Very little has been discussed about the origins of the current crisis in a larger economic framework. So, I went hunting for something that would offer an economic-political perspective and found an excellent article by a professor of economics in the US, which I think is excellent as and overview.
Senior Scholar L. Randall Wray is a professor at the University of Missouri–
Kansas City and director of research at the Center for Full Employment and
Price Stability. I think you will find his theory very insightful , thought provoking and most of all, more suitable that the outdated ‘free market model’. The theory he applies comes from the work of economist Hyman Minsky
What We Learned from Minsky
Minsky argued that the Great Depression represented a failure of the small government, laissez-faire economic model, while the New Deal promoted a highly successful Big Government/Big Bank model for financial capitalism.
The current crisis just as convincingly represents a failure of the Big Government/Neoconservative (or, outside the United States, what is called“neoliberal”) model that promotes deregulation, reduced supervision and oversight, privatization, and consolidation of market power in the hands of money manager capitalists.
In the United States, there has been a long-run trend that favors relatively unregulated “markets” over regulated banks that has also played into the hands of neoconservatives. The current financial crisis is a prime example of the damage that can be done by what has been called the “post-regulatory environment” (Thomas 2008).
The New Deal reforms transformed housing finance into a very safe, protected business based on (mostly) small, local financial institutions that knew their markets and their borrowers. Home ownership was promoted through long-term, fixed-rate, self-amortizing mortgages. Communities benefited, and households built wealth that provided a path toward middle class lifestyles (including college education for baby boomers and secure retirement for their parents). This required oversight by regulators, deposit insurance courtesy of the FDIC and the Federal Savings and Loan Insurance Corporation, and a commitment to relatively stable interest rates. Other policies identified by Minsky as “paternalistic capitalism” also helped to build a robust economy: cooperation with unions to ensure rising wages and thus growing consumer demand; a social safety net that also encouraged consumption;student loans that enhanced earnings capacity; and a sense of shared responsibility to take care of the young, the old, and persons with disabilities. Together, these policies reduced insecurity, enhanced trust, and promoted economic stability. Over time, however, the economy gradually evolved toward fragility. The Cold War favored investment in the leading industries, where wages were already high. Inequality grew as other sectors and workers with less education fell behind. Social programs were cut, and trickle-down economics favored the growth of inequality. Policy increasingly turned to promotion of investment in particular, and business in general, to fuel growth—rather than relying on growing consumption fueled by growing household incomes.
Because a large portion of investment in our type of economy must be externally financed, this policy mix increased the importance of finance. At
the same time, the absence of a depression in the postwar period allowed
financial wealth to accumulate, albeit increasingly in the hands of an elite. A
formally “anti-government” bias led to the erosion of many of the New Deal
reforms. In practice, however, the rising conservative ideology never really
embraced a return to the prewar small-government form of capitalism, but
rather merely substituted a meaner “big government” for the paternalistic
government of the early postwar period. Hence, the Big Government/Neocon
model replaced the New Deal reforms with self-supervision of markets, with
greater reliance on“personal responsibility” as safety nets were shredded, and with monetary and fiscal policy that is biased against maintenance of full employment and adequate growth to generate rising living standards for
most Americans. In short, the government was neither smaller nor less interventionist. However, its constituency had shifted away from America’s middle class and toward Wall Street’s money managers.
The model is in trouble—and not just with respect to the mortgage mess, as the United States faces record inequality and destruction of the middle class, a health care crisis, an incarceration disaster, and other problems beyond the scope of this analysis (Wray 2000, 2005).We must return to a more sensible model, with enhanced oversight of financial institutions and with a housing finance structure that promotes stability rather than speculation.
We need policy that promotes rising wages for the bottom half (or even
three-quarters) of workers so that borrowing is less necessary to maintain
middle-class living standards, and policy that promotes employment, rather
than transfer payments—or worse, incarceration—for those left behind.
Minsky always advocated job creation programs so that government would act as an employer of last resort—the only way to ensure that the supply of jobs would be adequate to maintain continuous full employment. Not only would this eliminate involuntary unemployment, but he also showed that it could be used to reduce inequality and poverty, while also ensuring that the government’s budget would swing countercyclically to offset recessionary forces as well as inflationary forces in a boom.
Monetary policy must be turned away from using rate hikes to preempt inflation and toward stabilizing interest rates, direct credit controls to prevent runaway speculation, and supervision and regulation—its proper role.
Minsky advocated support for small banks, and creation of a system of
community development banks—the latter only partially achieved under
President Clinton—as a viable alternative to the predatory lending practices
that did increase the supply of credit to low-income borrowers and
neighborhoods, but which is now resulting in foreclosures and vacancies.28
Unfortunately, we turned American home finance over to Wall Street, which
operated the industry as if it were a casino. The swing toward markets and
away from regulated banking greatly increased risk, while at the same time it
necessarily extended government assurance to the unregulated institutions
for the simple reason that the government cannot allow a financial crisis to
threaten the economy.What Bernanke called “The Great Moderation” is also
known as the “Greenspan put”—the belief that no activity is too risky
because the Fed will intervene if things go bad. Unfortunately, it is Chairman
Bernanke who is left to clean up the mess left by years of lax oversight and
deregulation that operated to the advantage of Wall Street.
Minsky insisted that “the creation of new economic institutions which constrain the impact of uncertainty is necessary,” arguing that the “aim of policy is to assure that the economic prerequisites for sustaining the civil and civilized standards of an open liberal society exist. . . . If amplified, uncertainty and extremes in income maldistribution and social inequality attenuate the economic underpinnings of democracy, then the market behavior that creates these conditions [has] to be constrained” (Minsky 1996). It is likely that the current crisis will make it politically feasible to devise and to put into place such institutions.
Filed under: Markets |