Who Can We Blame For The Great Recession?
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This year marks the tenth anniversary of the “Great Recession” and the media are trying to determine if we have learned anything from it. The Queen visited the London School of Economics after the “Great Recession” to ask her chief economists why they hadn’t seen this disaster coming. They told her they would get back to her with an answer. Later, they wrote her a letter saying that the best economic theory asserts that recessions are random events and they had successfully predicted that no one can predict recessions.
Still, George Packer, a staff writer at the New Yorker magazine since 2003, thinks he knows more than the LSE academics. He wrote the following in the August 27 print issue:
"It was caused by reckless lending practices, Wall
Street greed, outright fraud, lax government
oversight in the George W. Bush years, and
deregulation of the financial sector in the Bill
Clinton years. The deepest source, going back decades, was rising inequality. In good times and bad, no matter which party held power, the squeezed middle class sank ever further into debt...
"In February, 2009, with the economy losing seven hundred thousand jobs a month, Congress passed a stimulus bill—a nearly trillion-dollar package of tax cuts, aid to states, and infrastructure spending, considered essential by economists of every persuasion—with the support of just three Republican senators and not a single Republican member of the House."
Typically, journalists will defer to an expert on matters in which they aren’t trained, which is most subjects. But Packer didn’t bother to ask an economist as the Queen did. Had he done so, he would have received the same answer from mainstream economists – recessions are random events and can’t be predicted. If economists knew the causes of recessions they could predict them when they see the causes present.
So where did Packer get his “causes” for the latest recession? In the classic movie Casablanca, the corrupt and lazy policeman Renault is “shocked” to find gambling going on at Rick’s place and orders the others to round up the “usual suspects.” That’s what Packer does. People have blamed greedy businessmen and bankers for crises for centuries. Since the rise of socialism they added capitalism and the politicians who support it. The only new suspect in the socialist line up is inequality, even though inequality has varied little since 1900 and is near its record low since then.
Had Packer consulted the University of Chicago Booth School of Business, he wouldn’t have received much help. Keep in mind that mainstream economists think recessions are random events. After the storm subsides, they can identify likely contributors for the latest disaster, but those differ with each recession. Recently Chicago Booth queried experts for the top contributing factors of the latest recession. The top answer was flawed regulations, followed by underestimating risk and mortgage fraud.
The “flawed regulations” excuse assumes that bitter bureaucrats who write the regulations are wiser than the actual bankers and ignores the fact that banking is one of the most regulated industries. One analyst described the recent recession as the perfect storm of regulations so massive no one group could understand them all and many of them working against other regulations.
Blaming “underestimated risk” is good Monday morning quarterbacking. Everyone has 20/20 hindsight, or 50/50 as quarterback Cam Newton said. The same economists don’t explain why banks that took similar risks didn’t fail or why what seems risky now didn’t seem so risky in 2007. As for fraud, the amount was negligible and is always there; why did it contribute to a recession this time? Sadly, the correct answer to what caused the Great Recession– “Loose monetary policy” – came in next to last among Chicago Booth’s experts.
Perspective is vital. A magnifying glass can make a lady bug look terrifying. Let’s pull back and put the latest recession in a broader context. There have been 47 recessions/depressions since the birth of the nation. Before the Great Depression economists called crises “depressions” and since then they are “recessions.” They’re the same thing; economists thought “recession” was less scary.
Recessions before the Great Depression were mild compared to it. It took the Federal Reserve and the US government working together trying to “rescue” us to plunge the country into history’s worst economic disaster. Journalists like Packer have convinced people that the Great Recession of 2008 was second only to the Great Depression, but if we combine the recessions of 1981 and 1982, separated only by a technicality and six months, that recession would have been worse. The Fed did not reduce interest rates after that recession because it was still battling the inflation it has caused in the 1970s, yet the economy bounced back and recovery lasted almost a decade.
I want to drive home the fact that the three worst recessions in our history assaulted us after the creation of the Federal Reserve in 1913.
The best explanation of the causes of recessions, because it enjoys the greatest empirical support, is the Austrian business-cycle theory, or ABCT. Ludwig von Mises and Friedrich Hayek are most famous for refining and expounding it, but the English economists of the Manchester school were the first to write about it. They discovered that expansions of the money supply through low interest rates motivated businesses to borrow and invest at a rapid rate. That launches an unsustainable boom because businesses are trying to deploy more capital goods than exist. Banks raise rates to rein in galloping inflation and the boom turns to dust.
