by Jerome a Paris
Thu Jan 24th, 2008 at 02:17:54 AM EST
Martin Wolf, the senior economics commentator of the Financial Times (in London) has a column this morning where he proposes a number of explanations for today's crisis, and indicates his preference.
Guess what: it's China, Russia and Saudi Arabia's fault, with that old chestnut, the "savings glut" theory.
His article is worth going through, because he does list a number of plausible reasons, dismisses some a bit too summarily, and ends up choosing the least inconvenient for the proponents of neoliberalism (in the traditional economics meaning of that word: pro freetrade and pro deregulation - the hard version of which, currently being promoted by our global elites, has now also received the well-deserved monicker of "Shock Doctrine").
Let me explain in more detail what he means, and why I thinks he's wrong.
He starts well enough
One view is that this crisis is a product of a fundamentally defective financial system. An email I received this week laid out the charge: the crisis, it asserted, is the product of "greedy, immoral, solely self-interested and self-delusional decisions made throughout the 2000s, and earlier, by very real human beings at the very top of the financial food chain".
The argument would be that a liberalised financial system, which offers opportunities for extraordinary profits, has a parallel capacity for generating self-feeding mistakes. The story is familiar: financial innovation and an enthusiasm for risk-taking generate rapid increases in credit, which drive up asset prices, thereby justifying still more credit expansion and yet higher asset prices. Then comes a top to asset prices, panic selling, a credit freeze, mass insolvency and recession. An unregulated credit system, then, is inherently unstable and destabilising.
But he dismisses it. (I note that he discusses the systemic risk, but does not touch the sentence about decisions "at the very top of the financial food chain...")
Yet there is a different perspective. The argument here is that US monetary policy was too loose for too long after the collapse of the Wall Street bubble in 2000 and the terrorist outrage of September 11 2001. This critique is widely shared among economists, including John Taylor of Stanford University.* The view is also popular in financial markets: "It isn't our fault; it's the fault of Alan Greenspan, the `serial bubble blower'."
The argument that the crisis is the product of a gross monetary disorder has three variants: the orthodox view is simply that a mistake was made; a slightly less orthodox view is that the mistake was intellectual - the Fed's determination to ignore asset prices in the formation of monetary policy; a still less orthodox view is that man-made (fiat) money is inherently unstable.
This is the "bubbles" Greenspan theory, in different variants: a genuine mistake in the face of exceptional events (the dotcom/technological bubble, 9/11), a conscious decision to avoid assets prices, or a structual problem with the way money is created. He also does not address that last point, which I'm sure will provide fodded for ChrisCook...
But he moves on finally to the real culprit:
A final perspective is that the crisis is the consequence neither of financial fragility nor of mistakes by important central banks. It is the result of global macroeconomic disorder, particularly the massive flows of surplus capital from Asian emerging economies (notably China), oil exporters and a few high-income countries and, in addition, the financial surpluses of the corporate sectors of many countries.
In this perspective, central banks and so financial markets were merely reacting to the global economic environment. Surplus savings meant not only low real interest rates, but a need to generate high levels of offsetting demand in capital-importing countries, of which the US was much the most important.
In this view (which I share) the Fed could have avoided pursuing what seem like excessively expansionary monetary policies only if it had been willing to accept a prolonged recession, possibly a slump.
While he blames the problem on the surpluses of a few countries, he's still lettign the cat out of the bag: normal economic policy would have caused a recession in such circumstances.
He concludes from that last point that it was therefore a correct reaction to thesez imbalances.
My counterreaction is that the reaction only made the problem worse, by pushing it further until it could no longer be hidden under a mountain of money, and that will cause a worse recession. We're there right now, in fact.
And my position is that the monetary reaction to these imbalances was a coordinated effort with those that caused the surpluses on the other side in the first place, because these surpluses had the nice side effect of capturing and concentrating wealth in a few hands, a desired feature of economic policy by these policy makers.
Such capture policies were impossible in the past, precisely because of their recessionary effects: capture too much of the value added by shrinking wages, and demand collapses, recession hits, and profits suffer.
But if you can capture profits without causing demand to collapse, by supporting it through debt, you're home and dry - and you even create a "virtous" circle whereby the financial sector becomes even bigger, more and bigger assets create apparent wealth that can be leveraged yet again, profits become bigger and even easier to capture, and the economic headlines look excellent.
To be fair, that whole scam was made possible with the cooperation of the Chinese and others, who protected their "take" in that cycle by keeping their currencies low, thus ensuring that global wages would remain as low as possible, that their demand would not grow to absorb the surpluses (because that would likely come in the shape of inflation, and cause the whole circus to collapse a lot earlier), and that they had plenty of liquidity to recycle in the financial system. Their "take" was a huge inflow of investment, rapid development and, in the smarter cases, infrastructure building that could prove durable.
But still, the core of the whole cycle was fiscal policy that favored the rich, macroeconomic policies and discourse that lauded profits as the ultimate goal and pushed for endless "reform" (meaning, lower wages and less stable jobs, thus a more compliant and cheaper workforce), and monetary policies that helped ride the inevitable empoverishment of the middle classes.
Thus this does not necessarily means that the financial system is inherently unstable, but it means that it can be, and that a few decisionmakers at the top can easily abuse policy for the profit of a few and at the expense of almost everybody else.
And it means that regulatory supervision of the system can only work if the narrative of profit and growth changes.
Which is our job.
