In which I agree with Megan McArdle

by John Quiggin on November 23, 2012

For quite a while, I’ve been arguing that the simultaneous occurrence of sustained depression in most developed countries provides fairly conclusive evidence that both new classical macroeconomics and standard versions of real business cycle theory cannot explain actual macroeconomic outcomes. That argument is directed both against US-based economists like Casey Mulligan and Narayana Kocherlakota, who are trying to explain the US experience in terms of problems specific to the US labor market[1] and to European advocates of austerity who blame the crisis in peripheral European countries on (mostly falsely) alleged government profligacy in those countries.

An immediate implication, drawn out here by Paul Krugman, is that the success or otherwise of the limited stimulus undertaken by the Obama Administration should be assessed by comparison to the performance of other countries, most of which undertook less stimulus, returned to austerity faster, and have experienced correspondingly weaker growth (as some Oz tweeps are pointing out, he might have mentioned Australia, which undertook a big stimulus and avoided recession altogether).

But, as Megan McArdle snarks here, there’s an implication more appealing to Republicans. If Obama can’t be blamed for a global recession, neither can Bush. Although McArdle’s argument isn’t watertight (the US is big enough that US actions have a big effect on the world as a whole), the conclusion is broadly correct. There’s plenty of blame to go around for the Global Financial Crisis and the subsequent depression, and the Bush Administration deserves only a small share. Bush’s main contribution was to introduce unfunded tax cuts at a time when the budget should have been in surplus, thereby reducing the fiscal space available for stimulus when the crisis came. But, given the weakness of the stimulus and the ferocity of the political response, it’s not clear that was a binding constraint in any case.

The primary culprit is market liberal economics, which may be considered both as a set of ideas with its own internal logic and as an expression of the class interests of those who benefit from the finance-dominated form of capitalism that produced the crisis and has prevented any recovery. My book Zombie Economics is a critique of market liberalism considered as an economic theory, showing how market liberalism produced the crisis. Colin Crouch’s Strange Non-Death of NeoLiberalism gives more of the class interpretation, explainign why these discredited ideas remain dominant.

{ 159 comments }

1

JW Mason 11.23.12 at 4:27 am

Unfunded tax cuts

Oh for the love of Christ. If the federal budget had been 2 points closer to surplus in 2006, it would have been two points closer to surplus in 2009. Show me a shred of evidence that “fiscal space” played any role in stimulus debates in the US or elsewhere. Let alone that it was a large enough factor to overcome the fact that the US would have been starting from a more contractionary fiscal stance, in your preferred scenario. Nor is there a shred of evidence that the additional unemployment you’re wishing the US had had in the mid 2000s, would have been any less harmful than the unemployment we have now.

The zombies have eaten your brain, John. Tough Keynesianism, or whatever you call it, is just austerianism under another name.

2

John Quiggin 11.23.12 at 4:59 am

@JWM I already made the point that fiscal space wasn’t a binding constraint in the US, so it seems OTT to hammer me on this issue

On your main claim “the additional unemployment you’re wishing the US had had in the mid 2000s, would have been any less harmful than the unemployment we have now”, do you really believe that the fiscal multiplier is the same in a mild expansion as in a deep contraction? That if the US had not cut taxes in 2002, and instead had twice the stimulus in 2009 that there would be no net impact? The only theoretical position I know of that supports this is “Modern Monetary Theory” – is that where you’re coming from.

As regards labels, given Keynes’ observation that “the boom, not the slump, is the time for austerity”, I’ll label my position as plain old Keynesianism. From our interactions, yours appears to me to be, like that of the MMTers, a denial that there is ever a policy-relevant government budget constraint, but I’ll leave you to spell that out if you want to.

3

rootless (@root_e) 11.23.12 at 5:02 am

Just as a rough rule, finding oneself in agreement with Megan McArdle should provoke a little more soul searching. Certainly the US real-estate and finance boom engineered by the Bush administration sucked in a huge amount of money from the rest of the world and helped blow up the bubble in Europe. From the “dumb guys in Dusseldorf” who financed CDOs to the Deutsche Bank role in originating many crappy US mortgages to the role of US AIG in the CDS boom in London – the bubble in Europe and in the US were tightly linked.

JW Mason I think people are making a serious error when they consider all government spending to be equivalent. If your Federal government is borrowing short term money at 4% to spend it buying gasoline at $200/gallon in Iraq, it is not stimulating domestic employment. Similar expenditures on tax breaks for the rich and corporate give-aways like Medicare Advantage, similarly do not obviously have a stimulative effect on the economy. Furthermore, government expenditures that increase the profitability of rentier and/or speculative economic activity don’t necessarily boost employment. Bush’s relaxation of enforcement of financial regulations, of regulations on mortgage insurance from the agencies, and on basic tax law enforcement all acted to channel private money to investments that created little employment.

4

Andrew 11.23.12 at 5:02 am

Professor Quiggin concedes that point just one sentence after the spot where you apparently stopped reading. How embarrassing for you.

5

Both Sides Do It 11.23.12 at 5:26 am

The policy points are all well and good but rhetorically this seems a bit muddled.

If we’re talking about responsibility and blame for the crisis, and the culprit of the crisis is a set of ideas and policies, then don’t administrations that buy into those ideas and enact those policies deserve responsibility and blame for their effects?

Or are you saying that even if the US weren’t in the grip of market liberal policies that the recession/depression would have played out largely as it did?

6

John Quiggin 11.23.12 at 5:35 am

“Both sides do it” seems an appropriate moniker in this case. Sure, the Bush Administration bought into market liberalism, as did Clinton, Bush I and Reagan and (with the limited exception of the stimulus) Obama, and the entire econ policy establishment. The big deregulation, culminating in the repeal of Glass-Steagall had already happened by the time Bush got in. And, throughout the years leading up to the crisis, the Fed and its counterparts were much more important actors than national goverments.

7

Skeptic 11.23.12 at 6:09 am

I don’t think anyone can really say government profigacy is “mostly false” in terms of the Euro periphery. There’s an awful lot of brigand-like behavior there. I do agree it’s far from the whole story though. The two narratives are not either-or!

8

JW Mason 11.23.12 at 6:42 am

I already made the point that fiscal space wasn’t a binding constraint in the US

OK. (Though you must think they were some kind of constraint, since you think Bush gets some share of blame for the recession.) But it wasn’t a binding constraint elsewhere either. I say there has been no systematic relationship between a country’s public debt pre-crisis and the extent of countercyclical policy following the crisis. Do you disagree?

do you really believe that the fiscal multiplier is the same in a mild expansion as in a deep contraction? That if the US had not cut taxes in 2002, and instead had twice the stimulus in 2009 that there would be no net impact?

I think a constant fiscal multiplier is a reasonable first approximation. Lots of factors will make it larger or smaller in various situations. The main reason for thinking that it is systematically smaller in expansions is that in an expansion the central bank is already targeting the current level of output so any change in fiscal policy will be offset by monetary policy. This exaggerates the power of central bankers, IMO; but even if it were true it would not help your argument. If the US had entered 2007 with the same level of unemployment but interest rates two points closer to zero, there would have been that much less space for expansive monetary policy. And unlike fiscal space, the zero lower bound definitely has been a binding constraint on monetary policy in the US. So the standard Keynesian analysis is that if we’d had smaller deficits under Bush, we would have had less countercyclical policy when the crisis hit. Because the gain of fiscal space wouldn’t have helped much (as you agree) but the loss of scope for monetary policy would certainly have hurt.

This is just textbook ISLM. If the ZLB is likely to bind in the future, you want full employment to occur at a point with relatively high nominal interest rates. This is usually taken as an argument for higher inflation. But it could just as easily be an argument for structural deficits.

I think you will agree then that it must be the case that either (1) the Bush deficits did not lead to higher interest rates, in which case they boosted employment in the 2000s without reducing space for stimulus in the crisis; or (2) the Bush deficits did lead to higher interest rates, in which case they did not affect employment in the 2000s but increased the space for (monetary) stimulus in the crisis.

More broadly, the fiscal space argument is that smaller deficits today allow larger deficits in a downturn. This requires not only that fiscal constraints bind regularly, but that the gain from increasing fiscal space outweighs the loss from inertia in public budgets. In other words, because budgets are not drawn up de novo each year, a smaller deficit this year implies a smaller deficit in future years. As an experiment, I just ran a regression of the structural government balance for the OECD countries in 2009 on the structural balance in 2006. The coefficient was 0.92, not significantly different from 1. In other words, among the rich countries a smaller 2006 deficit implies an equally smaller 2009 deficit.

If fiscal policy is really that persistent (which is consistent with what we know about the politics of budgets) then the idea of adopting austerity in the boom in order to expand in the slump is nonsense; government budgets can’t maneuver nearly fast enough. The best we can hope to do is get the fiscal balance right over the cycle. If that’s the goal, then a period of high unemployment is evidence that deficits are *secularly* too low. (Just as periods of inflation would be evidence that they are too high.) A high-deficit, high interest rate full employment equilibrium (with government borrowing costs held down via financial repression) is also preferable from the point of view of reducing speculation. One thing that should be very clear today is that relying on central banks to maintain full employment is an invitation to asset bubbles — another reason why aiming for budget surpluses in booms is folly.

I have mixed feelings about MMT, which I won’t go into now But that’s not relevant here; on this topic I am coming from the same place as you, theoretically. I am just following our shared Keynesian logic further from zombieland than you (so far) are willing to.

9

andrew 11.23.12 at 6:55 am

What the…I thought that McArdle’s “fresh insight” was always kinda just basic logic.

The financial crisis is supposed to have its roots in structural features of the economy going back many years (deregulation, financialization and what have you), and thus the implication is that no recent president can have CAUSED the crisis so much as responded to it and/or contributed to it.

One may say that Bush Jr. contributed to the crisis by failing to introduce regulations that may have curbed financialization somewhat, etc., but that’s about it.

Martin Wolf says global imbalances due to international monetary system, etc. Bernanke says savings glut. Rajan says misinvestment caused by political attempts to fight unequally distributed growth (which is actually a version of an older theory put forth by UC Santa Cruz heterodox economist James O’Connor, as well as the “fiscal legitimacy crises” theory put forth by Daniel Bell and Fred Block)

10

john b 11.23.12 at 6:59 am

I don’t think anyone can really say government profigacy is “mostly false” in terms of the Euro periphery. There’s an awful lot of brigand-like behavior there.

“Mostly false” isn’t the same as “there are no reported cases of thievery”.

It’s more like saying “the EZ periphery countries don’t have particularly high government spending as a % of GDP (which true in all cases), and were running surpluses or modest deficits before the financial crash and bank bailouts (which is true in all cases except Greece, where the brigandry took the form of tax dodging rather than excessive spending. Americans may be able to relate to this one).

11

Chaz 11.23.12 at 7:21 am

John,

MMT advocates certainly do recognize a policy-relevent constraint on government spending. They say that government spending must not cause aggregate demand to exceed aggregate supply, to avoid excessive inflation. Personally, I am not well schooled in the differences between schools of economics, and that position seems extremely similar to Keynesianism. Why do you and other Keynesians feel that the budget must be balanced over the long term? Is it simply a fear of building up extremely high debt levels and thus extremely high interest payments? If so how would you feel if budget deficits were not offset by bond issuance? I’ve been confused about this for a long time.

The economy was not growing quickly at any point under Bush and inflation was low. I certainly do not think a smaller budget deficit was called for. I hate Bush’s tax cuts for their distributional effect but not for their budgetary effect.

I can sympathize with your “reducing the room for stimulus” idea if you mean it in a purely political way–that national politicians are obsessed with the total public debt and would be more willing to accept stimulus if preexisting debts/deficits were low, totally apart from economic effects. I’m not sure if it really works that way–my theory would be that Congress gets used to the current baseline no matter what it is–but it’s a decent theory.

12

JW Mason 11.23.12 at 7:23 am

Just to clarify the point in my next-to-last paragraph. One of the main arguments for deficit-cutting (very prominently under Clinton, for instance) was that the components of expenditure most sensitive to interest rates were almost among the most socially valuable — business investment and similar. Today, though, it’s increasingly recognized that the components of expenditure most sensitive to interest rates may not be socially valuable, may in fact be a big part of the problem — namely consumption fueled by asset bubbles. but if that is the case, then the whole argument for long-term reduction in government deficits falls to pieces. The *only* argument for a long-term reduction in government borrowing is that it allows for lower interest rates to the private sector. But if you think that lower interest rates to the private sector are likely to lead to socially harmful speculation, then high public deficits become a positive good. (I wrote about this a while back at Rortybomb.)

