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bubble-driven economic growth? « Previous | |Next »
March 8, 2010

In his How They Killed the Economy in the New York Review of Books Roger E. Alcaly states that almost everyone agrees that the global financial crisis developed in part because of failures of regulation—principally of banks, mortgage brokers, and derivatives markets—and much effort is currently being devoted to revamping and shoring up the regulatory system.He adds:

By any measure, the crisis was a consequence of extraordinarily reckless behavior—by banks and other financial institutions, by governments and their financial regulators, and by consumers—behavior that continued even in the face of a widely shared sense that serious trouble was brewing...The failure of central bankers and regulators to rein in leverage—the practice of borrowing as much as thirty or more times one's equity capital to increase investment potential —and excessive risk-taking owes much to complacency that had developed over the preceding twenty to twenty-five years.

This crisis was part of a series of crises, which were contained, including the stock market crash of 1987, the junk bond collapse of 1989–1990, the Asian crisis of 1997, the Russian default in 1998, the failure of Long Term Capital Management—a large and hugely leveraged hedge fund—later that year, and the collapse of technology stocks in 2000–2001.

Quick and effective responses to these and other dangers by Alan Greenspan's Federal Reserve (FDA) appear to have induced banks and investors to rely unduly on its ability to stave off collapses that threaten the system, and to ignore the serious malfunctioning of the financial markets.

The central argument is that the FDA' s monetary policy of keeping interest rates low for so long encouraged the housing bubble and the explosion of borrowing throughout the economy. This helped to create a false sense of security and stability that enticed financial institutions and investors to leverage their investments enormously, borrowing sums that dwarfed the capital they committed. The second argument is that the regulatory mechanism failed to mitigate boom/bust cycles of the “casino economy” and only tinkered around the edges. Hence the need for reform of the international financial system.

The implication is that financial firms faced crises largely of their own creation and that government's needed to protect major financial institutions from system-threatening disasters. This insurance to keep the whole game going encouraged the financial firms to ever more risk-taking to enhance their profitability. Because of the benefits the big banks have accrued from a number of government programs/subsidies, the big banks are profitable again and now dictating the terms of financial “reform”. We have “asset price driven recovery", attempts to reinstate financial institutions as the motor force of the economic system, and bubble-driven economic growth.

What we have is the emergence of an unprecedentedly huge and fragile financial superstructure subject to stresses and strains (ie., financial bubbles that threatened to burst) that increasingly threaten the stability of the economy as a whole. If what has emerged since the 1980s is the shift in the center of dynamic core of the capitalist economy from production to speculative finance, then the normal economic situation is going to be an unstable one of more financial crises

| Posted by Gary Sauer-Thompson at 12:28 PM | | Comments (3)
Comments

Comments

It's called Elite Expert Trader

It's called Elite Expert Trader

Hmm that's amazing but frankly i have a hard time figuring it... wonder how others think about this..