Now that the world economy has been brought to its knees, when trillions of dollars worth of investments have been wiped out, when millions of jobs are being lost, whom do we blame for the meltdown?
Most investors have no hesitation in pointing their fingers at Wall Street. It is in that hotbed of greed, so goes the accusation, that the worst excesses have been committed. It was on Wall Street that they made and sold those financial weapons of mass destruction, with the merchants of financial death, aka investment bankers, dreaming up ever more toxic products to sell to gullible investors. That’s one narrative.
Others blame regulators for allowing it to happen. Alan Greenspan, yesterday’s maestro, is today’s arch villain. It was he who kept interest rates so low for so long, thus lowering the price of risk and goading investors into a false sense of security that all was well. He is the serial bubble-blower, accuse his critics. To be fair, the former chairman of the US Federal Reserve has issued a mea culpa of sorts, admitting before the US Congress that he had found a “flaw” in his model. That’s a likely story.
Wrong, say another set of finger-pointers. They lay the blame squarely on the intellectual progenitors of bogus models, those who served as apologists for what they claimed was a revolution in finance. As Nassim Nicholas Taleb, the man who made the term black swan so popular in our current lexicon, puts it succinctly, “Six Nobel prizes were handed out to people whose work was nothing but BS. They convinced the financial world that it had nothing to fear.” In times of trouble, blame the intellectuals.
But this is not the first big crisis to have visited the economy in modern times. The Great Depression of the 1930s, Japan’s stagnation since 1990 and the global depression in the late 19th century have all led to a search for causes and there have been a slew of theories to account for them. John Maynard Keynes pointed out: “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else.”
Many schools of thought each have their own version of what led to the disasters and the best way out of them.
Ben Bernanke, the chief of the US Federal Reserve and a scholar of the Great Depression, is firmly of the school that believes policy errors exacerbated the stock market crash of 1929 into a great depression. The ghost of Milton Friedman, guru of the Chicago school, broods over this narrative. He believed the Fed aggravated the Great Depression by not pumping enough money into the financial system following the crash. That is why we see Bernanke throwing everything, including the kitchen sink, at the problem. It’s wrong policy that is to blame.
Others are not so sure. A conservative group of economists called the Austrian School long ago pointed to the absurdity of solving a problem created by excessive credit by throwing money at it. In his 1933 essay, Friedrich Hayek, free marketer par excellence, wrote: “Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion.”
But those views have found little favour, probably because of their similarity to those of Andrew Mellon, secretary of the US treasury during the early years of the Great Depression, who is credited with this gem: “Liquidate labour, liquidate stocks, liquidate the farmers, liquidate real estate... It will purge the rottenness out of the system.” As stories go, this is one with biblical overtones, an epic tale of greed and penitence, of sin and redemption.
That is too faith-based a narrative for others, who prefer to repose their trust in regulators. Keynes, for instance, argued that markets are not self-correcting and government intervention is needed to maintain aggregate demand and full employment.
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Keynesians would pin the blame for the crisis squarely on the climate of deregulation fostered by the political right from Ronald Reagan and Margaret Thatcher onwards—the so-called neo-liberal revolution.
In the same tradition is Hyman Minsky, who propounded his financial instability hypothesis. According to the second theorem of his hypothesis, “Over periods of prolonged prosperity, the economy transits from financial relations that make for a stable system to financial relations that make for an unstable system.” He, therefore, argued, “The creation of new economic institutions which constrain the impact of uncertainty is necessary,” implying more oversight and more regulation.
These are the management stories, dull records of macroeconomic administration, presided over by god-like economists. But perhaps the most intriguing story is the subversive one that all these arguments and theories are meant to serve a purpose. As Lacanian philosopher Slavoj Zizek has said, their main task is to impose a narrative that will not put the blame for the meltdown on the system, but instead blame its deviations—errors of policy, bad theory, lax regulation, bad incentives, corruption, greed, human nature, etc. But that is another story.
Manas Chakravarty looks at trends and issues in the financial markets. Your comments are welcome at firstname.lastname@example.org