The specific application of this in the past decade is that, it appears, a lot of the demand for mortgage-backed securities came from investors who wanted Treasury-like assets but found that excessive demand for Treasuries had pushed yields down to unacceptable levels. There’s a strong and actually quite respectable argument that one of the causes of the crisis was that US deficits under Bush were too low.

Look: There’s a reason that zombie ideas perpetuate themselves, and it’s not (just) that people are stupid or evil. It’s that we are all reluctant to follow logic and evidence when they conflict too sharply with received opinion. Received opinion in this case is that *in general* higher government debt is costly and lower government debt is beneficial. I’m not arguing that government *never* face fiscal constraints, let alone that they literally cannot as MMTers sometimes seem to. Just that in practice they are not the main reason why government borrowing matters macroeconomically, and from the point of view of seeing why it does matter, often point the wrong way.

13

Skeptic 11.23.12 at 7:25 am

@john b
I did say it’s only part of the story-but, Italy? Massive tax-evasion there, that’s why they don’t have big corporations like Germany or the UK but rather small family-owned firms. Also true in Spain and Portugal. Brigand-age is not the whole story but it is silly to dismiss it.

14

John Quiggin 11.23.12 at 7:26 am

@JWM Your position now seems to be that of Friedman – get the balance right over the cycle, and leave it at that. And your argument (lags in policy adjustment) is straight Friedman.

As regards the “right” balance, we went over that some time ago, and I showed that, under the plausible assumption that the nominal rate of growth equals the nominal interest rate, maintaining any stable debt/GDP ratio requires that the primary budget deficit must average zero over the cycle. So, if you don’t want to do anything countercyclical, you must support (primary) annual budget balance.

I really don’t think you want to follow this argument where it leads.

15

ponce 11.23.12 at 7:33 am

I think the main economic problem is the U.S. and Europe are stuck with a particularly shitty crop of CEOs and entrepreneurs who have no business starting or running corporations.

16

John Quiggin 11.23.12 at 7:34 am

Just to be clear, I should say that all this ought to be interpreted in accrual terms, so acquiring or selling revenue-generating assets doesn’t affect the primary balance. That’s not a big issue in the US context, except in exceptional circumstances like those of 2009.

17

john b 11.23.12 at 7:38 am

Skeptic: if a government is running a balanced budget on any given level of tax evasion, you can’t reasonably claim that tax evasion is a cause of the country getting into trouble when external economic circumstances change in a way that has nothing to do with changes in the tax base. It’s simply an irrelevant fact about how that country makes up its tax base.

(in the US, rich people pay politicians to ensure their tax bill remains low; in Italy, they achieve the same result by lying about their income. The US one retains more respect for the letter of the law, but the net result is more or less the same.)

This view, roughly “this country does things in a way I don’t like, and now there’s an economic crisis, therefore the economic crisis must be because this country does things in a way I don’t like” is the same fallacy that drove S&P’s recent downgrade of France: yes, it has famously inflexible labour markets and high levels of regulation, but that’s been the case for as long as there’s been anything recognisably resembling France, so is an absolutely terrible justification for a downgrade.

18

JW Mason 11.23.12 at 7:40 am

John-

I think that financial repression such that the interest rate on government debt is held below the growth rate of GDP, is a much more realistic policy goal than your hard Keynesianism. After all, unlike the latter, it was actually achieved in the rich countries for many decades.

19

John Quiggin 11.23.12 at 7:41 am

Also, I’m not putting any weight at all on the Clinton-type arguments you mention. I guess, if valid, they might be relevant to determining the optimal ratio of public debt to GDP, but the arguments I’m making aren’t about the level. If you want to argue that, at some particular time, some government ought to be raising its net public debt/GDP ratio and therefore running consistent primary deficits, I agree that might be correct, depending on the circumstances. But I haven’t seen a clear presentation of that in the US context.

20

Skeptic 11.23.12 at 7:48 am

@john b,
Good point, but to the extent Italy is in trouble the range of fixes should include fixing the tax collection problem, not just fine-tuning macro-policy.

21

JW Mason 11.23.12 at 7:49 am

get the balance right over the cycle, and leave it at that. And your argument (lags in policy adjustment) is straight Friedman.

Friedman was a smart guy.

If you want to do countercyclical policy, you need policy tools that operate at a high enough frequency. At present, except in China and I suppose a few other places, fiscal policy is not really such a tool.

If we ask *why* countries have been unable to deploy appropriate fiscal policy in the face of very high unemployment, “lack of fiscal space” is not an important factor anywhere. (Do you disagree? Where *is* it an important factor?) On the other hand, the fact that the political class strongly believes that government debt is very costly, and that low deficits (as opposed to inflation or financial repression) are the only way to keep it under control, clearly *is* a major constraint on fiscal policy. So what you are doing is reinforcing the actually binding political constraint, in the name of weakening the hypothetical but actually non0binding economic constraint. Your intervention is moving us farther away from a world in which fiscal policy could function in a countercyclical way.

The reason I am comfortable with the Friedman position is that I do not think the problem of excessively high unemployment began in 2007. I think that chronically inadequate demand is a big factor in the stagnation of wages in the rich countries over the past 30 years. I think the only time in that period when the US approached something like full employment was a few years in the late 1990s. And I think that the costs to human wellbeing of chronically high unemployment and low wage growth are much higher than even the very high costs of the Great Recession.

22

John Quiggin 11.23.12 at 7:49 am

@JWM #18 OK, I’m all for financial repression. But

(a) clearly that wasn’t on the agenda when Bush pushed the tax cuts through
(b) That still doesn’t get you far. Say you have zero real interest rates (negative real is hard to sustain for long), 2 per cent growth and 60 per cent debt/GDP ratio. That only gives you a primary deficit of 1.2 per cent.

In any case, I think we should take this offline. I’m derailing my own thread here.

23

JW Mason 11.23.12 at 7:56 am

You’re right, it was just an aside to a larger argument (the rest of which I completely agree with, fwiw.)

24

Man Kay 11.23.12 at 8:39 am

Being consistently wrong takes hard work. One must expect McArdle to be right once in a while.

25

dax 11.23.12 at 8:58 am

To a Keynesian every problem is lack-in-demand and every hammer government spending. So if the US is doing better, then of course it must be because it has less austerity. Hmmm…

IMHO the reason why the US is doing comparatively better than its international peers is that it has fracked like crazy, going from almost 0 in 2007 to a position in 2012 where gas prices are so low that the U.S. is now the low cost manufacturer for industries which use lots of natural gas. When you’re the new Saudi Arabia, GDP is bound to be better compared to the rest.

Prediction: If France ever begins to extract its shale gas, expect the same to happen there.

26

reason 11.23.12 at 9:02 am

JMW @12 John Quiggin @14 etc.

Personally, I think this argument is wrong headed. The relationship between “government debt” and “budget deficit”, is for countries with a sovereign currency voluntary. We should want to see more new money created by government spending and less by increased private indebtedness. Inflation should be identified as the enemy not debt. Otherwise, we are saying that all government spending involves continuing subsidies to the rich who own government debt (which oddly we can tax back). Why provide those subsidies if we don’t need to?

27

reason 11.23.12 at 9:05 am

P.P.S.
To head comments off at the pass, I’m not a believing member of the MMT school. I think some of their policy ideas are just wrong. I think their accounting is good though.

28

reason 11.23.12 at 9:12 am

andrew @9
I’m inclined to go with Wolf – and notice he seems to have the theory which explains the international nature of the thing AND the correlation of persistant trade deficits with crisis best.

29

reason 11.23.12 at 9:19 am

JMW
As to policy response time – my take is that surely is a good reason to push up automatic stabilisers – if possible make them strong enough to make monetary policy often respond to counteract them or at least stay neutral! After all monetary policy (a la Friedman) has long and variable lags in effect – fiscal policy (at least real expenditure) much shorter lags. Maybe we should plan infrastructure projects in the booms ready to be implemented in the next bust when they are cheaper and easier to implement.

30

christian_h 11.23.12 at 9:23 am

Derailed or not, thanks to John and JW for a very illuminating discussion. And I agree with the thrust of the original post (I always thought btw that this – that Bush cannot be blamed for the global recession – was understood as obvious).

31

otto 11.23.12 at 9:29 am

“Colin Crouch’s Strange Non-Death of NeoLiberalism gives more of the class interpretation, explainign why these discredited ideas remain dominant.”

Does he explain why they remain dominant in politics, which is relatively easy to understand, or why they remain dominant at universities, which is rather more difficult to explain? I dont think a few outside consulting gigs for banks for research professors can really be a big part of the explanation as far as academic economists are concerned.

32

JSeydl 11.23.12 at 9:30 am

“If we ask *why* countries have been unable to deploy appropriate fiscal policy in the face of very high unemployment, “lack of fiscal space” is not an important factor anywhere. (Do you disagree? Where *is* it an important factor?) On the other hand, the fact that the political class strongly believes that government debt is very costly, and that low deficits (as opposed to inflation or financial repression) are the only way to keep it under control, clearly *is* a major constraint on fiscal policy.”

This is correct. As a share of GDP, the interest burden is near a post-war low. There’s plenty of fiscal space for more borrowing and spending. The problem is political, in that one side of the political debate has completely hijacked the conversation with scare stories about children and debt or whatever.

“I think the only time in that period when the US approached something like full employment was a few years in the late 1990s.”

This statement is a bit more troublesome. Yeah, you could call the late-1990s “full employment,” but it was all being driven by an unsustainable $10 trillion stock market bubble. In addition, the same bubble is the sole reason why the budget swung into surplus (see the CBO’s projections in 1996). Because of this fact, the whole conversation about surpluses and the Bush tax cuts is somewhat meaningless.

In short, if you want something like sustainable full employment, the trade deficit will need to narrow. Neoclassical trade theory predicts that large, developed country like the US should be a capital exporter to the developing world. As long as this is the opposite way around, there are going to be huge distortions and chronic demand gaps, which will only be filled by demand from unsustainable bubbles.

33

Kevin Donoghue 11.23.12 at 9:32 am

Narayana Kocherlakota has been favouring expansionary monetary policy for some time, so it seems a bit harsh to lump him with Casey Mulligan. You have a ‘[1]‘ in the sentence, did you mean to soften that cruel taxonomic blow in a footnote?

34

Tim Worstall 11.23.12 at 10:16 am

“The primary culprit is market liberal economics, which may be considered both as a set of ideas with its own internal logic and as an expression of the class interests of those who benefit”

Worth asking who has actually benefitted from market liberalism really. If we’re to assume that the world really has been run along “market liberal” lines for the past 30, 40 years, then the things that have happened over the past 30, 40 years ought to be ascribed to market liberalism. Especially if it’s going to get blamed for the bad bits, worth looking at the good bits.

Like, say, the greatest reduction in absolute poverty in the history of our species. Actual real growth in sub-Saharan Africa: yes, even with rising Sen welfare. Chinese average (real) wages going up 5x or so since the turn of the millennium. Even, reducing global inequality (yes, even by Milanovic’s Concept Three, not just Sala i Martin’s concept two measurements).

Perhaps these things have been bought at the cost of the stagnation of rich world working class incomes. Perhaps the Masters of he Universe have indeed been sucking up all the rich world growth to spend on the third wives and fourth mistresses.

But think back 30, 40 years. Perhaps taking as an extreme the Paul Ehrlich type projections, of the world descending again into Malthusian immiseration. If someone came along and offered you the deal that is the modern world would you have accepted it? A couple of billion moving from abject destitution to three squares and a change of clothes? At the expense of the majority of the rich world standing still for a generation?

Leave aside whether it could have been done better with one’s own set of pet policies. Just for a moment.

Is that actually a bad deal?

35

Anon. 11.23.12 at 10:26 am

“and to European advocates of austerity who blame the crisis in peripheral European countries on (mostly falsely) alleged government profligacy in those countries”

I am utterly baffled at how anyone could believe that is false. They borrowed extraordinarily in “good” times and because of that were subsequently unable to borrow when their economies actually needed stimulus. How could anyone possibly disagree with this?

Their absurd regulations also play a role of course, but I think that problem would still be masked had they followed the standard Keynesian approach, for example like Sweden did.

36

Both Sides Do It 11.23.12 at 10:41 am

I’m all for saying “a pox on both partisan houses” about this, but that just means “multiple US administrations share responsibility and deserve blame for the great recession”. It does not mean “Bush can’t really be blamed for the great recession.”

Mitigating the crisis was possible, and his decisions certainly accelerated it. If the failure to pursue legislation like replacing Glass-Steagall can’t be put at his feet, the staffing failures that resulted in a Fed that pumped up a housing bubble or a regulatory apparatus that couldn’t police outright ratings agency or mortgage fraud can. The new regulations that did get passed at the very least were ineffectual and probably enabled the crisis to some extent, eg Sarbanes-Oxley providing a veneer of effectiveness and accountability in regulating auditing while failing to make auditing effective or hold auditors accountable.

