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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.
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'.
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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.