The Gift that Keeps on Taking

Ever since the subprime market collapsed in America things haven’t been looking so good for global markets.

Our current situation has come to be known as the GFC (Global Financial Crisis) which has to be a euphemism if ever I heard one.  What we are seeing is not a ‘crisis’.  Crisis is too specific a word: a plane crash is a crisis; a terrorist attack is a crisis.  A global collapse of capitalism is NOT a crisis…it’s a disaster of incalculable proportions.

So let’s have some linguistic clarity and call a spade a spade.  We are in a global depression.

I’m not an economist and I don’t pretend to understand the way these things work or unfold…but there’s two things floating around in cyberspace that have caught my attention and I want to point people towards.

Despite my lack of economic knowledge, I have been making a feeble attempt to try and at least understand what it was that caused the financial crash.

Veritable mountains have been written about this – including Kevin Rudd’s much discussed article in The Monthly – and yet there is no single, unified understanding of where and why it all went wrong.  We can accurately predict to millioneths of a second what happened after the Big Bang.  We can explore the deepest trenches of our earth’s great oceans.  We can map the synaptic pathways of the human brain (with some accuracy).  We can unlock the humane genome.  But we cannot make sense out of the intricacies of global capitalism.

That’s why my eyebrows almost rose up off my forehead when I read Paul Krugman’s recent opinion piece in the NY Times.

The more one looks into the origins of the current disaster, the clearer it becomes that the key wrong turn — the turn that made crisis inevitable — took place in the early 1980s, during the Reagan years.

Attacks on Reaganomics usually focus on rising inequality and fiscal irresponsibility. Indeed, Reagan ushered in an era in which a small minority grew vastly rich, while working families saw only meager gains. He also broke with longstanding rules of fiscal prudence.

On the latter point: traditionally, the U.S. government ran significant budget deficits only in times of war or economic emergency. Federal debt as a percentage of G.D.P. fell steadily from the end of World War II until 1980. But indebtedness began rising under Reagan; it fell again in the Clinton years, but resumed its rise under the Bush administration, leaving us ill prepared for the emergency now upon us.

The increase in public debt was, however, dwarfed by the rise in private debt, made possible by financial deregulation.

The change in America’s financial rules was Reagan’s biggest legacy.  And it’s the gift that keeps on taking. [my bold]

Perhaps it’s not rocket science – but it helped clear up my thinking a lot.  This global collapse was Reagan’s biggest legacy.  And it is a gift that keeps on taking.

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4 Comments

Filed under Politics

4 responses to “The Gift that Keeps on Taking

  1. penguinseesaw

    DO. NOT. SEEK. THE. TREASURE.

  2. penguinseesaw

    agree, IN PART, but disagree with the glib oversimplification. To blame this on “deregulation” is to vastly oversimplify the issue in a number of ways.

    [1] blaming “deregulation” is too vague to be meaningful – less regulation is not bad if you get *better* regulation. Even since Regan, the US have had a confusing collection of overlapping departments tasked with scrutinising different corners of the financial sector – the problem is that they were not effective. Even now I would argue that the US may have too much regulation in some areas, to the point where it creates confusion over what is regulated and who is doing the regulation.

    [2] Regulation – in the broad sense of the word, by which I ‘governmental oversight’ – can be part of the problem. It is also worth pointing out that the ‘explosion’ in subprime mortgage lending was fanned by initiatives passed by congress during the Clinton administration, the purpose of which was to facilitate home ownership amongst socioeconomic groups which couldn’t afford their own house. The perception, even then, was that house ownership was a compulsive form of saving and an asset class that could only have capital growth. Now, post-GFC, we love to talk about how absurd it is that banker$ believed that house prices could only go up, but politicians made the same err. So, unfortunately, this noble, socially-minded plan (which seemed like a great idea at the time) became the cornerstone for a future banking crisis. In a loose way of speaking, it was government ‘regulation’ that was part of the problem.

    [3] It’s fine to *blame* Reaganomics for rising inequality and fiscal irresponsibility – and I do think we can largely agree with the diagnosis – but if you cease your criticism there then that’s empty tub thumping. Need to take the next step and examine the theoretical basis for Reaganomics. You blame Reaganomics for creating a situation where private debt skyrocketed, but can you mount a convincing argument against the theoretical idea that private individuals should always be better at ‘regulating’ (ie managing) their own assets/debts than the government can manage the vast, complex market of individuals.

    [4] “The gift that keeps on taking” is rather overblown. Implies that we’ve had nothing but decline and decay since Reagan. However, should point out that the track record for the global economy since Reagan is more complicated and included, up until recently, long, sustained periods of growth in per capita incomes amongst poorer parts of the world. What that means is, in part, the US consumer (fuelled, in part, by private debt), pulled a number of smaller, export-driven, mostly Asian economies out of poverty. (OK, so in some cases they went from poverty to less-poverty – but even that’s better than nothing). Even after the crisis subsides, world per capita incomes will be far above where they were pre-Reagan, and although I can’t show what would have happened without his administration, I suspect that the consumption binge he started in America has had positive effects in other parts of the world.

    • These are fair points –

      Deregulation is a wide, general term and I think it is useful, as you suggest, to be exact about what we mean by it. In terms of the Reagan era I think it’s fair to say that the “deregulation” which we are talking about is, as Krugman points out in his opinion piece, the freeing up of financial markets such that advanced fiscal instruments were created and aggressive banking sectors made possible.

      “The perception, even then, was that house ownership was a compulsive form of saving and an asset class that could only have capital growth. Now, post-GFC, we love to talk about how absurd it is that banker$ believed that house prices could only go up, but politicians made the same error.”

      There can be no doubt (and on this agree with you entirely) that there is a significant political cause behind the subprime balloon. The dream of “home ownership”, which has been a feature of every successive government’s policy since WW2, has been a self-devouring monster. No politician could ever retract that inferred promise without crucifying himself/herself in the eyes of the public. Even Obama, with all of his oratorical wizardry, would not be able to throw that curve ball; he is having enough trouble with climate change and healthcare (see this week’s Economist). So the fact remains that, yes, consumers were driving the demand for cheap housing (though greedy investment banks also have to take some of the blame).

      “the theoretical idea that private individuals should always be better at ‘regulating’ (ie managing) their own assets/debts than the government”

      Now this is getting interesting: the assumption has been (basically since the 80s) that the invisible hand of the market will take care of necessary adjustments. But, without wanting to drag the discussion in a different direction, it seems clear that Marx was more perceptive on individual consumption than Hayek or Freedman. The fact is that consumers, in the West at least, are incapable of managing their debt levels. They are, for want of a better metaphor, pathological about accruing debt as a means to increasing capital base. Which, as you say, is all well and good if property prices continue their inexorable rise. But the minute the market takes a fall… we have another South-Seas China Bubble scenario (long bow to draw I know but it led to the creation of modern, limited-liability corporations).

      I am not going to pretend that I know better than top level economists and, sure, the consumption engine of the USA has pulled some developing countries up by their bootstraps. All I know is that, with climate change accelerating at a million miles an hour, and polar bears drowning in hundreds this summer, there needs to be another approach and it needs to arrive FAST.

      One of my friends made a similar point to me recently when he said:

      “We should not want to “stimulate” an economy based on debt and overconsumption back into existence. We should want to restructure it along sustainable lines.”

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