Every part needed every other part: without the initial push by Reagan and Bush I, Clinton wouldn’t have faced the economic or political environment in which he created the regulatory changes that required Bush II’s incompetence and ideological fervor to culminate in a crisis. It’s all of a piece. All are punish-ed.

Even if you want to say that all the decisions that created the crisis for the last thirty years were mandated by the economic policy establishment that was by and large the same people playing out the same ideas, those people and those ideas were still part of those administrations. We hold politicians and their administrations accountable for bi-partisan fuckups like the drug war and the military-industrial complex, even though the politics and policy establishments for both are similarly constrained. I get people want to emphasize the systemic failure of the broad set of ideas that governed this stuff, but focusing on that doesn’t preclude holding the people who implemented it responsible and assigning them blame, and it prevents holding them accountable.

(I also want to point out McArdle’s argument – “the whole entire world is having economic problems so no Americans can be assigned blame” – is her standard ‘no one can be held accountable for anything’ bleating; she’s just being her usual shallow mendacious self and didn’t make anything resembling the arguments being made here.)

37

reason 11.23.12 at 11:09 am

JSeydl @32
“Neoclassical trade theory predicts that large, developed country like the US should be a capital exporter to the developing world. As long as this is the opposite way around, there are going to be huge distortions and chronic demand gaps, which will only be filled by demand from unsustainable bubbles.”
Yes.
And the whole post is very good.

38

reason 11.23.12 at 11:11 am

Anon @35
Ireland and Spain were fiscal “Musterkinder” until the crisis. I thought this was well known? Don’t you ever read Krugman?

39

Cass Young 11.23.12 at 11:42 am

John, re your last paragraph and the mysterious failure of the mainstream intellectual world to adjust to the GFC in the same way it changed in reaction to the inflation of the 70s, I wonder whether you have read “The Master & His Emissary” by neuro-scientist Iain MacGilchrist. It may offer an answer to the obvious question – why not?

His portrait of the left brain’s strong tendency to block the the exits from reductive abstract systems repeatedly reminded me of the picture presented in your “Zombie” book. The description of individuals whose right brain hemisphere had been anaesthetised resembles orthodox economists. They readily assent to arguments with a correct logical form but with false premises and conclusions. They are conformist and respond to counter-evidence with ever more complex and spurious adhoc reasoning. I’m normally skeptical about these kinds of arguments (which can be reductive in themselves) but the parallels here are so numerous and so marked that MacGilchrist seems to be on to something.

40

dax 11.23.12 at 12:03 pm

“Ireland and Spain were fiscal “Musterkinder” until the crisis.” Only if you don’t consider the banks as part of the government. Which, in fact, they turned out to be.

41

Hawkeye 11.23.12 at 12:27 pm

It’s the energy stupid !

“Both casual observation and physical intuition have convinced many investigators since Georgescu-Roegen first expounded on the subject, that production in the real world cannot be understood without taking into account the role of materials and energy”

http://www.fraw.org.uk/files/economics/ayres_2005.pdf

No wonder macro-econonics is failing to explain current woes. It purports to analyse our wholly materialistic society, without acknowledging the role of materials!!

http://forensicstatistician.wordpress.com/2011/05/27/is-economics-a-real-science/

42

rootless (@root_e) 11.23.12 at 12:52 pm

“I am utterly baffled at how anyone could believe that is false. They borrowed extraordinarily in “good” times and because of that were subsequently unable to borrow when their economies actually needed stimulus. How could anyone possibly disagree with this? “

Because it is false? Spain’s debt is still lower than Germany’s in relation to GDP, for example. And Germany, UK, France were engaged in huge bailouts before the peripheral crisis set in. Greece is not responsible for DB offering mortgages in the US or IKB speculating on CDOs it did not understand or for Hypobank or ING or SG or RBS or any of the many other bank failures in the EU “core”. Greece is not even responsible for the willingness of core banks to lend for real-estate speculation in Greece. However, the victims of this crisis are being made to pay for the irresponsibility of the instigators.

As is often the case in capitalism, the cold remorseless logic of the market applies only to those who are not backed by powerful states.

43

Watson Ladd 11.23.12 at 1:07 pm

I’m just going to point out the banking crisis was not a cause of the recession. Don’t believe me? Ask yourself when the bailouts began and the recession started. You need a strong expectations story to get the causation to go the way you want. We should look at 2007, household balance sheets, wage trends, and global demand for safe capital due to various institutional constraints for the whole story.

@Tim: All very true. But the growth in the third world hasn’t come in the form of making everyone burgers. Mumbai is a slum city with fascist gangs roving the streets, the Islamists have Cario, etc, etc. Socialism, capitalism, barbarism are political categories, and since today the politics of freedom are off the table, we’ve got barbarism no matter how nice the economy runs.

44

phosphorious 11.23.12 at 1:20 pm

The important thing is that we not blame Bush. Solving the problems takes second place to making sure that Bush doesn’t get blamed for them.

Sometimes I think that conservative Obama-hatred is merely sublimated Bush-love.

45

dax 11.23.12 at 1:41 pm

“Because it is false? Spain’s debt is still lower than Germany’s in relation to GDP, for example. “

Not if you include the de facto Spanish debt from Spanish banks.

46

bob mcmanus 11.23.12 at 1:42 pm

household balance sheets, wage trends, and global demand for safe capital

Someone who reads Kalecki and Minsky can connect these things interdependently to a banking crisis and a recession.

47

Main Street Muse 11.23.12 at 1:42 pm

“The primary culprit is market liberal economics, which may be considered both as a set of ideas with its own internal logic and as an expression of the class interests of those who benefit from the finance-dominated form of capitalism that produced the crisis and has prevented any recovery.”

A “market” – such as the global financial market – that provides products that obscure the true nature of the risk involved in its purchase, that throws all laws of business ethics aside, that engages in potentially illegal transactions (NINJA loans, etc.) is less of market and more of an underworld come up to the surface for air and profit.

And if such a market requires the world’s governments to bail it out when it fails, the it’s hardly the failure of “liberal market economies.” This “market” is a showcase for what the Reagan Revolution strained to achieve – deregulated businesses operating without the burden of government oversight.

And in 2008, the market spoke – in a scream – this type of market is exceptionally costly and damaging to the global economy.

Macroeconomics needs to figure out a way to include greed into the equations…

48

Alex 11.23.12 at 1:50 pm

Well, I think JWMason has a point. So I made a FRED chart: http://research.stlouisfed.org/fredgraph.png?g=d3U

One line (blue, left-scale) shows annual capacity utilisation in industry as an index with 1990 = 100. The other (red, right scale) shows the inverse of the Gini ratio for all households (inverse, so worse is the same direction on both series). You’ll observe that they seem to be correlated. Capacity utilisation, as a series, is dominated by the recessions. A moving average or some other trend line would probably be a prettier fit (as would just rescaling the right axis) but you need a proper spreadsheet for that.

I theorise that as JWM suggests, the US macroeconomy has been operating at less than its potential, this is because growing inequality redistributes income to people who don’t need it, and that the mechanism of action is that without full employment as a goal of policy, recessions (which seem to be getting worse over time) force down wages for (ahem) the 99%, and the previous level is not quite recovered.

49

rootless (@root_e) 11.23.12 at 1:53 pm

@12 “The specific application of this in the past decade is that, it appears, a lot of the demand for mortgage-backed securities came from investors who wanted Treasury-like assets but found that excessive demand for Treasuries had pushed yields down to unacceptable levels. There’s a strong and actually quite respectable argument that one of the causes of the crisis was that US deficits under Bush were too low.”

Arguments like this one are why Keynes explained that a productive economy needed the government to direct investment. Otherwise you end up with “left” economists claiming that returns for risk free rentier investment were too low.

50

Neil 11.23.12 at 1:53 pm

@Tim. What evidence do you have for your implicit claim that there was no feasible alternative to liberal market economics which wouldn’t have done at least as well at poverty alleviation? Unless you have some evidence for that claim, your defence doesn’t amount to much.

51

ajay 11.23.12 at 1:57 pm

I’m just going to point out the banking crisis was not a cause of the recession. Don’t believe me? Ask yourself when the bailouts began and the recession started.

When did the bailouts start? Northern Rock sought and received Bank of England support in September 2007.
When did the recession start? Q3 2008. (GDP growth of -0.6% in the UK, followed by -1.5% in Q4.)

Evidence seems not to be on your side, Watson.

52

Main Street Muse 11.23.12 at 1:58 pm

One more thing – the US recession, which started before the 2008 crash, is the result of the WalMart-ization of the middle- and labor-classes – stagnant wages (or diminishing wages, if you worked at a company like Hostess) over decades when costs (healthcare, etc.) were rising dramatically.

Simultaneously, corporations saw enormous profits and C-suite execs saw enormous raises. (Roughly thirty years ago, CEO salaries were roughly 40% greater than the employees; now CEO salaries are 127% greater than the employees – http://huff.to/10G46ge).

As consumer salaries became increasingly stretched, our nation’s financial system, unfettered from the restrictions of Glass-Steagal, went insane. The financial crash of 2008 is the result of highly educated (predominantly Ivy-league trained), highly compensated, ethically challenged individuals who believe that maximizing their bonus is the goal of all transactions, not necessarily selling products that work. Frankly, that is a terrible business model, no matter the business.

And they figured out how to get their guys in high places so that when the walls came tumbling down, the government gave them a TARP…

[Megan McArdle may want to continue upholding the values of GW Bush, but most people see him for what he is, one of the worst presidents this nation has ever seen.]

53

rootless (@root_e) 11.23.12 at 2:02 pm

“Not if you include the de facto Spanish debt from Spanish banks.”

That is, if you accept the theory that the public is responsible for the privately contracted debt of banks to investors.

Sure.

54

The Tragically Flip 11.23.12 at 2:17 pm

I’m really dubious of this idea of treating all stimulus as equal even as a “first approximation.” The Bush tax cuts can be seen as a kind of stimulus and the early 2000s economy was weak, so it could have been defensible on those grounds.

But giving money to rich people is really shitty stimulus.

One reason I think is that Galbraith’s insight doesn’t get enough attention: A lot of the consumption spending by rich people is to buy “status” goods that are expensive purely to make them exclusive and mark yourself apart. I think the thing about a $1000 bottle of perfume is that there’s no reason to think it generates 20 times the economic activity that a $50 bottle of perfume generates because really it is about the same level of labour and effort to make each. The additional $950 spent doesn’t go to the workers who make the $1000 perfume, it goes back in the pockets of the owners who also use it to buy goods like $1000 perfumes.

Meaning, I think rich people shuffle a lot of money back and forth amongst themselves that has no appreciable economic effect beyond what would be accomplished by their buying ordinary versions of these same goods.

55

dax 11.23.12 at 2:27 pm

“That is, if you accept the theory that the public is responsible for the privately contracted debt of banks to investors. “

It doesn’t matter what I accept; what matters is how in fact the Spanish government treats it.

Incidentallly myself I would have let banks go bust long ago. But unlike many with rose-tinted glasses, I realize my proposal would have caused a lot of grief to the largest group of bank creditors – namely the Spanish depositor.

56

The Raven 11.23.12 at 2:30 pm

“Obama can’t be blamed for a global recession, neither can Bush [...]“

But Reagan can be, or at least for laying most of the groundwork.

Croak!

Now, if I were going to be fair about this, I could point out that we’ve had 30 years of market liberal economics, but I think I will be as fair as the Republicans are, instead. Besides, it’s the Republicans that led; the Democrats followed.

It’s All St. Ronnie’s Fault. :-)

57

rootless (@root_e) 11.23.12 at 2:36 pm

“Incidentallly myself I would have let banks go bust long ago. But unlike many with rose-tinted glasses, I realize my proposal would have caused a lot of grief to the largest group of bank creditors – namely the Spanish depositor.”

Governments are able to guarantee small depositors without guaranteeing bondholders.
If they want.

58

Watson Ladd 11.23.12 at 2:36 pm

@ajay: The US is the place to look. The UK fundamentally isn’t as important as you think it is to the global economy. And in the US the recession started in December 2007, with the main series of bailouts starting in October 2008. So on the basis of that evidence I’m willing to argue that the economic slowdown and drop in housing prices were causative agents of the bank collapse. The flight to Treasuries observed at that time was contained via TARP and some clever Fed maneuvering: from a bank perspective the crisis has been long over (LIBOR spreads are back to long-term norms)

The current economic weakness is due to procyclical fiscal policy in Europe and the possibility of procyclical fiscal policy in the US. There is a strong structural component: the wealth shock of the housing price fall decreases consumer spending, as does the 40 years of stagnating wages. Keynesianism cannot understand this, and has to pretend there is a magic wand to wave that can reverse the increasingly tenuous and superfluous nature of labor.

