Chapter 16: The Fraying Consensus

On September 15, 2008, Lehman Brothers filed for bankruptcy. Within days, the global financial system stood on the brink of collapse. Credit markets froze. Stock markets plunged. The economic orthodoxies of a generation—efficient markets, light-touch regulation, financial innovation as progress—lay in ruins.

What followed was, by necessity, a repudiation of those orthodoxies. Governments that had preached fiscal discipline ran trillion-dollar deficits. Central banks that had focused on inflation targeting invented new tools to pump money into failing financial systems. Institutions deemed "too big to fail" were rescued with public funds, even as the homes of ordinary people were foreclosed.

The 2008 crisis cracked the neoliberal consensus. The COVID pandemic, twelve years later, shattered what remained. The question now is not whether the old consensus is dead, but what, if anything, will replace it.

The 2008 Crisis: What Broke

The financial crisis of 2008 was a Minsky moment on a global scale.

For decades, financial innovation had created ever more complex instruments: mortgage-backed securities, collateralized debt obligations, credit default swaps. Each layer of innovation promised to spread risk, increase efficiency, generate returns. Regulators, captured by the ideology of efficient markets, assumed that private actors had adequate incentives to manage their own risks.

They didn't. The system had evolved from hedge finance to speculative finance to Ponzi finance, exactly as Minsky had predicted. Borrowers couldn't service their debts; they depended on rising asset prices to refinance. Lenders didn't care about creditworthiness; they were selling the loans immediately into securitization chains. Rating agencies stamped AAA on toxic assets. Everyone was making money, so everyone assumed the music would keep playing.

When housing prices stopped rising, the entire structure collapsed. Mortgages defaulted. Securities backed by those mortgages became worthless. Banks that held those securities faced insolvency. Credit froze. The real economy, starved of financing, plunged into recession.

The policy response was massive—and contradictory to everything the previous era had preached. The Federal Reserve created trillions of dollars to buy assets no one else would touch. The U.S. government took stakes in banks and automakers. Fiscal stimulus packages around the world ran up deficits that would have been unthinkable a year earlier.

It worked, in the sense that complete collapse was averted. It also worked in a way that deepened resentment: the bankers whose recklessness caused the crisis were bailed out; the homeowners whose mortgages were underwater were not. The system was saved, but its legitimacy was further eroded.

The COVID Response: Orthodoxy Abandoned

If 2008 cracked the consensus, 2020 shattered it.

The COVID-19 pandemic forced governments worldwide to shut down economic activity. The usual rules—balanced budgets, inflation vigilance, monetary prudence—were suspended. The U.S. government sent checks directly to citizens. Central banks bought not just government bonds but corporate debt and even exchange-traded funds. Deficits reached levels not seen outside of world wars.

The results confounded expectations. Despite the massive increase in government spending and money creation, inflation remained subdued for nearly two years. (When it finally arrived in 2021-2022, driven by supply chain disruptions and energy shocks, the causes were debated furiously.) Unemployment, which had spiked to Depression-era levels, recovered with remarkable speed.

The pandemic response was, in effect, an experiment in Modern Monetary Theory. Governments created money, spent it into the economy, and the predicted disasters (hyperinflation, currency collapse) did not immediately materialize. The fiscal constraints that had been treated as ironclad laws turned out to be, at least under certain conditions, more flexible than anyone had admitted.

This is not to say MMT is correct in all particulars. Inflation did eventually arrive, and its causes remain contested. But the COVID response demonstrated that the boundaries of fiscal and monetary policy were not where orthodox economists had placed them. The taboos had been broken. What comes next is unclear.

China: The Alternative That Refuses to Fail

While Western economies lurched from crisis to crisis, China continued to grow. The hybrid system we examined in Chapter 11—neither pure market nor pure plan, but a strategic combination adjusted through pragmatic experimentation—proved more resilient than either ideological camp had predicted.

In 2008, while Western banks tottered and credit markets froze, China launched a massive stimulus program: four trillion yuan (about $586 billion) poured into infrastructure, housing, and industrial capacity. It was Keynesian intervention at a scale the West had forgotten how to attempt. Critics worried about debt accumulation and malinvestment. But the economy kept growing while America shed millions of jobs.

The COVID response extended the pattern. China's initial lockdowns were draconian; its later reopening was messy. But throughout, the state demonstrated capacity for coordinated action that market democracies struggled to match. Meanwhile, the Belt and Road Initiative extended Chinese influence across continents. Infrastructure investment for political alignment; patient capital seeking returns that quarterly-focused Western investors wouldn't touch.