Banks don’t control interest rates today as they did in the past. That’s the Federal Reserve’s job. The Fed generally reduces interest rates or expands the money supply through “quantitative easing,” or buying bonds from banks, in order to force an economy in the ditch to climb out. The recovery from the Great Recession remained on its feet for so long because the Fed’s policy of paying interest on reserves at banks soaked up much of the new money it created out of thin air. Also, much of the money went overseas to buy imports or as investments.
The lesson – don’t ask medical advice from your plumber or economics from a journalist. And if you ask an economist, make sure he follows the Austrian school.
Ten years since the collapse of Lehman Brothers
15 September 2018
Ten years
ago on this day, the global capitalist system entered its most far-reaching and
devastating crisis since the Great Depression of the 1930s. A decade later none
of the contradictions which produced the financial crisis has been alleviated,
much less overcome. Moreover, the very policies carried out to prevent a total
meltdown of the financial system, involving the outlay of trillions of dollars
by the US Federal Reserve and other major central banks, have only created the
conditions for an even bigger disaster.
The
immediate trigger for the onset of the crisis was the decision by US financial
authorities not to bail out the 158-year-old investment bank Lehman Brothers
and prevent its bankruptcy. There is considerable evidence to suggest that this
was a deliberate decision by the Federal Reserve to create the necessary
conditions for what they knew would have to be a massive bailout, not just of a
series of banks but the entire financial system.
The previous
March, the Fed had organised a $30 billion rescue of Bear Stearns when it was
taken over by JP Morgan. But as the Fed’s own minutes from that time make clear
the Bear Stearns crisis was just the tip of a huge financial iceberg. The Fed
noted that “given the fragile conditions of the financial markets at the time”
and the “expected contagion” that would result from its demise it was necessary
to organise a bailout. As Fed chairman Ben Bernanke later testified, a sudden
failure would have led to a “chaotic unwinding” of positions in financial
markets. The bailout of Bear Stearns was not a solution but a holding operation
to try to buy time and prepare for what was coming.
While the
demise of Lehman was the initial trigger, the most significant event was the
impending bankruptcy, revealed just two days later, of the American insurance
firm AIG, which was at the centre of a system of complex financial products
running into trillions of dollars.
Due to the
interconnections of the global financial system, the crisis rapidly extended to
financial markets around the world, above all across the Atlantic to Europe
where the banks had been major investors in the arcane financial instruments
that had been developed around the US sub-prime home mortgage market, the
collapse of which provided the immediate trigger for the crisis.
The value of
every crisis, it has been rightly said, is that it reveals and starkly lays
bare the underlying socio-economic and political relations that are concealed
in “normal” times. The collapse of 2008 is no exception.
In the
twenty years and more preceding the crisis, particularly in the aftermath of
the liquidation of the Soviet Union in 1991, the bourgeoisie and its
ideologists had proclaimed not only the superiority of the capitalist “free
market” but that it was the only possible socio-economic form of organisation.
Basing themselves on the false identification of the Stalinist regime with
socialism, they maintained that its liquidation signified that Marxism was
forever dead and buried. In particular, Marx’s analysis of the fundamental and
irresolvable contradictions of the capitalist mode of production had proved to
be false. According to the central foundation for what passed for theoretical
analysis, the so-called “efficient markets hypothesis,” a financial meltdown
was impossible because with the development of advanced technologies all
information had been priced into decision making and so a financial collapse
was impossible.
Rarely have
the nostrums of the bourgeoisie and its ideologists been so graphically
exposed.
Two days after
the crisis erupted, President George W. Bush declared “this sucker’s going
down.” Later, the high priest of capitalism and its “free market,” the now
bewildered former head of the US Federal Reserve Alan Greenspan, testified to
the US Congress that he had been completely confounded because markets had
failed to behave according to his “model” and its assumptions.
The crisis
also exposed in full glare another of the central myths of the capitalist
order—that the state is somehow a neutral or independent organisation committed
to regulating social and economic affairs in the interests of society as a
whole.
It confirmed
another central tenet of Marxism, expounded more than 170 years ago, that “the
executive of the modern state is but a committee for managing the common
affairs of the bourgeoisie.”
This was
exemplified in the naked class response to the financial meltdown. The plans,
already developed by the Fed and other authorities to cover the losses of the
financial elite, whose speculative and in many cases outright criminal
activities had sparked the crisis, were put into operation.
In the
lead-up to the presidential election of November 4, Wall Street swung its
support behind Obama—with the media promoting him as the candidate of “hope”
and “change you can believe in”—over McCain. The Democrats had committed
themselves to the bailout, securing the passage of the $700 billion TARP
asset-purchasing program through Congress. This massive increase in the
national debt of the United States was authorised with virtually no debate.