59

Tim Worstall 11.23.12 at 2:41 pm

“@Tim. What evidence do you have for your implicit claim that there was no feasible alternative to liberal market economics which wouldn’t have done at least as well at poverty alleviation?”

That’s not my claim. My claim is rather, that taking JQ’s assignation of blame to market liberalism as true isn’t enough. Absolutely everything has both good and bad effects. So, what were the good effects of whatever did happen in the last few decades?

For there’s a point implicit in JQ: if all our woes are to be blamed on market liberalism then at least some portion of the good things now also need to be assigned to something quite so obviously globally powerful.

At which point to restate it. In a stronger form perhaps. I’m sure that people have been telling me for decades that the rich ought to give up a little bit of what they have so that the poor can have more. What’s been happening over the past few decades is that there’s less growth in the rich world and more in the poor. So what’s wrong with the last few decades? Isn’t that what everyone kept saying we needed?

60

Alex 11.23.12 at 2:48 pm

ajay: Danny Blanchflower pointed out that some labour market indicators turned south in the summer of 2007, almost simultaneously with the financial crisis breaking out, and worsened continuously through 2008. This was his justification for repeatedly voting for lower interest rates while the rest of the BoE thought everything was under control.

here’s a FRED: http://research.stlouisfed.org/fred2/graph/?graph_id=97650&category_id=0#

note especially that youth unemployment took off in early 2007. the profile is spookily like that for total unemployment, just with a 6 month lead.

61

Neil 11.23.12 at 2:51 pm

Tim, the counterfactuals are always relevant here, precisely because your claim that everything has good and bad effects is true. It is true that some good effects can be attributed to market liberalism, but because your point about good and bad effects is true, telling us that it had some good effects is trivial. We want to know about the feasible alternatives.

62

ajay 11.23.12 at 3:11 pm

57: Try again, Watson. What I said for the UK is also true for the US: the recession started in Q3 2008, when GDP growth went negative for the first of four quarters in a row. In December 2007, the US wasn’t in a recession. GDP growth was 3.6% nominal or 1.7% real in Q4 2007.

As for the bailouts: if you meant to ignore everything that was happening outside the US, you should have said so.
Furthermore, it’s a sneaky move to define the start of the financial crisis as “when the bailouts started to happen”. The ship normally starts to sink a bit before the lifeboats are launched. The US financial sector first started to crack up with the failure of the Bear Stearns High-Grade Structured Credit Funds, and that was in June 2007. Alarm bells had been sounding about the US subprime market since late 2005.

Alex: I think that graph shows youth employment dropping in 2008, not 2007… the wider point is good, the economy was definitely slowing but the financial crisis is what turned what would otherwise have been a minor slowdown into the Great Recession.

63

dax 11.23.12 at 3:14 pm

“Governments are able to guarantee small depositors without guaranteeing bondholders. If they want.”

And if they can afford. The total value of deposits was over 150% of GDP.

64

MPAVictoria 11.23.12 at 3:27 pm

“Chinese average (real) wages going up 5x or so since the turn of the millennium.”

Oh go back to the National Review Tim. Anyone honest would not describe China’s state led economic policy as “market liberalism”.

65

William Timberman 11.23.12 at 3:40 pm

Watson Ladd @ 57

So…if I’m understanding your last paragraph correctly, it’s not that in the long run we’re all dead, it’s that in the long run we’re gonna have massive structural unemployment no matter what we do. Obviously, then, there’s less risk in the short run to the owners of capital if they operate casinos than invest in the future production — even at very low interest and wage rates — of goods or services that they probably aren’t going to be able to sell.

No, we haven’t solved that problem yet, not at all. Neither Keynesians nor our beloved neo-liberals seem to have have even a half-way convincing solution to offer, unless maybe we consider police states with larger armies, and — pace JQ — larger navies, to be the only plausible investment-based solutions. These may turn out to be temporary, but then again, maybe not. So if Spain or Italy can’t afford these big-ticket toys, Spain and Italy will have to become accustomed getting poorer and remaining that way, unless they’re prepared to kiss Germany’s bum, or the U.S.’s, or China’s.

Maybe it’s not in the long run that we’re all dead, but in the medium run. That, frankly, is why I’m more than a little fearful that we’re closer to 1914 than 1937, despite what the Krugman/DeLong/Thoma/Quiggin axis keep telling us. If governments just did X rather than Y with fiscal and monetary policy…. may be true, but it doesn’t seem very helpful given what else is going on in the world.

66

Alex 11.23.12 at 3:47 pm

ajay: look again. Youth unemployment is the dark green line – it is flat or marginally falling in 2006, then starts rising in early 2007 (about the same time as the HSBC profits warning:-)), before skyrocketing in early 2008 at the same time as overall unemployment took off.

67

rootless (@root_e) 11.23.12 at 4:19 pm

@62 but the banks were not zero assets. The governments of the EU chose to protect large depositors and bondholders, while the US routinely lets bank bondholders take the hit.

68

Katherine 11.23.12 at 4:19 pm

I’m sure that people have been telling me for decades that the rich ought to give up a little bit of what they have so that the poor can have more. What’s been happening over the past few decades is that there’s less growth in the rich world and more in the poor. So what’s wrong with the last few decades? Isn’t that what everyone kept saying we needed?

Tim, it ill behoves you to be this disingenuous. “Rich” and “poor” within the rich world is relative and you know it.

69

rootless (@root_e) 11.23.12 at 4:20 pm

Tim Worstall correctly notes that for “the left” only white men really count.

70

ajay 11.23.12 at 4:29 pm

ajay: look again. Youth unemployment is the dark green line

Quite right. Sorry, I was misreading the graph.

71

John 11.23.12 at 4:38 pm

The charge is made, that is was “those who benefit from the finance-dominated form of capitalism that produced the crisis.”

Sorry, but I was unaware that there is any form of capitalism other than finance dominated.

Today we have more idle people and resources than I ever thought possible. The reason is straight forward. Finance is broken in two places. No one can finance putting the idle people and resources to work, especially because (second break) consumers cannot finance purchase of more goods and services.

Now if you believe that finance isn’t broken and that there is some way other than via finance to get our idle people and resources back to work, I would be very interested.

It seems to me that Minsky was right: Finance is risky, but it is also all that we have.

Again, if you have some way to put idle people and resources to work, other than finance, would be all ears.

72

rootless (@root_e) 11.23.12 at 4:54 pm

@64
“Oh go back to the National Review Tim. Anyone honest would not describe China’s state led economic policy as “market liberalism”.”

Why not? After all, the USA which spends trillions defending oil lanes, bailed out its auto companies, and features such industrial giants as Boeing (50% govt contracts) is described as “market liberalism”. The EU is more of the same. Consider the US economy without even 4 government projects: transcontinental railways, highways, Internet, GPS.

73

ajay 11.23.12 at 5:11 pm

It’s certainly more market liberal than what they used to have.

74

Bloix 11.23.12 at 5:29 pm

Bush didn’t cause Katrina, either.

75

Lee A. Arnold 11.23.12 at 6:15 pm

John Q, I think this is a fascinating topic and one of the most important discussions we can have. Market liberal economics and financialization are causing an accelerating inequality for Marx’s reasons. At the same time, but for different reasons, (i.e. for the reasons of technology and age) all economies are enlarging their transfers for medicine and retirement. The question is, where is this headed, so that no one gets hurt anymore?

An description and acceptance of Transfers as some sort of basic, eternally necessary institution (as opposed to some sort of stopgap, which is how most of the public thinks intellectually about retirement security and healthcare spending, if they think about it at all) may be the the thing to promote. After all, it is the public’s social preference which will determine the economics; and preferences and expectations are partly a public-relations game employing rhetoric as the main tool (something which economists seem reticent to point out, perhaps because it remands their field to a secondary ministration?)

In the same way, “fiscal space” is mostly about the public’s fears, and how those fears can be jockeyed by politicians. Commentators always say, “The public doesn’t really give a damn about deficits,” but that isn’t precisely true (and I am sort of tired of reading it). Debt is something that most people don’t like instinctually, and the long epochal rise in MBA’s has not turned around that distaste. Indeed once people realize that their extra tax payments (when interest rates go up, some day) go into the pockets of bondholders, with no evidence that this will increase investment in producing real goods and services, and therefore perhaps jobs, — they hate it even more.

So the next step is to help the public understand that transfers are not government in the old sense of government. Or to put it in a different way, the solution is to realize, in a public way, that the government has two very different functions that should be separated in the mind, and perhaps separated institutionally: governing, and transfers. They are both necessary functions, but very different functions. The first requires bureaucracy, the second, not so much. “Transfers” are big money but not big government, in the traditional scary sense. They do not distort, in fact they aid, “market economics”, in areas where the needs are not met. This might go a long way, perhaps helps us through another century, in ushering late capitalism toward its final demise.

A second big thing I see happening (again, on the slow boil) is an evolution in thought against the idea that money has a long-term value. It is a rather halting and stumbling evolution, but it seems inevitable. It is hard to maintain the notion that interest rates are the result of any NATURAL supply and demand for money (which again, is a widespread popular notion, and not restricted to Ron-Paul style libertarianism). And again, the intro textbooks are very careful to sidestep the point. But (to close this quickly; I am running out the door): We are all working for the central bank, aren’t we?

76

Random Lurker 11.23.12 at 6:34 pm

“What’s been happening over the past few decades is that there’s less growth in the rich world and more in the poor. So what’s wrong with the last few decades? Isn’t that what everyone kept saying we needed?”

I think that it is true that less growth in rich countries and more growth in poorer countries is a good thing, however this didn’t happen because of “market liberalism” proper: this happened because poor countries (China) were allowed to apply mercantilist policies.
If we go back some decades to postward Europe, it seems to me that also the European boom was possible because the USA accepted to play the role of the “buyer of last resort” (or “hegemon”, if you prefer De Long’s terminology).

However it seems to me that this dynamic is coming to an end, because the society in the rich “buyer” countries has been somehow strained by the economic effects of being a long term importer (in the USA) and by the inner dynamics caused by the pressure on wages due to the need of competitivity in Europe.
In various ways, the GFC marks (or might mark, I don’t have a cristall ball) the end of this paradigm based on the USA as a buyer of resort.
Wich is a problem.

77

Bruce McCulley 11.23.12 at 6:43 pm

@62 It appears Watson is correct about the start date of the recession in the U.S. From Bloomberg, December 1, 2008:
“The U.S. economy entered a recession a year ago this month, the panel that dates American business expansions said today.
The declaration was made by the cycle-dating committee of the National Bureau of Economic Research….”

78

JW Mason 11.23.12 at 7:01 pm

Don’t want to continue the sidetrack about fiscal space — Ill try to assemble my thoughts on my own bog — but I do have to note that Krugman today agrees with me that it is a nonissue. He says it is *never* the case that country borrowing in its own currency risks runaway interest payments. Rather, the danger of excessive debt is depreciation and inflation (which of course brings the debt back down). So the fiscal space constraint never binds, and in a situation where a weaker currency and higher inflation are desirable, there is no danger from higher government borrowing at all. So says Krugman!

Again, I think this is perfectly orthodox Keynesianism. If you learn just one thing from the General Theory, it’s that the interest rate is the price of liquidity, not the price of saving. An increase in banks’ holdings of government liabilities (whether in the form of debt or “money”) leaves them more liquid. This is the opposite of the case with an increase in banks’ holdings of private borrowers liabilities. So the effect of higher government borrowing is to increase the supply of liquidity and reduce interest rates.

This is not only standard theory, it’s empirically very clear — as long ago as the US Civil War, even very large increases in government borrowing did not lead to any rise in real interest rates.

Fiscal space is a zombie idea. The fact that a given level of borrowing, if continued for an infinite amount of time, would lead to an infinitely high debt-GDP ratio, tells us nothing about the constraints on policy over any horizon that matters here on earth.

79

Bruce Wilder 11.23.12 at 7:19 pm

“There’s plenty of blame to go around for the Global Financial Crisis and the subsequent depression, and the Bush Administration deserves only a small share.”

Maybe, I just do not understand this statement.

It seems to me that the GFC is the outcome of a series of decisions to regulate the U.S. financial sector inadequately — a failure to regulate, which spilled over into, and was imitated in, Europe. The Bush Administration was directly responsible for regulation of U.S. banks and financial markets, and, rather famously pushed forward a policy of aggressive deregulation. They were deregulating within the framework of reform established by Congress and the Clinton Administration, but they exercised considerable discretion to push regulatory negligence to a radical extreme.

