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"...public opinion deserves to be respected as well as despised" G.W.F. Hegel, 'Philosophy of Right'

the illusions of the economists « Previous | |Next »
October 18, 2008

The neo-liberals are currently covering up economic reality by highlighting the failure of their core economic orthodox----that financial markets are effective, stable and self-correcting mechanisms. They are doing this by mocking those on the left who are apparently saying that we are living the history of capitalism's failure and end.

Marx+Lenin.jpg Leak

If you peel away the mocking, derisory tone, then we find that the neo-liberal economists are rather quiet about what went wrong with their theories, despite their claim that they stand in the tradition of scientific rationality and its testing of hypothesis through evidence. Their rationality now looks akin to dogma. So we need to go here to learn about the fundamental causes.

What we have is a particular cycle: credit expansion fueling growth and asset price inflation, resulting in undue optimism and receding perception of risk, followed by financial collapse and unpredictable financial interactions and economic consequences. Another serial bubble that has been pricked (a Minsky moment). But why do we have serial bubbles?

The free market economic commentators just change their tune---embrace Keynesianisms--- and hope no one notices. Thus Alan Wood says in The Australian:

These important issues [extending a government guarantee for bank deposits to nonbanks] don't change the conclusion that the tide has turned in credit markets, but along with other pressures do suggest a fundamental reshaping of financial institutions and the financial system. And what about this week's fiscal policy spendathon? A sensible move, but will it save the Australian economy from recession? At this stage all that can be prudently said is that before it was announced the spread of recession from the big economies to Australia looked inevitable, but there is now a reasonable chance we might avoid it.

And so a huge government intervention into the free market is rationalized as "the tide has turned." This covers up the need to address the issue of financial markets being nothing like effective, stable and self-correcting mechanisms; or the fundamental reconstruction of financial architecture that is taking place with partial nationalization of the banks.

Wood, it would seem, does not understand his own economic system or the self-destructive forces (contradictory tendencies in Marxist language) that drive it's movement and requires good old-fashioned Keynesian fiscal policy or stimulus package. Keynes, for the neo-liberals, was not just wrong; he was not even intellectually respectable.

Nouriel Roubini's predictions of how the credit bubble would implode have turned out very accurate. But he says hardly anything about what drove the expansion of the bubble in the first place, beyond mentioning 'reckless financial innovation and securitization'.

| Posted by Gary Sauer-Thompson at 2:16 PM | | Comments (16)


the neo-liberals will mount a defence of market rationality by attacking cheap populism. Watch John Roskam at the IPA

On the point that the economists don't understand their own capitalist system I recall that the Australian Bureau of Agricultural and Resource Economics forecasting a 44% per cent rise in commodity export revenues for 2008-9. They did not even even see a global recession happening--all they could see was boom time, not the pricking of the bubble.

the irony and significance of a Republican administration in Washington partially nationalising the American banking industry cannot be overstated. That sure undermines the assumptions and principles about the superiority of American -style, free-market capitalism.

It must irk some of them that they're not likely to be able to impose the full Calvinist monty, ie "pain"/"creative destruction" bit.
Never mind, its a triumph for Lockean weak government, except the current system is heterogenic and homogeneic, which brings up the question of how much rationality is locked out as well.

Kenneth Davidson is saying something similar in The Age:

Whatever the outcome of the global economic crisis, there is near-universal acceptance that deregulated financial markets have got the world into this mess and only governments, acting co-operatively to "pump-prime" the economy and — in some cases — effectively nationalise the banks can get us out of the mess.

We are all Keynesians today it seems. Gee the free market economists sure rolled over quick.

It's a global problem, right? Which requires a global solution, right?

Republican or Democrat, the US will not give up on free market fundamentalism as easily as others. The ideology is unevenly distributed.

Bush will have his summit and everyone else will be trying to negotiate towards a new Bretton Woods type framework, but the US will not be able to lean as far towards Keynesianism as everyone else.

"the irony and significance of a Republican administration in Washington partially nationalising the American banking industry cannot be overstated."

That's true, but they're not seeing it as partial nationalisation. They're seeing it as buying up debt, not buying into private enterprise. And they're still not talking regulation or anything else that would prevent the same thing from happening again.

it---the financial crisis and the economic slowdown---are both national and global; and so both require action at a national and global level.

Paulson's initial rescue plan was to buy up debt. But he was forced by events to go beyond that to inject capital into the banks for equity. He was following the lead carved out by Gordon Brown in the UK.

That is partial nationalization eveen if the Americans are calling it an equity injection

I agree that American exceptionalism is very powerful in the US., even if the American Dream of economic opprtunity is fading.

I'm not very good at economics speak, or think, but I get what you mean by they're both local and global. I tend to think of this in terms of world systems theory, so whatever the US does limits/extends whatever anyone else can do.

The cultural bit is the part I understand best about this thing, or these things as Peter pointed out. It's a horrible thing to contemplate, but I wonder how bad things would have to get in the US before they'd be prepared to get their heads around the idea that government intervention doesn't necessarily equate with socialism/communism? After all, they accepted the Patriot Act without too much objection.

Lyn, I get off on your scepticism. It is always good to come this site, not least because of your ability to sniff out a rat.
Never let them turn off that BS detector and same with the rest of you.

Sinclair Davidson's op-ed in The Age illustrates your point about the neo-liberals mounting a defence of market rationality by attacking cheap populism. Davidson, a senior fellow at the Institute of Public Affairs, says that Rudd is using the crisis as an excuse to take bank bashing to new heights.