Of course, a
new political fiction was immediately advanced. It was necessary to bail out
Wall Street first, the public was told, in order to assist Main Street.
However, this lie was rapidly exposed. The crisis was the starting point for a
massive assault on the working class. While bankers and financial speculators
continued to receive their bonuses, millions of American families lost their
homes. Tens of millions were made unemployed.
In the
following year, the rescue operation organised by the Obama administration of
Chrysler and General Motors, with the active and full collaboration of the
United Auto Workers union, resulted in the development of new forms of
exploitation, above all through the two-tier wages system, paving the way for
even more brutal systems such as those pioneered by Amazon.
This was the
other side of a Wall Street bailout—a massive restructuring of class relations
in line with the edict of Obama’s one-time chief of staff Rahm Emanuel to
“never let a serious crisis go to waste” because it provides “an opportunity to
do things you think you could not do before.”
The same
class response was in evidence elsewhere. After the initial effects of the
crisis had been overcome, the European bourgeoisie initiated an austerity drive
forcing up youth unemployment to record levels. In Britain workers have endured
a sustained decline in real wages not seen in more than a century.
The most
egregious expression of this class logic has been seen in Greece with the
imposition of poverty levels last seen in the Great Depression of the 1930s.
The numerous bailout operations were never aimed at “rescuing” the Greek
economy and its population but directed to extracting the resources to repay
the major banks and financial institutions.
The crisis
revealed the real nature of bourgeois democracy. The euro zone and the European
Union were exposed as nothing more than a mechanism for the dictatorship of
European finance capital. As one of the chief enforcers of its diktats, the
former German finance minister Wolfgang Schäuble, declared, in the face of
popular opposition, “elections cannot be allowed to change economic policy.”
As the
working class in every country confronts stagnant and declining wages, falling
living standards, the scrapping of secure employment and attacks on social
services, leading to mounting health and other problems, innumerable reports
and data chart the development of a global system in which wealth is siphoned
up the income scale.
According to
the latest Wealth-X World Ultra Wealth Report some 255,810 “ultra-high net
worth” individuals, with a minimum of $30 million in wealth, now collectively
own $31.5 trillion, more than the bottom 80 percent of the world’s
population—comprising 5.6 billion people. Overall the wealth of this cohort
increased by 16.3 percent in 2016–17, rising by 13.1 percent in North America,
13.5 percent in Europe and 26.7 percent in Asia.
The full
significance of the bailouts of the financial system and the subsequent
provision of trillions of dollars is clear. It has brought about the
institutionalisation of a process, developing over the preceding decades, where
the financial system, with the stock market at its centre, functions as a
mechanism for the transfer of wealth to the heights of society.
In its analysis of the financial crisis,
the World Socialist Web Site insisted from the outset that
this was not a conjunctural development, from which there would be a
“recovery,” but a breakdown of the entire capitalist mode of production.
That
analysis has been completely confirmed. While a total financial meltdown was
prevented, the diseases of the profit system that gave rise to the crisis have
not been overcome. Rather, they have metastasised and mutated into new and even
more malignant forms.
The actions
of the US Federal Reserve and other major central banks in pumping trillions of
dollars into the financial system in order to “rescue” it, and to enable the
continuation of the very forms of speculation that led to the crisis, have only
created the conditions for a new disaster in which the central banks themselves
will be directly involved.
This fact of
economic and financial life can even be seen in the comments by bourgeois
analysts and pundits on the occasion of the upcoming anniversary. While they
generally maintain that the financial system has been “strengthened” since
2008—a completely worthless assertion given that it was held to be strong in
the lead up to the crash and any warnings of growing risks were dismissed as
“Luddite” by such luminaries as former US Treasury Secretary Lawrence
Summers—no one dares to proclaim that the underlying problems have been
resolved.
Rather,
taking heed from the warning of JP Morgan chief Jamie Dimon that while the
trigger for the next crisis will not be the same as the last but “there will be
another crisis”, they nervously scan the horizon for signs of where it might
strike.
Some
analysts point to the rise in global debt, which is now running at 217 percent
of gross domestic product, an increase of 40 percentage points since 2007,
contrary to all expectations that, since debt was a major cause of the 2008
crisis, some deleveraging would have occurred.
Others
single out the mounting problems in so-called emerging markets facing
repayments on dollar-denominated loans, a source of speculation when interest
rates were at record lows but which now present major refinancing problems as
interest rates have started to rise.
The
seemingly unstoppable rise of stock markets, fuelled by the provision of
ultra-cheap money by the Fed and other central banks, is also an issue of
concern. The increased use of passive investment funds tied to global indexes
via computer trading systems tends to reinforce downswings as has been seen in
a series of “flash crashes” such as that of last February when Wall Street fell
by as much as 1,600 points in intraday trading.