Obviously, there were many actors at work, but various agencies of the U.S. government, under the responsibility of the U.S. Administration, as well as the Federal Reserve have supervisory or regulatory responsibility, which makes them a strategic cause. They can never “deserve only a small share” of the blame. They deserve all the blame, because it is their responsibility to manage. That they looked on negligently as the U.S. housing bubble inflated after 1998, with figures like Bernanke talking about “savings gluts” is just evidence of rank incompetence, not the innocence of a bystander. It wasn’t their job to be bystanders; that was a policy choice, and a blameworthy one. (Similarly, the architects of the defective Euro, whose only “solution” to the crisis they created, is to grind the inadequate social welfare states of southern Europe to dust, are entirely blameworthy.)

My purpose in commenting, though, is not to rant.

My puzzlement is over the implied causality. What is cause-and-effect in economics, if the government policy is not blameworthy in the GFC?

80

JW Mason 11.23.12 at 7:24 pm

BW-

There’s no argument about the causal importance of US government policy in general. The question is how much of a departure’s Bush’s policies in particular represented from Clinton’s. John Q.’s answer, which I agree with, is little or none.

81

Lord 11.23.12 at 7:29 pm

Would you also categorize as market liberal economics the zombie ideas of trickle down job and wealth creators, and low taxes on them promoting investment rather than consumption? Those seem much more aligned with one party. Presidents do matter at the margin and whether they endorse and promote bad policies and compound them or struggle against them, just as the Fed.

82

MPAVictoria 11.23.12 at 7:39 pm

“as opposed to some sort of stopgap, which is how most of the public thinks intellectually about retirement security and healthcare spending, if they think about it at all”

Now this seems to me to be false. People LIKE Medicare and Social Security. The certianly do not think of them as temporary measures.

83

rootless (@root_e) 11.23.12 at 8:01 pm

There’s no argument about the causal importance of US government policy in general. The question is how much of a departure’s Bush’s policies in particular represented from Clinton’s. John Q.’s answer, which I agree with, is little or none.

So you write off the economic effects of two unfunded wars? Just noise in the signal?

84

lupita 11.23.12 at 8:04 pm

The primary culprit is market liberal economics, which may be considered both as a set of ideas with its own internal logic and as an expression of the class interests of those who benefit from the finance-dominated form of capitalism that produced the crisis and has prevented any recovery.

First, change “market liberal economics” to “neoliberalism” and “class interests” to “interests of the powerful nations”.

Then, add to your definition of neoliberalism its most important aspect: it is a set of global institutions such as the IMF, World Bank, UNSC, NATO, the City, Wall Street, and Washington.

Mix and you have what el Sub has been saying for almost 20 years.

85

eddie 11.23.12 at 8:24 pm

“‘If Obama can’t be blamed for a global recession, neither can Bush’. …Bush’s main contribution was to introduce unfunded tax cuts.”

This strikes me as about the worst clutching-at-straws argument it’s possible to make given what actually happened. Apart from the obvious that Obama wasn’t in charge when it happened and Bush was there’s the fact that Bush (with the help of dumbocrats in congress) removed regulations (Glass-Steagall) from Wall St that were aimed specifically at preventing what brought the crash.

86

rootless (@root_e) 11.23.12 at 8:34 pm

But the “progressives” have much in common with Glibertarians like McArdle, including an ideological insistence that reform Democrats are pretty much the same as radical right Republicans.

87

MPAVictoria 11.23.12 at 8:42 pm

“But the “progressives” have much in common with Glibertarians like McArdle, including an ideological insistence that reform Democrats are pretty much the same as radical right Republicans.”

Not sure if serious….

88

John Quiggin 11.23.12 at 9:23 pm

@Eddie Glass-Steagall was repealed in 1999, with the active support of the Clinton Administration, most notably Robert Rubin.

89

John Quiggin 11.23.12 at 9:26 pm

@rootless. I’m sick of your continuous slurs of racism at anyone who criticises the Democrats, and I have never found your reflexively partisan comments to be of any value. Please don’t comment any further on my threads

90

John Quiggin 11.23.12 at 9:33 pm

As far as dating is concerned, it’s important to note that the financial crisis was well under way in 2007

91

Harold 11.23.12 at 10:04 pm

No doubt from the perspective of Australia Clinton and Bush seem more the same than they do from here in the US. I voted against Clinton and Gore in the Democratic primaries because of their repellent Southern anti-government economic ideology. But still, from day to day Bush was worse and people who had lived in Texas told me that as governor he had absolutely ruined Texas in a thousand small ways just as he did the USA as a whole with his cronyism and general incompetence. You have to live here to fully experience it.

92

christian_h 11.23.12 at 10:19 pm

Harold please this is really not another thread about who is or is not the lesser evil. It is about one question: is it correct to claim that the Bush administration is responsible for the financial crisis and global recession in the sense that a different administration would have avoided it. I am stunned that this is even being argued – the answer is obviously no.

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Harold 11.23.12 at 10:24 pm

As I see it, they are to blame in that they willingly colluded, aided, and abetted in spades, yes. Did they collude even more than Clinton Gore? This seems to me a metaphysical question.

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John David Galt 11.23.12 at 10:35 pm

Krugman is one of the worst who don’t get it. And “unfunded tax cuts”? Give me a break.

The causes of the recession are (1) too much government spending (we need another President Harding, who stopped a recession by cutting spending) and (2) overregulation, including of labor and of the energy, medical, insurance, and banking industries (all of which are Obama’s big agenda items, though the problem in banking started with Barney Frank’s CRA).

As long as these policies stand, the US is going to have “structural” unemployment in the 10%+ range, just as France and Germany do.

Right now as we speak, we’re seeing a huge number of workers have their hours cut, since the ObamaCare bill says that anyone working 30 hours/week counts as full time. Just wait until the rest of ObamaCare kicks in, and we see a third dip in this depression.

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John Quiggin 11.23.12 at 10:57 pm

I really didn’t mean this to be another round of the lesser-evil debate (to restate, I cast my notional vote for the lesser-evilist side http://crookedtimber.org/2012/11/06/the-climatic-case-for-obama/, and the OP observes that Obama’s response to the crisis was better than most).

The central point is that this is a global (or more precisely, developed-world) crisis, arising from the policies and ideology that have been dominant for the last 30-40 years, under governments of various political colors in many countries, which have allowed the growth of an uncontrollable financial system. The US is a big part of the global financial system, and the US financial sector played a big role, but the same processes were going on the EU and UK, and contributed to the crisis.

96

lupita 11.23.12 at 11:23 pm

The crisis arose from policies and ideology, yes, but the these arose from the growth imperative inherent in capitalism. Perhaps another crisis in necessary before the West re-defines “lost decades” as stability and recovery as something other than GDP growth.

97

ponce 11.23.12 at 11:30 pm

@95

” The US is a big part of the global financial system, and the US financial sector played a big role, but the same processes were going on the EU and UK, and contributed to the crisis.”

There were economic booms and busts long before governments got so involved in their economies.

To blame the latest crisis on government policies seems…simplistic.

98

Steve LaBonne 11.23.12 at 11:54 pm

If government policies had nothing to do with the crash, why did Canadian banks weather it so much better than their deregulated US counterparts?

99

Steve LaBonne 11.24.12 at 12:02 am

One can only marvel at the ability of people like “John David Galt” to continue spouting, with the utmost confidence, garbage that has been definitively refuted by everything that’s happened since 2007.

100

ponce 11.24.12 at 12:03 am

@98

1. Canada’s real estate bubble hasn’t burst yet.
2. Canada has an ongoing oil bubble.

101

Steve LaBonne 11.24.12 at 12:08 am

Question-begging is the best you can do, ponce?

102

Lee A. Arnold 11.24.12 at 12:24 am

MPAVictoria #82: “Now this seems to me to be false. People LIKE Medicare and Social Security. The certianly do not think of them as temporary measures.”

Sorry, “stopgap” is the wrong word. People normally think of these things as necessities, yes, but they also tend to think of them as add-ons to the system of free markets and individualism. They don’t think of transfers as one of the necessary principles of the system.

103

ponce 11.24.12 at 12:24 am

Without a fast forward button, yes.

104

GiT 11.24.12 at 12:29 am

Also, don’t people tend to view Social Security as something that they themselves paid for, rather than as a transfer?

105

Tim Wilkinson 11.24.12 at 12:35 am

‘Safety net’.

106

Main Street Muse 11.24.12 at 1:46 am

Hi John Quiggen, when you say, “as far as dating is concerned, it’s important to note that the financial crisis was well under way in 2007,” what source are you using? Recession started in 2007, yes, but many people (Hank Paulson for one) seem to date the “economic crisis” with the collapse of Lehman in fall of 2008. Or with the collapse of Bear Stearns in the summer of 2008. So curious about where this info comes from.

107

john c. halasz 11.24.12 at 1:56 am

Well, I’m just amazed, not for the first time, at the ability of economists, while claiming some special authority over policy and “social welfare”, to separate out economics from politics, and pretend to some sort of unclarified systemic “causality” that operates entirely independently from human agents and agencies, (based on mathematical assumptions about self-regulating markets, utilizing a not very good theory of nominal price determination, without regard to its productive components, other than a mythical stick figure), which then diffuses all human responsibility for economic trends and events, most of all that of economists. Sure, the GFC was the outcome and culmination of a 30+ year trend, (“the controlled disintegration of the global economy”, as Paul Volcker styled it at the outset, more lucid about what was up than the average bear), and that inbred idiot and Hegelian anti-hero Dubbya didn’t bring it about because of his unique incompetence and malevolence, though, ya know, maybe, in accordance with his historically appointed role, his regime might have added some accelerant to the conflagration. But it’s not as if the “inevitable” result operated without a deliberately constructed policy architecture, even if in stages and without perfect foresight, (which only a neo-classical economist would “believe” in anyway).

108

John Quiggin 11.24.12 at 2:05 am

@jch Possibly you’d be less amazed if you read the last para a little more carefully

109

Harold 11.24.12 at 2:31 am

Much as I admire, defer to, and usually agree with John Quiggin, arguments about the size of the fraction of Bush’s blameworthiness for the global financial crisis seems to me an exercise in futility. It was one of a series of spectacular catastrophes that occurred on his watch. To say his administration bore “only a small share of the blame” for any of them makes no sense.

110

Lee A. Arnold 11.24.12 at 3:35 am

GiT #104 — Thanks for that, it suddenly made me visualize a picture of “intergenerational transfer”.

111

Lee A. Arnold 11.24.12 at 4:36 am

If there is one person to blame for the Global Financial Crisis, it is Alan “Bubbles” Greenspan. Bruce Bartlett traced the “starve the beast” theory to testimony by Greenspan in 1978. See:
http://economix.blogs.nytimes.com/2012/11/20/the-new-republican-tax-policy/
Jump past lots of fun stuff, all the way to 1992, the day after Clinton gets into the Oval Office, Greenspan visits to tell him that the budget deficits are unsustainable, and Clinton, believing him (!), tells the world, “The era of big government is over.” Well, it must be so! We suffice instead with the Web 1.0 tech-stock bubble, which bursts into a recession as Dubya takes office, whereupon Greenspan tells Congress they must approve the Bush Tax Cuts because the gov’t shouldn’t hold onto the surpluses programmed by Clinton’s budgets (and never mind that the Social Security Trust Fund is coming due!) Then, looking for his next useful bit of “froth”, to save the Randian view as it might be, he sits by and refuses more regulation while the world pours its “savings glut” into mortgage derivatives, pumping up the U.S. economy from the DEMAND side (by construction spending and household wealth effect. Yes, I know that residential construction gets booked as investment spending, but this is coming from the households.) Which MUST be Randishly okay, because private actors are doing it… He is Mr. Bubbles, baby. There is your culprit. He could be the unbelievable villain in the next James Bond movie.

“Pressures be to our hoary frothers!” (Finnegans Wake)

112

Tim Worstall 11.24.12 at 9:16 am

“Oh go back to the National Review Tim. Anyone honest would not describe China’s state led economic policy as “market liberalism”.”

As Ajay points out, it’s most certainly a lot more market liberal than it was. And in many respects it’s more market liberal than many rich world economies too. It most certainly is a lot more dynamic in my little part of the business world. New companies pop up, new factories get built, vastly faster than they do here for example. And none of those new companies is “state directed”. They’re not even state bank financed. Because you don’t get state bank financing unless you’re a state controlled company (SOE).

Various economists (Tim Harford one I think?) have pointed out what has actually happened in China. Sure, there’s still state planning. But that’s of one part of the economy. The part that hasn’t really grown very much. The other part of it is a very red in tooth and claw capitalism. Without even much law let alone state involvement. And that’s the part that has grown explosively.

