Understanding the Financial Crisis: Inside “the secret laboratory of the bourgeoisie”

Alejandro Nadal

Marx is the ultimate critic of capitalism, so what does a Marxian analysis offer when applied to the present global economic and financial crisis?

Two preliminaries are important. First, for Marx crises are not pathologies of capitalism. They are the necessary outcome of the contradictions that define the essence of this mode of production. The backdrop of Marx’s analysis of crises is always class struggle. Second, capital has its own views of crisis and cycles: they are designed to facilitate policy and intervention. These views vary in their degree of accuracy, but in general they do not question capitalism. Marx’s perspective has a different objective: to reveal to the working class the forces that can overthrow capital.

Marx’s theory of crises is disseminated in several key writings. We concentrate our attention on the following: Grundrisse, Contribution to the Critique of Political Economy, Capital, Theories of Surplus Value. It must be remembered that Engels first advanced his theory of overproduction in his Outline of a Critique of Political Economy (1843).

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Emerging Asia next?

C.P. Chandrasekhar

It is now more than four years since the onset of the real economy recession in the United States. It is also close to five years since the disclosure by the investment-banking firm Bear Stearns that two of its subprime mortgage-linked funds were worthless, which signalled the onset of the financial crisis. Yet the global economy has not emerged out of both crises.

In the January 2012 update of its World Economic Outlook, the International Monetary Fund (IMF) has revised downwards by three-fourths of a percentage point (to 1.2 per cent) its global growth forecast for 2012. It also fears that things could be even worse. “The world recovery, which was weak in the first place, is in danger of stalling. The epicentre of the danger is Europe, but the rest of the world is increasingly affected,” said Olivier Blanchard, the IMF’s Economic Counsellor. The IMF has also noted, in a parallel January update to its Global Financial Stability Report: “Since the last Global Financial Stability Report (GFSR), risks to stability have increased, despite various policy steps to contain the euro area debt crisis and banking problems.”

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A Better Deal? Chinese Finance in Latin America

Kevin P. Gallagher, Amos Irwin, and Katherine Koleski, guest bloggers

Lending by the Chinese Development Bank (CDB) and Export-Import Bank of China (China Ex-Im) to Latin America is larger, newer, and growing faster than its Western counterparts.  According to our research, since 2005, China has provided $75 billion in loans and credit lines to Latin American countries.  In 2010, Chinese funding exceeded the region’s combined financing from the World Bank, Inter-American Development Bank (IDB), and U.S. Export-Import Bank. In fact, China overtook the World Bank and IDB even as those banks doubled lending to the region from 2006 to 2010.

China’s emerging role as a major lender to Latin America has raised concerns regarding the competitiveness of loans from World Bank and Western export credit agencies and implications on governance and environmental initiatives. In an article for The Washington Post, journalist John Pomfret further outlined these concerns stating that “China is a master at low-ball financing, fashioning loans of billions of dollars at tiny interest rates that can stretch beyond 20 years… This has become a headache for Western competitors, especially members of the 32-nation Organization for Economic Cooperation and Development (OECD), which long ago agreed not to use financing as a competitive tool.”  Others argue that Chinese financing provides an alternative source of financing without the restrictive policy conditionalities imposed by the World Bank. Deborah Bräutigam, a professor at American University, believes that in Africa, China is filling an unmet need for energy, mining, infrastructure, transportation, and housing lending, which was all but abandoned by the World Bank decades ago.

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“Memento”, the Meltdown and the Mainstream

Gerald Epstein

In “Up to Speed, but Still Lagging Behind” Matias Vernengo presents an important critique of Gary Gorton’s and Andrew Metrick’s (GM) “speed read” survey, “Getting up to Speed on the Financial Crisis” which is to be published in the Journal of Economic Literature, the predominant U.S. general literature survey journal in the economics profession. As Vernengo shows in his Triple Crisis blog piece, the Gorton and Metrick piece demonstrates just how far behind mainstream economics is in its understanding of the causes, dynamics and impacts of the financial crisis, both in an absolute sense, and also – and this was Vernengo’s main point – compared with the rich heterodox literature that both predicted the crisis and has been analyzing it dynamics since it has broken out.

In fact, the Gorton and Metrick piece presents an even more devastating picture of the ability of mainstream economics to “get up to speed” than Vernengo suggests. For it essentially admits that mainstream economics, which, for the last several decades, has cost society millions and millions of dollars on highly paid economists’ salaries at elite universities and prominent public institutions such as the IMF, the Federal Reserve and all the Federal Reserve Banks which have armies of economists– to say nothing of the high priced economists working in financial institutions themselves – completely missed the financial crisis and, according to Gorton and Metrick, are just now getting up to speed.

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Once we are up to speed, then what?

Edward B. Barbier
(also available in Portuguese at INESC)

The survey by Gary Gorton and Andrew Metrick on what happened during the 2008-9 financial crisis, “Getting Up To Speed on the Financial Crisis,” to be published by the Journal of Economic Literature, focuses on an important cause of this crisis: global imbalances in the world economy.  As Gorton and Metrick suggest, such imbalances include the “institutional cash pools” caused by sovereign wealth funds and the “global savings glut”.

While the United States has been amassing large current account deficits, China, Japan, other Asian emerging market economies and some oil exporters have been generating trade surpluses.  Similar structural imbalances were occurring within major regional economies, such as the European Union, where the large current account surpluses of France and Germany were offset by deficits in Ireland, Greece, Portugal, Spain and the United Kingdom.  The result was that economies with chronic trade deficits were receiving large and sustained capital inflows from surplus economies seeking new asset investments. These massive credit flows precipitated the bubble and subsequent bust in financial markets, and the persistence of such global imbalances continues to add to the uncertainty and instability of the world economy.