China presents a challenge to the assumption that liberal democracy and free markets are the only viable path to prosperity. Here is an authoritarian state, with a heavily managed economy, extensive state ownership, and pervasive industrial policy, that has produced the most dramatic poverty reduction in human history—lifting over 800 million people out of extreme poverty since 1980. Whatever its problems—debt accumulation, real estate bubbles, demographic decline, political repression—it has not collapsed on schedule.

The "Beijing Consensus," if such a thing exists, offers a different model: state direction of investment, patient capital, strategic protection of key industries, gradual rather than rapid liberalization (remember Deng's dual-track pricing), political control maintained throughout. Whether this model is exportable—whether it depends on specific Chinese conditions that cannot be replicated—remains debated. But its mere existence challenges the ideological certainty of the Washington Consensus.

The West must now reckon with the fact that it no longer monopolizes the definition of economic success. China's model may not be superior; it certainly has flaws. But it is real, it is growing, and it refuses to be dismissed as a temporary deviation from the inevitable market-liberal endpoint.

The Legitimacy Crisis

At the heart of the fraying consensus is a legitimacy crisis.

Economic systems derive legitimacy from different sources:

Performance legitimacy: The system delivers results—growth, prosperity, security. When results are delivered, people accept the system's constraints. When results fail, acceptance erodes.

Procedural legitimacy: The system follows fair rules—voluntary exchange, democratic governance, due process. When rules seem fair, outcomes are more acceptable. When rules seem rigged, even good outcomes breed resentment.

Distributive legitimacy: The system distributes fairly—not necessarily equally, but according to principles people can accept (effort, merit, need). When distribution seems arbitrary or captured, the system loses moral authority.

The neoliberal era scored poorly on all three measures.

Performance: Growth slowed for most people. The gains flowed upward. Middle-class living standards stagnated while billionaire wealth exploded. For those outside the professional classes, the system stopped delivering.

Procedure: Markets were supposedly voluntary, but what choice did laid-off workers have? Democracy was supposedly in charge, but policy seemed captured by donors. The rules of the game seemed to favor those who already had.

Distribution: The 2008 bailouts crystallized the injustice. Banks rescued, homeowners foreclosed. Risk privatized (for gains) and socialized (for losses). Heads, finance wins; tails, everyone else loses.

The result is what we see around us: political polarization, populist movements, declining trust in institutions, the fraying of social fabric. These are not merely political phenomena; they are symptoms of a coordination system that has lost the consent of those it coordinates.

What Would Legitimacy Require?

The coherentist framework points toward what legitimacy would require.

Resonance, not extraction: Coordination mechanisms must align individual incentives with collective flourishing. When systems optimize for the few while the many experience decline, resonance breaks down. Restoring legitimacy requires that gains be broadly shared.

Voice, not exit: In purely market logic, if you don't like something, you exit—go elsewhere, buy something else, work for someone else. But exit isn't always possible. Communities can't exit their geography. Workers can't always exit their skills. Citizens can't exit their citizenship. Where exit isn't available, voice must be: mechanisms for participation, dissent, and influence over the systems that shape one's life.

Accountability, not impunity: Those who make decisions that affect others must be accountable for those decisions. When bankers crash the economy and receive bonuses, when executives destroy companies and receive golden parachutes, when politicians serve donors rather than voters, accountability has failed. Restoring it is essential to restoring legitimacy.

Security, not precarity: Market flexibility may be efficient, but perpetual insecurity is corrosive. People need stability—predictable income, reliable healthcare, secure housing—to plan their lives and invest in their communities. Systems that treat people as disposable undermine the trust on which coordination depends.

None of this is novel. It describes, roughly, what the postwar mixed economy tried to achieve. But the conditions have changed. Globalization complicates national policy. Technology disrupts stable employment. Climate change demands coordination beyond what markets or nations can provide. Restoring legitimacy will require new forms, not merely nostalgia for old ones.

The Thread Forward

The mixed economy compromise—Keynesian management, welfare state protection, democratic accountability—was the twentieth century's answer to the coordination problem. It worked, imperfectly, for a time. Then it frayed.

The legitimacy question now bridges economics and governance. Any economic system is also a political system: it distributes not just goods but power, not just income but voice. The story of economics is always also the story of politics. And the crisis of our moment is a crisis of both.

What comes next? The remaining parts of this chronicle examine first the radical critiques—those who argue that the monetary system itself is the constraint—and then the discontinuities ahead: automation, AI, and coordination mechanisms we cannot yet imagine. The answers are not yet clear. But the questions must be asked.