Mining Angus Maddison’s figures gives to me an astonishing set of numbers. GDP per capita (yes, these are all PPP and inflation adjusted numbers) in 1978 was $1,000 in China. About what it was in Britain in 1600. In 2008 it was about the same as the UK in 1948. That’s three and a half centuries of economic growth in only 30 years.

We might say that this is just well, Maoism doesn’t work. But given that that growth is concentrated in that much too libertarian (or even anarchic) even for me sector there does seem to be some merit to such libertarian near anarchy as a method of producing economic wealth.

If we want to restrict ourselves to JQ’s seeming description of market liberalism, that finance capital bit. That’s also the bit that has been directing $500 billion a year of FDI into Africa recently. That is the bit that all of the various development theories say we’d like to happen: capital moving to capital poor parts of the world. Turns out that free markets do indeed do what we’d like to be happening. Capital does flow to where it can make excess returns, just as Adam Smith said it would.

This doesn’t mean that I’m an advocate of all markets all the time markets of course.
There really are such things as externalities etc. But to say “look, a 5% fall in GDP from market liberalism!” seems to me incomplete as a description of the past 30 years. For the very same processes have been boosting GDP in other places.

“Tim, it ill behoves you to be this disingenuous. “Rich” and “poor” within the rich world is relative and you know it.”

Sure, that’s how it’s defined. But I don’t have to agree with you that that is a major problem. Someone on $20k a year sees their countryman move from $100k to $200k. Not sure I’m greatly worried about that (and no, I’m not one of those moving to $200k). And if as part of that same process a few hundred million Chinese are moving from $1k a year to $6k a year (roughly how Chinese manufacturing wages have moved since the 90s) then I’m afraid I cannot even raise a crocodile tear. Sounds like a damn good idea to me actually.

And yes, I do indeed think that this increasing in country inequality and this decreasing global inequality is part and parcel of the same process: globalisation. Or, as I would also call it, market liberalism.

113

Peter T 11.24.12 at 10:16 am

JQ’s post and Tim’s reply both leave me uneasy. As descriptions of the actual process at work they are very very thin. Both argue in terms of large aggregates like “overall demand”, “capital”, “finance” as if these had explanatory power in themselves. I’m not saying they are completely unimportant, but they are far from the real story. Tim’s Maoist China, for example, with it’s GDP per capita comparable to the UK in 1600 was a place where, by enormous effort, the population was almost universally literate, effectively governed, and in command of the skills and equipment necessary to operate a modern industrial economy (none of these true of England in 1600). Bit hard to tender for electronics assembly without a power grid, a workforce able to read, the steel necessary to put a roof overhead and so on. Amounts of money do not equate to these things in themselves.

Similarly, the numbers for GDP per capita do not tell the story of what has happened in the US over the last 30 years – one could argue that just as Mao’s China created the underpinnings of wealth without creating much money, so the US has increasingly destroyed the underpinnings of wealth while still creating lots of money. I think we have to get away from arguing as if money could just be assumed to equate with wealth.

114

Bruce Wilder 11.24.12 at 10:27 am

I read JQ’s last paragraph carefully, and what I see is a remarkable erasure of agents and agency.

I would not have any particular problem with what JQ says in his last paragraph or how he says it, as a sweeping and poetic summary. Poets are allowed to make ideas into actors. (Is this metonym, to say, “idea”, to refer to a series of policy choices?) I do not even mind the book plug; he’s allowed — it’s a good book. But, he precedes poesy with plain prose, where he argues exclusion: this cause and not that cause, this person a small share, that person no share. A global phenomenon constitutes evidence for this cause, but not that cause.

For exclusion, you need a bit more logic. Economists do seem to have a remarkable facility for talking past one another, and for failing to confront one another on commensurable grounds.

The point about aggregate demand should not be that it is a special “cause” to be opposed to other causes, but that it is an arithmetical sum. It has to add up to some quantity, some quantitative rate, for recovery to restore full employment, and the problem of explanation must fix on how it comes to add up, or fails to add up. Someone like Casey Mulligan just punts on his obligation to explain a quantity, quantitatively.

I don’t see that the global nature of the financial crisis or the subsequent recession is dispositive with regard to much of anything. The global business cycle is global. The Panic of 1873 was global, too, as was the financial crises of 1929-33, which led to the Great Depression. Ditto for 1973-75.

Money and finance are proximate causes for macro-economic events. And, that in no way excludes structure, or structural problems, from policy consideration or responsibility. Just because you can abstract one from the other in analysis, in theory is not grounds for believing that you can simply detach one from the other, practically, in context, on the ground.

The one thing that international comparisons do highlight is that national income and aggregate demand refer to quantities, to be accounted for, and explained, quantitatively.

But, if the alternative is to excuse the Bush Administration from responsibility and to attribute causality, instead to the qualitative zeitgeist, you can count me out.

115

Jordan 11.24.12 at 11:03 am

Yes, McArdle was right in the sense that you can not blame presidents that just followed the trend which was going on since 1968. Same for Australia and more or less most European nations.
The trend is Surplus circulation is preassured to the breaking point. As Yanis Yaroufakis calls it Surplus Circulation of money and trade from rich to poor and back, weather involving nations or states in federation or people. It is about circulating the wealth trough the economies. If circulation is accumulated in one place, the rich, the economy halters.
In 1968 two things happened that caused this, Acctually first one was used as an excuse for other to happen.
First thing is that US as a major organizer of Surplus Circulation between the nations stoped being exporter of things or Surplus exporter or money importer which was enabled by Marshall plan which was a pure giveaway of US dollars to the world and taking it back trough exports. In 1968 US started importing more then exporting and hence had to switch the Surplus Circulation flow which kept it going. So the US is a major mover in world economy due to the size of it. With the crisis hiting USA in 2008 Surplus Circulation reduced by 30% by Yanis’s calculations; yanisvaroufakis.eu
US also has internal Surplus Circulation within states that is ongoing between surplus and deficit states.
EU crisis is caused by interupting Surplus Circulation between surplus and deficit countries within eurozone when Merkel decided that every country has to take care of their own banks that needed capital infusions which started sovereign bond crisis. The risk of default prevented further Surplus Circulation from surplus countries to deficit countries that is requierd and normal in all stable federations, regions, cities, and people.
Yes, even the regions within every state has Surplus Circulation, even the cities have ongoing Surplus Circulation between surplus and deficit quorters, and hauseholds have ongoing Surplus Circulation between parents and kids.
Yes, Surplus Circulation must be ongoing in normal, friendly times, but are interupted in times of crises when emotions and fear switch to animosity and blaming each other.
In 1968 also the Surplus Circulation between rich and poor in the USA was interupted by stalling the rise of the workers income and switching it to menagement. The leveled income was counteracted with easing up on credit conditions which enabled ever more higher consumer debt which kept Surplus Circulation going up untill 2007 when large US banks who also had Surplus Circulation between them realized the size of trouble, whether real or nominal stoped such weakening of credit conditions.
In Aus there was no such bankers panic, or it was prevented with fiscal stimulus, hence private debt rise is not reversed, hence Surplus Circulation is still ongoing.
High marginal tax rates kept workers income grow with productivity growth, when high marginal taxes were reduced it enbled managers to take the productivity growth for themselves.
High marginal tax rates were reduced when Communist Party of USA and unions were attacked and weakened, by McCarthy process and reformation of Democratic party after Civil Rights Act of ’64.
New entrants to labor market from women and blacks were only contributing to power of management to take more of the productivity growth for themselves.
This construction comes from combining the writings of Yanis Yaroufakis, Robert Reich and Richard Wolf.
It is the Surplus Circulation trends that were the cause of the GFC not so much presidents that just followed it. Reagan and Thacher were just first that realized the ongoing switch in the trend and reinforced it and therefore only speeding it up. Following presidents did not do anything to change the trend, and only in that sense you can blame them.
The key to succesfull ongoing Surplus Circulation between the people is high marginal tax rate or non profit cooperatives or anything that will prevent accumulation of assets into one oversized element of economy.

116

John Quiggin 11.24.12 at 11:07 am

@Bruce You think an explanation in terms of ” the class interests of those who benefit from the finance-dominated form of capitalism” constitutes a “remarkable erasure of agents and agency.” So, if you don’t like class-based explanation, I can give you a list of names instead.

Greenspan, Rubin and Gramm come to mind immediately. Obviously Bush Jr would be somewhere on that list, but even confining attention to the US, I doubt he would make the top 20. Paulson would be on it too, but I’d regard Bush as working for him rather than vice versa

117

Watson Ladd 11.24.12 at 2:08 pm

lupita, captialism is a global phenomenon. There is nothing inherently uncapitalist about Africans: look to Singapore, Malaysia, Uganda, etc. to see the subalterns being very willing to truck and barter. What you propose in the analysis is Stalinist nationalism against Trotskyist internationalism, a politics that will ultimately leave revolution and the overcoming of capitalism off the table. Third Worldism: Just Say No!

As for all the Bush-blaming: Let’s have John Kerry win. Let’s have Glass-Steagall reintroduced. We’ll even reduce the fraud in mortgages. What happens? Well, traditional banks see their holding of mortgages go down, because they either securitize them to get them off the books, or hold. But they hold only more conservatively, while brokers have no such restrictions. When the bubble breaks (and it gets just as high) there is still a huge wealth shock to the homeowners. That’s all you need for a recession to start, as aggregate demand dips.

JQ: My understanding was that it was not until Lehman weekend that the crisis spilled over
into the banking sector. Until then it was believed that most of the victims were hedge funds and other sophisticated investors who could bear it. I could be wrong.

118

Freshly Squeezed Cynic 11.24.12 at 4:19 pm

The thing is, if we disaggregate things, there’s significant regional disparities in the decline of extreme poverty.

So, if we’re taking the good with the bad here, it’s more a case of those countries which were rising before what we’re considering the “period of market liberalism” (1980-present day?) did quite well in reducing poverty (the East Asian, import-substitution countries which then liberalised, which you could make an argument about either way, I guess). Some others which weren’t (China, mostly, possibly India as well) are as well. But some which were doing quite well are doing less well through this period (some of the South American countries, iirc), some with mixed results (Russia had a terrible 90s, but a very good 00s) and the bottom of the heap (your LDCs and HIDCs, especially the sub-Sarahan) do pretty badly.

This is a far more nuanced case in favour of market liberalism than the “rising tide raising all boats” scenario Tim is suggesting happened. The people at the bottom are still desperately poor, and getting more so, relatively speaking (and at the very bottom, in absolute terms as well, iirc), which does not paint quite such a rosy picture. And this is before we get into the methodological arguments about the “$1-a-day” line. (which is now the “$1.25 in 2005 PPP line”, if we’re being exactly correct.)

119

cambridgemac 11.24.12 at 4:27 pm

@39
Re: responding to disconfirming data with ever more convoluted arguments…
Reminds me of telling one of my econ professors (a MacArthur Fellow) in 1981 that I was tired of being taught “Ptolemaic economics” at MIT. The whole universe revolving daily around the human ego’s never-observed, but fervently believed-in Utility Function.
He was amused. But then, he was a labor economist and fond of the French “theorie de la regulation” guys.

120

Bruce Wilder 11.24.12 at 8:48 pm

“You think an explanation in terms of ” the class interests of those who benefit from the finance-dominated form of capitalism” constitutes a “remarkable erasure of agents and agency.” “

Paragraph 4 of the OP does, in the context created by the preceding, paragraph 3, which is where your pinball machine seems to have gone FULL TILT.

The thesis of paragraph 4 has implications for paragraph 1 (of the OP), which I would like to see more fully developed. Perhaps, we can hope to see you return to this?

121

mpowell 11.24.12 at 9:13 pm

I agree with JWM versus JQ on this debate. Following up on some of JQ’s arguments, one of the interesting contribution of MMT to this discussion is in making the point that maybe we should have a theory at to what the desirable level of debt/GDP ratio is. It would certainly matter as to whether ‘hard keynesianism’ is a useful (as opposed to just accurate) policy prescription today. The classical assumption seems to be that the answer is always lower, but I don’t think this is true. I’m just an observer to these debates, so I’m wondering, is anyone attempting to discuss this issue for an amateur audience?

122

rf 11.24.12 at 9:52 pm

“what I see is a remarkable erasure of agents and agency.”

