 2011 Budget in Antoinette Abboud (ed.), Budget 2011: InSight Edition, Centre for Policy Development, Haymarket, NSW, May 2011, http://cpd.org.au/wp-content/uploads/2011/05/CPD_Budget_Insight_2011_FINAL.pdf. For New Zealand, see John Key, ‘Speech from the Throne’, speech on the occasion of the State Opening of Parliament, 21 December 2011, www.beehive.govt.nz/speech/speech-throne-1.

6. Bob Edlin, ‘Bold Leadership is Needed’, New Zealand Management, November 2008, www.management.co.nz/articles/economics-bold-leadership-needed.

7. Stijn Claessens and Laura Kodres, ‘The Regulatory Responses to the Global Financial Crisis: Some Uncomfortable Questions’, IMF Working Paper, WP/14/46, Washington DC, March 2014, pp.6–8.

8. These were the Third World debt crisis of the early 1980s; the Savings and Loans crisis in the US in the mid-1980s; the October 1987 sharemarket crash; the bursting of the mergers and acquisitions and commercial property bubble at the end of the 1980s; the Asian Financial Crisis in 1997–98 that flowed into Latin America, Russia and elsewhere; the threat to the US financial system from the near-collapse of the hedge fund Long-Term Capital Management in 1998; the tech boom of the late 1990s, culminating in the bursting of the dotcom bubble in 2000; and the GFC itself: see Ian Macfarlane, ‘Australia and the International Financial Crisis’, The 2008 Lowy Lecture, Lowy Institute for International Policy, Sydney, 3 December 2008. Martin Wolf lists six globally significant crises, including the Tequila crisis of 1994 and, more recently, the Eurozone financial crisis from 2010–13, as well as devastating national crises, notably Argentina’s financial collapse from 1999 to 2002: see Martin Wolf, The Shifts and the Shocks. What We’ve Learned – and Still Have to Learn – from the Financial Crisis, Penguin Press, New York, 2014, p.318.

9. Parr v Financial Marketing Authority, Advertising Standards Authority, Complaint 11/409, 13 September 2011, p.5. See also Matt Nippert, ‘FMA Wins Cowboy Complaint’, NBR, 13 October 2007, www.nbr.co.nz/article/fma-wins-cowboy-complaint-mn-102350.

10. International commentators predict this could occur at any time, e.g., former chief economist at the IMF, Raghuran Rajam: Puja Mehra, ‘Raghuran Rajam Warns of Another Global Financial Crisis’, The Hindu, 8 August 2014, www.thehindu.com/business/Economy/raghuram-rajan-warns-of-another-global-financial-crisis/article6292494.ece.

11. Mairéad Considine and Fiona Dukelow, ‘Ireland’s Economic Crises in Recent Historical Perspective: From Resilience to Retrenchment in the Irish Welfare State?’, in Guðmunder Jónsson and Kolbeinn Stefánsson (eds), Retrenchment or Renewal? Welfare States in Times of Economic Crisis, NordWel, Helsinki, 2013, pp.126–46; and Stefán Ólafsson, ‘Crisis and Recovery in Iceland’, in Jónsson and Stefansson (eds), Retrenchment or Renewal?, NordWel, Helsinki, 2013, pp.106–25.

12. Jónsson and Stefansson, Retrenchment or Renewal?; Ólafsson, ‘Crisis and Recovery’, p.123; IMF, ‘Iceland’s Unorthodox Policies Suggest Alternative Way Out of Crisis’, IMF Survey Magazine, November 2011.

13. Ann Leahy, Sean Healy and Michelle Murphy, ‘The Impact of the European Crisis’, Caritas Europa, Brussels, 2013.

14. See, e.g., Paul Krugman, End This Depression Now!, W. W. Norton & Co., New York, 2013; Bryan Gould, Rescuing the New Zealand Economy: What Went Wrong and What We Can Do To Fix It, Craig Potton, Nelson, 2008. Wolf acknowledges this concern and suggests the need for more radical options in the conclusion to The Shifts and the Shocks, pp.325–53.

15. Jane Kelsey, The New Zealand Experiment: A World Model for Structural Adjustment?, Auckland University Press/Bridget Williams Books, Auckland, 1995.


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