Understanding how the global imbalances caused the financial crisis and subsequent recession is important. But addressing these imbalances in the world economy will need a much more profound change in global economic development.

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Up to Speed, But Lagging Behind

Matías Vernengo

Gary Gorton and Andrew Metrick have just produced a survey on the vast literature on what happened during the last financial crisis (and to a lesser extent why it did) titled “Getting Up To Speed on the Financial Crisis,” to be published by the Journal of Economic Literature. They used only 16 documents, between papers from ‘top journals,’ reports and speeches and congressional testimonies. It must be noted that the objective of the review is to provide “a one-weekend-reader’s guide” to the crisis.

The biggest problem with their paper is not the limited number of documents reviewed, which seem to be fairly representative of conventional views on the financial crisis, but the limitations of what the mainstream of the profession knows about the crisis, and worse, what the profession clearly does not know it does not know, the unknown unknowns, so to speak. And that is why ignoring heterodox and progressive contributions has been very harmful for the profession. I will use three of their cited documents as an example of what I mean.

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Household Profligacy vs. Rentier Neoliberalism as a cause of Household Indebtedness

Arjun Jayadev

American households have been profligate spenders over the last 30 years and have lived beyond their means for too long. Or so it is proclaimed repeatedly in the media and among policy makers. What else could explain the fact that household debt to income ratios have increased while the personal savings rate has fallen?

As it turns out, there are other ways in which debt-income ratios can increase other than actually borrowing more. Specifically, income can grow slower than the real interest burden. The latter in turn depends on both nominal interest rates and inflation. In the case of public debt, there is a long and distinguished literature trying to separate the relevant importance of these effects in periods of leveraging and deleveraging. Interestingly enough, although household debt exceeds public debt substantially (look here at Table L1), there has been virtually no research trying to assess the importance of each channel.

Josh Mason and I have attempted to address this in a new working paper.  The basic idea of our paper is to apply the standard equation used to analyze government debt trajectories to the debt of the household sector. We decompose changes in the sector’s debt-income ratio into a primary deficit (i.e. net new borrowing), nominal interest rates, real income growth and inflation. Using this approach, we find some interesting and underappreciated patterns.

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Economists to Issue Statement on Capital Controls and the TransPacific Partnership Agreement

GDAE and IPS circulated the following sign-on letter for economists demanding that the TransPacific Partnership Agreement (TPPA), now being negotiated, exclude current proposed restrictions on the use of capital account regulations to prevent and mitigate financial crises. They are seeking signatures from economists in the nine current TPPA countries: Australia, Brunei, Chile, Malaysia, Peru, New Zealand, Singapore, United States, and Vietnam.

Economists from these countries who wish to sign on to this call for action please send your name, affiliation and country to: gdaeannounce@tufts.edu.

The TPPA is what US President Barack Obama hails as a “21st Century Trade Agreement” that improves upon and rectifies past problems in US trade and investment treaties.  Thus this is a particularly opportune time to weigh in, as a major TPPA negotiation round will begin in Melbourne, Australia on March 1, 2012.

Since the financial crisis began, the Asian Development Bank, the United Nations Economic and Social Commission for the Asia-Pacific, the International Monetary Fund and others have all agreed that capital account regulations are legitimate tools to buffer nations from volatile capital flows.  However, the U.S. government has used trade agreements to severely restrict a nation’s ability to deploy such regulations.

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Whatever happened to the G20?

Jayati Ghosh

For a while, in the immediate aftermath of the Global Financial Crisis of late 2008, the G20 came into its own. This group of (self-styled) leaders of the global economy, representing governments in nations contributing more than half of global GDP, came together in April 2009 to pledge a co-ordinated response to unprecedented global economic threats. This not only had a role in staving off immediate disaster through the implementation of broadly Keynesian responses, but also promise more for the future. This was not just vainglorious self-importance on the part of these governments. There was a genuine absence of global institutions that were sufficiently small as to be coherent (something that was not as possible in the United Nations, given its size and structure) or even seen as generally reliable, flexible and aware (given how the IMF has discredited itself by awarding good marks to so many economies just before they imploded financially).

But since then, the drama in the world economy could even have been Hamlet without the Prince of Denmark, as Act 2 of the global financial crisis unfolds. In its subsequent meetings, the G20 has been much more about style than substance – and sometimes the style has also been lacking. At least, in its Seoul meeting in 2010, the G20 committed themselves to promoting inclusive and sustainable economic growth. They argued that ‘for prosperity to be sustained it must be shared’ and also endorsed ‘green growth’, which promised to decouple economic expansion from environmental degradation.

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Will Germany Bully Europe Over the Brink?

Jeff Madrick

The audacity Germany has shown in floating a demand to manage Greece’s finances is a window on the leaders of that country and how much perspective they’ve lost. Let’s be clear; not all in Germany agree with this narrow, insensitive stance and the uninformed and uneducated demands for austerity economics in debt-ridden and recessionary nations. For example, there are political parties in Germany that want their country to take the lead on a Marshall Plan for the periphery of the eurozone. But they are not the ones setting policy.

I am tempted to say that antediluvian economics is ruling in Germany, but it may not really be about economic theory, but rather superior pride, irrational fear of inflation, and perhaps vindictiveness. It’s as if a German version of our own Tea Party is now running economic policy in Europe. Germany reduced its unit labor costs beginning in the late 1990s, which were higher than much of the rest of the EU, but with the euro fixed, they benefited as their export prices remained low. Could they have done well without their eurozone trading partners buying more from them than they were selling? And they lent them the money to do so. Do they have no moral obligation here? Without the fixed euro, the DM would have soared.

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