Genuine question, but where is the agency? The bits I’ve read (and I’m obviously no expert so looking for clarification) appears to argue (let’s say in the case of Ireland) that there were serious regulatory and policy failures (as a result of specific domestic decisions taken) but even without these failures we probably wouldn’t have been spared the crisis. Thomas Oatley, from a couple of things I’ve found online – one with Kindred Winecoff who would have something interesting to say here – argues (I think) that the problem is systemic, and global and that the primary cause is capital inflows encouraged by current account deficits. Which, I guess, is the result of specific policies, but not to a significant extent?
Of course I’m simplifying and misremembering and not grasping the nuance of their arguments,* but I don’t see where the blame can fall for this crisis. Certainly not along partisan lines in the US.

*All of that might not make sense so if someone thinks they can do a better job expressing the point I’m trying to make I won’t be offended.

(or..If financial crises are primarily caused by inflows of capital inflating asset bubbles etc as a result of imbalances in the global economy, then this doesn’t seem to have much to do with either class interests or market ideology, or does it? Once again I’m looking for clarification so apologies if this doesn’t make sense is unsophisticated etc)

123

John Quiggin 11.24.12 at 10:12 pm

“Which, I guess, is the result of specific policies, but not to a significant extent?”

The set of policies collectively called “financial deregulation” produced, over several decades, a situation where the volume of international financial flows is hundreds of times greater than the flows of goods, services and long-term capital investment and where gross holdings of financial assets are measured in the hundreds of trillions of dollars. In these circumstances, financial crises can be expected to cause massive and sustained economic disruption, as they have done.

Obviously, individual agents were involved in this process, but it makes much more sense to me to view it in ideological and class terms. As I said in the OP, there’s plenty of blame to go around for all this – in political terms, the harder task would be to identify anyone who wasn’t (at least passively) complicit in the process.

124

Metatone 11.24.12 at 11:24 pm

It’s worth noting that anyone who has spent time in China knows Tim Harford is talking through his hat – and there are plenty of people who have said so.

125

DrJim 11.24.12 at 11:46 pm

@118 “never-observed, but fervently believed-in Utility Function” Guess you didn’t take any PhD level Micro, did you? (or, as is the habit of many Macro guys, you slept through it …) If one assumes little more than transitive preferences utlity functions necessarily exist. Whether you like it or not you behave as if you have one.

126

Salient 11.25.12 at 12:38 am

If one assumes little more than transitive preferences utlity functions necessarily exist.

…you’ll probably correct me on this and I’ll be appreciative, but so far as I understand, the individual util distribution that necessarily exists has a strong stochastic component over time, and you have to assume that’s negligible to get signal >> noise at the micro level. At least a few of the macro theorems (most of which I’m not terribly conversant with) carefully characterize the circumstances under which this noise evens out in the aggregate, right? It’s at least arguable (I assume) that you can get signal >> noise over long time-horizons, and signal > noise over short time-horizons if you work in some kind of probabilistic environment, but that’s not “little more than transitive preferences.” Isn’t naively treating the util function as smooth, or even as continuous over time, the kind of thing you would not want your graduate students to do? (unfortunately I’m coming at this from a sort of ignorant pure-math perspective, and I’m not sure how far PhD level Micro delves into this… corrections/refutations welcomed)

127

James Wimberley 11.25.12 at 12:42 am

#125: we have no reason to believe that people can order enormous numbers of baskets of goods and services outside their daily experience. All we observe is that people make choices in the environments they are familiar with. And of course they often make make minor mistakes, thinking the bigger packet is cheaper. When marketing experts can really go to town, as with mobile phone service pricing, it´s extremely difficult to avoid inefficient choices. The big decisions are taken on the basis of comparing projects of locked-in complementary goods. The comprehensive utility function is a ghost in the machine.

128

Eli Rabett 11.25.12 at 1:26 am

It was not just the tax cuts, but the tax cuts, the two wars on the credit card, unfunded Medicare Part D (talk about goodies for the voters) AND easy credit secured by overvalued assets in a market where the regulators were in on the take;

Thank you Mr. Bush.

129

bob mcmanus 11.25.12 at 1:35 am

Obviously, individual agents were involved in this process, but it makes much more sense to me to view it in ideological and class terms. As I said in the OP, there’s plenty of blame to go around for all this – in political terms, the harder task would be to identify anyone who wasn’t (at least passively) complicit in the process.

When the system makes everybody a bad guy, it no longer makes any sense to try to fix ten per cent of it and expect the reforms to survive and prevail.

But I don’t believe we are all complicit and evil. It is the system that makes us see them that way. And there is a switch that can be flipped, inside and outside each of us, when we realize it all must go. Its only money.

130

MPAVictoria 11.25.12 at 2:11 am

“When marketing experts can really go to town, as with mobile phone service pricing, it´s extremely difficult to avoid inefficient choices. “

Having recently looked into updating my mobile phone I must say that this seems accurate to me. It is pretty much impossible to tell if you are getting a good deal or not.

131

William Timberman 11.25.12 at 2:52 am

And there is a switch that can be flipped, inside and outside each of us, when we realize it all must go. Its only money.

I clicked on a link today that I thought would take me to a report on the current status of cloud computing, which has been promised for ages, but seems only now to be coming into its own as the presumptive paradigm shifter of the century. (How long ago was it — 10 or 15 years — that Larry Ellison was going on ad nauseam about his thin clients and Gage’s the network is the computer?)

Anyway, the link took me instead to a Motley Fool video touting Google stock. All I can say is that looks like it’ll be a long, long time before it’s only money can compete with listen to me and get rich.

132

ezra abrams 11.25.12 at 4:17 am

why should theorys from one time be good in another ? Do things really stay the same ?

I have felt for some time that software really constitutes a change in human society similar in magnitude to the industrial revolution, but happening faster
if we follow, say, hobsbawm, the IR caused great suffering and privation

Our population is aging, and medicine has not yet benefited from mechanizatin (I think it will soon – the idea that a100K a year plus physician should do a routine physical will soon be a thing of the past, software is getting better at asking questions)

why do economists never talk about raw naked political power, eg the power of the “1%” (more properly the 0.01%) to buy politicians and bend laws to benefit the weatlhy ?
This is real – surely, the spectacle of the democrats failing to overtunr the carrried interest exemption is empirical proof of this

why do economists (wiht the recent, single column exception of PK) never talk about uncertainty, and how the uncertainty that has always been part of blue collar life has recently migrated upwards
surely, the uncertainty associated with the huge burdens of education, healthcare and retirement and parental care have dramaticaly altered the economic thought of the middle and upper middle classes

133

john c. halasz 11.25.12 at 4:41 am

@117:

“I could be wrong.”- Bingo! The financial crisis in the U.S. began in August 2007; check out the TED spread for a quick reference check. And then there was Meredith Whitney’s announcement of Citigroup’s impending losses, which earned her death threats in Oct., but started to be officially announced in Nov., followed on by Hank Paulson’s failed MLEC proposal. And, oh, the Bear Stearns failure in March 2008.

Now if we could go back and obtain fact corrections that have accompanied all your other adventitious opinionating here, then that might provide some serious entertainment for the exceedingly patient amongst the comment crew here.

JQ @ 108:

Really? Such a mite bit of CYA is expected to require the work of deep reading?

Now I realize that there are no irony tags on the internet and that some broad irony was intended by the headline announcing your agreement with Megan McArdle. (Otherwise, taken literally, the statement of agreement with her would be equivalent to saying that it would be a good idea to put a bullet in your head). And, of course, I read the off-off-Broadway tryouts of your Zombie Econ. book, which I found obvious and underwhelming. But, quite frankly, no explanation is offered not just of the persistence of “zombie econ” ideas and the failure of better policy knowledge to take hold in the midst of the crisis, but of the origins of such ideas, which erased the possibility of developing and implementing better policy knowledge. Nor is there any acknowledgement of the broader failure of the economics profession, and its accumulated “human capital”, (which term is already a broad hint of how things have gone so wrong), to effectively foresee the broad outlines of the coming economic crisis, which, pardon me and while acknowledging that I live in the bubble of the U.S. data drip and am not familiar with the profiles of other countries, let alone the entire global economy, was fairly obviously impending to any alert observer. Which is the sort of thing that leads one to suspect that economics is far more akin to Babylonian astrology than anything like an authentic social science. (Which latter, ya know, might require addressing the epistemic issues of the intertwinement of structure and agency and the power-relations that it generates).

So all you got is the idea of self-replicating structure and utterly detached ideas/ideology, together with the muddled Tolstoyan notion that power-holders are most of all the slaves of history, because they are captive to their power. And a plaint that capitalism has adventitiously malfunctioned because it has become overly financialized, without any inquiry into how and why that financialization occurred, in response to the restructuring of economic rents via corporate globalization. (But, of course, the whole thrust of neo-classical economics is to obscure the key issue of economic rents). And thus a diffusion of responsibility and any clarifying effects its assignments might have.

In other words, a complete absence of political economy, in order to preserve the notional autonomy of conventional, disciplinary economic “explanation”. Though, yeah, it’s just a blog post, it’s still a piece of fairly stolid thinking.

Though some of us might have better, more useful things to do, than endlessly place subaltern comments on blog post threads. Ya know, like trying to organize Black Friday anti-Walmart demonstrations.

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ponce 11.25.12 at 5:33 am

@123

“a situation where the volume of international financial flows is hundreds of times greater than the flows of goods”

This seems like a gross exageration, unless you are counting the pretend money the Wall Street morons were trading in derivitives.

The countries of the world export and import about $18 trillion worth of goods every year.

I doubt the entire net worth of the globe exceeds $200 trillion, and most of that is unexportable real estate.

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john c. halasz 11.25.12 at 6:27 am

@134:

In 2010, the “Economist” magazine estimated total global financial assets at $210 tn. Total global GDP might have be $70 tn. That’s a wealth/income or stock/flow comparison. But it’s at least a 3/1 ratio. However, the total notional reference value of financial derivatives outstanding is now over $700 trillion, with an estimated market “value” of $19 tn, so less than 10% of assets by market value, but over 3 times the “value” of the financial assets referenced. And no, RE is not per se a productive asset claim, but more collateral for loans.

And, oh, gross financial flows are vastly greater than net flows, to such an extent that when I have referenced the net figures, the rather puzzling response has come that they are only a tiny percentage of the gross, as if that would abolish the issue rather than amount to a counsel of resignation, since who really knows what’s in those gross figures, overnight repos, computerized trades in stocks and futures, etc.?

136

Peter T 11.25.12 at 6:31 am

Ponce @134

“the pretend money the Wall Street morons were trading in derivitives.” The whole point of this kind of trading is to swap pretend money for real wealth. So, yeah, it has its effects.

137

Harold 11.25.12 at 7:22 am

I understand that Canada and Germany did not have as much of a bubble because they had regulations in place and did not have a chorus of celebrated economists and bankers telling them that everything would be just fine without them.

138

Tim Worstall 11.25.12 at 2:09 pm

“I understand that Canada and Germany did not have as much of a bubble”

Germany spent more sorting out its bust banks than the UK did. So I’m not sure you’re quite right there.

139

Watson Ladd 11.25.12 at 2:57 pm

@john c. halasz: I’m looking at the TED spread graph right now. It has three or four spikes in 2007, each of which is reduced to normal by Federal Reserve action. As late as summer 2008 the feeling was that the crisis was contained. What caused the spillover was a wealth shock, the ultimate root cause, that dropped consumer spending through wealth effects, and thus made once safe loans and investments not safe.

If you want to blame someone, blame Obama and his failure to align fiscal policy with monetary policy. Or blame Clinton, Regan, and Bush for steadily increasing household debt as wages never kept up with incomes, creating a demand for credit that was supplied. But don’t blame it on the banks, who were middlemen between those with money seeking a safe haven and those who wanted money to spend.

140

Cranky Observer 11.25.12 at 3:21 pm

= = = DrJim @ 11:46: “If one assumes little more than transitive preferences utlity functions necessarily exist. Whether you like it or not you behave as if you have one.” = = =

Given that I observe situations where human’s preferences are clearly not transitive on a daily basis (a group of friends attempting to decide where to go for dinner is a good example) I am not really inclined to grant that assumption [1].

Cranky

[1] I also observe that humans – whose intuitive behavior is admittedly often fooled – are incredibly sensitive to “money pump” situations and will either avoid them or ostracize those to attempt to create them, so the “money pump” argument against intransitive preferences doesn’t work in practice.

141

lupita 11.25.12 at 4:17 pm

In the 80s we had the Latin American sovereign debt crisis. In the 90s, Japan, Sweden, and Finland had banking crises and Latin America had a second bout of financial meltdowns followed by the Asian crisis and Russia. The 00s brought us banking crises in the US and UK and meltdowns in Iceland, Ireland, and Greece. The 10s have been characterized by the European sovereign debt crisis. Trying to determine the root cause of any one of these particular crises is like trying to determine which particular spark set one’s house on fire when the whole block is burning.