On the spendng package he says that:

the Government has moved from Howard-light to Howard-heavy on spending.Of course, there is nothing wrong with government giving something back to the community — yet tax cuts would be a far more effective way to do so, and also to stimulate the economy.

Didn't Rudd have big tax cuts in the Budget? On the infrastructure spending he says:
The Government intends to bring forward several, as yet unspecified, "nation-building" infrastructure projects.Of course, the Government was always going to build some white elephants — only the justification has changed.

That is the limit of the critique of the turn to Keynes. Most of the article argues that there is no evidence that excessive salaries are the cause of the crisis. It is not obvious that Rudd is claiming that the excessive salaries of bank executives are the cause of the crisis.

The US libertarian/free market economic commentators are more sophisticated. As Megan McArdle observes they have been predicting that there would be economic trouble when the housing bubble popped. When the housing bubble popped, the economic results would be ugly.McArdle also acknowledges that:

I did not foresee how tightly coupled our financial system would prove to be. I didn't see how far the problems would spread--I didn't even expect the magnitude of the crackdown in commercial real estate lending, much less the generalized credit freeze.,..And one of the areas that we were both very concerned about, the decline of the wealth effect, has proven to be relatively much less important than expected....

She adds that we all saw the problems with the housing bubble; most of us thought a recession was getting pretty likely, given America's terrific overextension of its consumption, the falling housing market, rising commodity prices, and the simple fact that the longer you've gone without a recession, the more likely you are to get into one soon.

a bit of history.

After the 1929 crash, Republican Treasury Secretary Andrew Mellon advised the government to cut spending to balance the budget, and left desperate banks, businesses, and families to fend for themselves because it would "purge the rottenness out of the system." But Keynes said he did "not understand how universal bankruptcy can do any good or bring us nearer to prosperity," and he insisted that there was "no hope of a recovery except in a revival of the high level of investment." The most fundamental way to do this is by creating decent jobs that give people money to spend and restore confidence in the economy—something that was done to a degree through New Deal programs, and then more completely through wartime spending

Mike Davis in Casino Capitalism, Obama, and Us makes the following point:

we can't rely on the Great Depression as analog to the current crisis, nor upon the New Deal as the template for its solution. Certainly, there is a great deal of déjà vu in the frantic attempts to quiet panic and reassure the public that the worst has passed. Many of Paulson's statements, indeed, could have been directly plagiarized from Herbert Hoover's Secretary of the Treasury Andrew Mellon, and both presidential campaigns are frantically cribbing heroic rhetoric from the early New Deal. But just as the business press has been insisting for years, this is not the Old American Economy, but an entirely new-fangled contraption built from outsourced parts and supercharged by instantaneous world markets in everything from dollars and defaults to hog bellies and disaster futures.

Casino capitalism is a very different beast to the capitalism of the 1930s.

Another attempt by neo-liberals to defend the free market in The Australian. This time it is Eamonn Butler, director of the Adam Smith Institute think tank, London, who says:

WITH turmoil in the world's markets, politicians and commentators have been demanding more regulation and control of the financial sector. Kevin Rudd even says it was caused by extreme capitalism. Their reaction is predictable, but entirely wrong.

This crisis was not caused by capitalism being fatally flawed. It was caused by politicians forcing the banks to give out bad loans, monetary authorities flooding the West with cheap credit and regulators being asleep at the wheel... Western capitalism has been dealt a severe blow by inept politicians and officials. But global capitalism continues to pull hundreds of millions of people out of poverty. It's a great system. Let's not break it.
The poor investment bankers. The Government "forced" them to create the derivatives market and to take their risk. The invisible hand has got its hands tied by big bad government---lenders were forced into giving out risky mortgages called sub-prime loans as a result of US president Jimmy Carter signing the anti-redlining law in 1977.

Gary said: "The free market economic commentators just change their tune---embrace Keynesianisms--- and hope no one notices"

Actually, it's every journo who was pushing the "strong economy", "foundations are strong" line over the last couple of years. Ditto the politicians.

I'd love to see a scorecard on economics journos printed near their comments in the same way that footy tippers in newspapers have their records published.

But that'd leave only Ken Davidson and a couple of others who have the luxury of saying "told ya so", along with "The Economist" which has been warning everyone for years about the now-exposed mess.

But back to the pollies: either they believed the press and the industry (in other words, too dumb for office), or they lied to the public.

Gary also said "casino capitalism is a very different beast..."
Darn good term, although personally, I don't think capitalism is suffering from a mere addiction that can be cured with a bit of cold turkey, but something more malignant which I've termed derivatoma.

Casino Capitalism came from here Do you know of any good accounts of the fundamental causes----long wave---- of the financial crisis?

We can say with certainty that the recent neoliberal era of freewheeling and deregulated finance has ended. The financial liberalisation of the past two decades across the world was based on two mistaken notions.

First is the "efficient markets" hypothesis beloved of some economists and many more financial players, which asserts that financial markets are informationally efficient, in that prices on traded financial assets reflect all known information and therefore are unbiased in the sense that they reflect the collective beliefs of all investors about future prospects.

Second is the notion that financial institutions, especially large and established ones, are capable of
and good at self-regulation, since it is in their own best interests to do so. And therefore external regulation by the state is both unnecessary and inefficient.

Both of these neo-liberal presumptions are now in tatters, completely destroyed by the waves of
bad news that keeps coming from the financial markets. The result is that finance capital, which had systematically tried to undermine the state and demanded autonomy for all its actions, is now calling to that same state to save finance from its self-destruction.