The greatest
source of anxiety, although it is not mentioned so much publicly, is the
resurgence of the working class and the push for increased wages. To the extent
it is discussed publicly, this fear, manifested in stock market falls generated
by news of relatively small wage increases, is generally couched in terms of
“political tensions” caused by increased social inequality.
A further expression
of the ongoing and deepening breakdown of the capitalist order is the
disintegration of all the geo-political structures and relationships that have
constituted the framework within which the movements of capitalist economy and
finance have flowed throughout the post-war period.
In the wake
of the 2008 crisis, the leaders of the G20 gathered in April 2009, in the midst
of a collapse in world trade taking place at a faster rate than in 1930. They
pledged to never again go down the road of the protectionist tariff policies
that had played such a disastrous role in the Great Depression and had worked
to create the conditions for the outbreak of World War II, just ten years after
the Wall Street crash of October 1929.
That
commitment lies in tatters as the Trump administration, seeking to counter the
economic decline of the US so graphically revealed in the 2008 collapse,
embarks on ever widening trade war measures.
The
principal target, at least to this point, is China. But the Trump
administration has designated the European Union as an economic “foe,” and has
already implemented trade war measures against it, with more in the pipeline.
The G7, the
grouping of major capitalist powers set up in the wake of the world recession
of 1974–75 and the end of the post-war boom to try to regulate the affairs of
world capitalism, exists in name only following the acrimonious split at its
meeting last June with the US decision to impose tariffs against its nominal
“strategic allies.”
World war
has not yet broken out. But there are innumerable flashpoints—in the Middle
East, in Eastern Europe, in North East Asia and in the South China Sea to cite
just some examples—where a conflict could erupt between nuclear-armed powers.
The impetus for a new global conflagration is the drive by US imperialism to
counter its economic decline by asserting its dominance over the Eurasian
landmass at the expense of its enemies and allies alike.
It is of
enormous significance that the civil war that has erupted in the American state
apparatus between the state and military-intelligence apparatus, whose
mouthpiece is the Democratic Party, and the Trump administration is over how
this objective should be accomplished; that is, whether the American drive
should be directed in the first instance against Russia or China. At the same
time, all the major powers are boosting their military budgets in preparation
for the escalation of military conflicts.
The
political system in every country is beset by deep crisis. The very rapidity of
the crisis is accentuating the contradictions between the objective dangers and
the level of class consciousness. The chief obstacle to achieving the necessary
alignment of working class consciousness with the objective reality of
capitalist crisis on a world scale remains the reactionary political role of
the old bureaucratised labour and trade union organisations, abetted by the
various pseudo-left tendencies, in suppressing the class struggle. But the
conditions are developing for these shackles to be broken.
In the
founding program of the Fourth International, Leon Trotsky wrote: “The
orientation of the mass is determined first by the objective conditions of
decaying capitalism, and second, by the treacherous policies of the old
workers’ organisations. Of these factors, the first, of course, is the decisive
one: the laws of history are stronger than the bureaucratic apparatus.”
That
perspective is now being confirmed in the resurgence of the class struggle
internationally, above all in the centre of world capitalism, the United
States.
Conscious of
their profound weakness in the face of such a movement, and fully aware of its
revolutionary implications, the ruling classes in every country have been
developing ever-more authoritarian forms of rule.
Their greatest fear is the development of
political consciousness, that is, the understanding in wider sections of the
working class, and above all the youth, of its real situation, that its enemy
is the entire capitalist system. Above all, the ruling elites fear the development
of a revolutionary socialist movement, based on the principles and program of
the Fourth International. This is why the World Socialist Web Site is
the central target of internet censorship. It is also the reason for the
escalation of attacks by the German coalition government on the Sozialistische
Gleichheitspartei, the German section of the International Committee of the
Fourth International (ICFI).
But the
efforts to suppress the work of the International Committee will fail. The
renewal of class struggle will provide new forces for the development of the
working of the ICFI throughout the world.
The meltdown
of 2008 demonstrated above all that the working class confronts a global
crisis. The crisis can therefore be resolved only on a global scale through the
unification of the working class across national borders and barriers on the
basis of an international socialist program for the reconstruction of society
to meet human need and not profit.
Nick Beams
GEORGE SOROS PARTNERS WITH BARACK OBAMA and ERIC HOLDER TO CREATE A GLOBALIST REGIME FOR THE BILLIONAIRE CLASS and CRONY BANKSTERS…. Open borders and endless hordes of illegals will make it happen!