It really does not matter who or what triggered each particular crisis but that these crises have been exploding all over the planet for decades and that they are traveling from periphery to core. At this point, the only pertinent question is, is another world possible?

However, if anyone insists on pinpointing the location from which emanates the policies, ideology, and enforcement of a predatory, unjust, and ruinous global financial system, I will be blunt and just blurt it out: it is the US. Obviously.

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ponce 11.25.12 at 6:17 pm

They are only crises because they mean people will stop the behavior that caused them in the first place.

Like a heroin addict being forced to go cold turkey experiences a crisis.

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John Quiggin 11.25.12 at 9:34 pm

@Bob McManus To clarify, when “in political terms, the harder task would be to identify anyone who wasn’t (at least passively) complicit in the process.” I didn’t mean “we are all complicit and evil”, but that the entire political class in most countries either actively promoted financial deregulation, or passively accepted it. At least in Australia, and I think in most other countries the mass of the population either opposed these policies or accepted them grudgingly.

@jch Your comments are as enlightening as ever.

144

reason 11.26.12 at 8:25 am

Tim Worstall @138
I live in Germany and can say on the basis of direct experience
1. Germany had its bubble at reunification time and its bust a few years post 2001. It didn’t have a bubble leading up to the GFC
2. German banks needed bailing out because of foreign business – encouraged by the Euro – which of course the UK banks were not so effected by.

So point 1 doesn’t have much to do with point 2.

145

reason 11.26.12 at 8:27 am

Jordon @115
Yes that is a good way of looking at it.

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reason 11.26.12 at 8:28 am

Tim Worstall @138
P.S. I’ll concede some banks had problems because of bad investments made post-unification in East Germany. But that boom was some time ago.

147

Katherine 11.26.12 at 10:49 am

I don’t have to agree with you that that is a major problem. Someone on $20k a year sees their countryman move from $100k to $200k. Not sure I’m greatly worried about that (and no, I’m not one of those moving to $200k). And if as part of that same process a few hundred million Chinese are moving from $1k a year to $6k a year (roughly how Chinese manufacturing wages have moved since the 90s) then I’m afraid I cannot even raise a crocodile tear.

Tim, you are assuming causation – that a few million Chinese people moving from $1k a year to $6k a year necessarily required some people going from $100k to $200k. They might be “part of the same process”, as you say, but that does not mean one relies on another.

You explicitly don’t care about equality, but – and here’s the important thing – most people do. Justice and propostionality and fairness do matter to people, therefore they matter. You might not care about the people going from $100k to $200k, but can you perhaps see that it’s a perfectly reasonable and normal reaction for the person on $20k (or $10k, because a large number of actually poor people in the “rich” world do exist) to be a bit miffed that those people have got twice as much for no extra effort?

And I daresay that the millions of Chinese people now on $6k might wonder how many more of them might have got to there, but for the people at the top who apparently are now not 100 times more productive and valuable, but 200 times more productive and valuable than the schmucks right at the bottom, even though that’s unlikely to actually be true, unless they became super heroes in that time, which they clearly didn’t.

Basic human psychology baulks at basic unfairness and injustice. You don’t, but your mistake is assuming that your feelings are the objective measure.

148

engels 11.26.12 at 12:01 pm

Justice and propostionality and fairness do matter to people, therefore they matter.

Hmm…

Rihanna and Katy Perry and Enrique Iglesies do matter to people, therefore they matter

Tyler Oakley and districtlines T-shirts and Justin Bieber do matter to people, therefore they matter.

Zayn Malik and Nicole Scherzinger and Tulisa Contostavlos do matter to people, therefore they matter.

I think there might something wrong with the structure of this argument….

149

engels 11.26.12 at 12:31 pm

…although I agree with the thrust of the point. (And that Worstall is making an ass of himself as usual.)

150

Jeffrey Davis 11.26.12 at 3:45 pm

As other people have mentioned, the blame doesn’t devolve to GWB as much as it devolves to Reagan/Thatcher policies.

The housing bubble was everywhere. There was financial Tom Foolery, enabled by Reagan/Thatcher de-regulation, enough for 3 global recessions. The countries that have responded better have been the ones that responded with something other than Reagan/Thatcher stock responses.

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Katherine 11.26.12 at 3:49 pm

Justice and propostionality and fairness do matter to people, therefore they matter.

Hmm…

Rihanna and Katy Perry and Enrique Iglesies do matter to people, therefore they matter

Rihanna and Katy Perry and Enrique Iglesies do matter to people, therefore they matter.

Tyler Oakley and districtlines T-shirts and Justin Bieber do matter to people, therefore they matter.

Zayn Malik and Nicole Scherzinger and Tulisa Contostavlos do matter to people, therefore they matter.

I think there might something wrong with the structure of this argument….

Not that I’m particularly keen to get into a semantics argument, but I was talking about concepts of justice and you have listed celebrities. I’m just going to say apples-and-oranges and leave it at that.

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Katherine 11.26.12 at 3:50 pm

Itallics tag fail. Oops.

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Bruce Wilder 11.26.12 at 6:57 pm

lupita @ 141

The French Revolution was triggered by the bankruptcy of the ancien regime, an event attributable to the ancien regime’s inability or unwillingness to adopt and maintain sensible fiscal and monetary policies and institutions. It was all there — corruption, reactionary rentiers, “shared sacrifice”, gold bugs, crackpot schemes, a consensus of enlightened opinion among the political class in favor of market liberalism, austerity. The monarch and much of the aristocracy went to the guillotine amid much talk of another world, but the Revolution was no more willing or able to solve the problem of money and finance. Napoleon rose, because his looting supplied hard currency to replace the assignats successive governments could not seem to administer, and he became Emperor, in part because he was willing to allow the clique of Swiss bankers in Paris to create a national Bank of France, an obvious step, which had been resisted since John Law and Mississippi Bubble.

We’re not going to create “another world” without money. The left really should stop with the millenial nonsense, and get serious about mastering money and finance. It is too important to leave it to right-wing hacks and thieves, propagating the myth of market liberalism.

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lupita 11.26.12 at 11:41 pm

The left really should stop with the millenial nonsense, and get serious about mastering money and finance.

Indeed. However, I would like to point out some recent instances in which the left, thanks to its keen understanding of the global dynamics of power and money, has been able to deal severe blows to the ancien regime.

1. Brazil and others have broken the patents for AIDS drugs and produce much cheaper, generic versions. The right, despite blacklists and threats, was not able to enforce the sanctity of profits for its pharmaceuticals.

2. 100 countries banded together in clear understanding that WTO rules skew the benefits of trade and globalisation towards the old core and, thanks to studies detailing how peasants in poor countries are robbed of their livelihood due to agricultural subsidies in the US and Europe, WTO negotiations has been paralyzed for the past ten years and it has even ruled against the US .

3. In Bolivia, people understood that being charged by Bechtel for collecting their own rainwater was not a good deal, financially, and ran them out of town.

4. With clear understanding of how the IMF operates, countries have hurried to pay off their debts and vowed to never take another loan from them. Except in Europe, the IMF has become as much a zombie institution as the WTO.

5. Distinctly non-neoliberal policies, such as export restrictions and taxing of speculative foreign capitals, have been on the rise since the 2008 crisis, restricting the center’s ability to outsource the effects of its lack of understanding of finance and money to the poorer regions of the world.

Compared to Lagarde, Paulson, and Rajoy, I think the left is holding its groud quite nicely.

155

faustusnotes 11.27.12 at 4:40 am

I think London and the British banks deserve a lot more blame than they get. Blair, especially. He’s a very evil man who has managed to escape blame while the world focuses on Bush.

Tim Worstall: comparing the income of a nation in 1978 to a nation in 1600 is ridiculous. And how much of the post-war growth in developing nations is due to market liberalism, rather than a combination of retreating colonialism and corresponding growth in free markets, needs to be considered. Furthermore, much of China’s post-1978 growth came on the back of a whole bunch of industrialization and stabilization projects that occurred before then, and I think might be overlooked by your average market-liberal analysis. And much of post-1978 Chinese economics was not market liberal, it’s only post-2000 which could be described that way, and as you observe only in some sectors. China is also now being forced away from the rampant anarchist capitalism you describe, with popular anger at corruption and increasing inequality. China is even introducing social health insurance, without any fanfare or vitriol.

Your description of post-war economic growth in the developing world, and of China’s remarkable changes, is simplistic at best.

156

ragweed 11.27.12 at 7:26 pm

@JQA “@Eddie Glass-Steagall was repealed in 1999, with the active support of the Clinton Administration, most notably Robert Rubin.”

It should also be noted that one reason the US repealed Glass-Steagall was that it was most likely prohibited by NAFTA, which, like nearly every trade agreement the US has negotiated since, included language that was interpreted to prevented signatories from restricting the size and types of products that financial corporations could participate in (there are already threats from Canadian investors to sue the US over the Volker rule in Dodd-Frank due to NAFTA). Which, of course, was negotiated by Bush I and signed by Clinton.

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Tangurena 11.28.12 at 1:24 am

Maybe it is too much to ask, but the mismatch when classical macroeconomics and business cycle theory meet the real world is something that Jane Jacobs wrote about years ago, and perhaps you might like to consider.

A very simple introduction, that you may take or leave, as you will, is one page at Zompist.

Jacobs arrives at this conclusion by considering the stagflation of the 1970s– simultaneous high unemployment and high inflation, something that was not supposed to be possible under either left-wing (Keynesian) or right-wing (monetarist) economics. They were supposed to trade off. She points out that this condition– high prices and not enough work– is normal for backward regions; Western economists mistook the fitful but constant economic boom from Smith’s time on as a permanent condition.

Thinking in terms of national economies smears over the economic facts. Once we take off these lenses, we can see that the world consists not of developed and poor nations, but of dynamic and poor regions. One of the great advantages of this point of view, in fact, is that we become aware of the backward regions in the First World, and realize that they follow the same dynamics as the Third World. These days they may be comfortable enough due to transfer payments from richer regions, but they are economically passive nonetheless.

Source

Jacobs wrote about “transactions of decline” in her later books, and the financial malaise of the US is that we’ve switched from being a productive nation to one that coddles the financial classes, has an excessive military and is quickly becoming a colony. Before 1776, we exported raw materials and imported finished goods because the British laws forced things that way at gunpoint. Today, we also export raw materials and import finished goods. In between, we became a powerful nation by importing raw materials and exporting finished goods. America is finished as a “great” nation because we’re too busy destroying the wealth that our parents and grandparents accumulated. We’re going to turn into a northern Mexico, where a tiny aristocracy controls the millions of plebes and proles.

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Lord 11.28.12 at 4:50 pm

There was bad with Glass Steagall such as the prohibition against interstate banking as well as good such as the commercial investment banking divide, but it is mistaken to blame the ending of this for the financial crisis as they were still separate at the time, and the investment banks, other than Lehman (and Bear to an extent) were saved despite not being insured. One could even blame the Glass Steagall commercial investment bank division for creating the illusion regulation of investment banks was unnecessary and they would be allowed to fail but weren’t. While the repeal of Glass Steagall can be seen as a extension of the deregulatory movement, it is not one that had any significant effect.

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Bruce Wilder 11.28.12 at 6:20 pm

Are you sure that the prohibition on interstate banking was a “bad”? I’m not.

The repeal of Glass-Steagall legalized the then already extant Citigroup amalgamation, and other so-called Universal Banks — holding companies, which could strategically control and coordinate all kinds of financial institutions, from commercial banks to insurance companies.

The housing bubble was the product of a reflexive loop between progressively relaxed mortgage underwriting standards at banks doing mortgage lending and the underwriting of mortgage-backed securities, where the banks were re-packaging and laying off their mortgages.

It is a very complicated story, which goes well beyond my ability to relate it in a comment. But, at the center is a mad rush by several relatively small institutions — former savings and loans, mostly — to find economic rents in gargantuan size and political power, once neoliberal policy had removed the barriers, which had protected much smaller, diverse institutions. Glass-Steagall and other regulations, earlier repealed, had maintained competition between smaller and diverse institutions, by giving them economic rents tied to an array of barriers. This contributed to the political independence of both politicians and various other institutions, like Fannie Mae and Freddie Mac, by allowing these actors to play one off against another.

The consolidations of the giant mortgage aggregators would corrupt the whole system, undermining the integrity of mortgage underwriting, securities underwriting, appraisals, etc.

Mainstream economics is deeply ignorant of the functions of hierarchy in the economy — “market economy” is a lie — and it is in the hierarchical functions, the control functions, where we see the breakdown in integrity take place. The shortcut way of labeling these failures, as failures of (government) regulation, are correct as far as they go, but it doesn’t help, when they leave the neoliberal conceits intact.

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