Saturday, August 29, 2009

My own prediction of the depression

In light of the discussion about who predicted the Depression, I thought that I would post the first chapter of The Confiscation of American Prosperity: From Right-Wing Extremism and Economic Ideology to the Next Great Depression


Brenda Rosser said...

Michael, in relation to your following comments:"Markets, attention only to commercial activities, ignoring considerations such as quality
of life or environmental degradation. Markets also disempower people from making political choices. Rules and regulations provide a counterweight to market forces, creating a means to keep the
harmful effects of markets in check. By this standard, the United States certainly has the most market-friendly economy in the world.

I can't agree with the assertion that 'markets' pay attention only to 'commercial activities.'

Markets have largely not been utilised under decades of neoliberal regimes.

The truth is that the western (mostly US) doctrine of 'free markets' was a classic example of the 'big lie' - a concept familiar to readers of Hitler's 'Mein Kampf'. Say an untruth often enough and the population goes along with it. Even when it's patently untrue.

The reality was that governments actively protected large corporations and most-favoured business people from the workings of 'the market'. In Tasmania this took the form of targetted and generous tax-payer subsidies to a handful of chosen corporations. In the forest industry (and you can see that this is also the case in other nations) ordinary people are not permitted to bid for the resource.

CEOs from large corporations meet in private with State premiers or national leaders/politicians and do deals behind closed doors. Everyone else is excluded from this process.

Resources from, what is more aptly described as 'the commons', are given over to a small number of transnational operators. Contracts are signed for decades ahead.

This is not 'market'. This is corporatism.

If we had a 'market' process in operation (albeit for the inappropriate bidding for the world's 'commons') then many individuals would pay big dollars just to protect our forests, our biodiversity and our water. A truly 'free' market would at least allow the possibility of such undertakings. Though markets wouldn't necessarily guarantee an adequate outcome - like saving our biosphere, for instance.

Aside from the above, it is critical that people around the world understand that the era of neoliberalism is one in which (as William Blum states) "There are probably well over a hundred separate and serious interventions by the U.S. government into maybe seventy or eighty countries." To secure their resources and their subservience to US interests.

[US commercial interests don't ignore] the record of the United States in determining how Guatemala, Nicaragua, the Dominican Republic and other countries in Latin America long had to be governed - in effect, by regimes the US supported. [They don't ignore US] military bases and troops in Okinawa, Puerto Rico, Japan, Germany, South Korea and other countries conquered in past wars. " and they certainly don't ignore the US military invasions of Iraq and Afghanistan?

Empire dressed up as 'free market'. How else can this era be seen?

Michael Perelman said...

I need to think about your comment. The abuses that you mention are real enough & they are part of market society. I guess that I should have said "market transactions" rather than just "markets."

john c. halasz said...

O.K. Since no one responded to my screed over at "Economist's View" on this mstter, I thought I might repost it here, just got redundancy's sake:

No, though the exact connections and mechanisms of the crisis and its exact timing might not have been fully envisioned by anyone, the build-up to the impending crisis was plain for anyone to see, provided they weren't blinded by technocratic idiocies or ideological proclivities. I recall remarking at an obscure website (James R. McLean's) that I was utterly amazed at the complacency of mainstream economic commentary and that, though the probability of a world-wide depression might not be large, it was far larger than it should be. (IIRC the occasion was the Rogoff and Obstfeld paper on global CA imbalances and the estimate of required currency adjustments, so this would have been in the fall of 2004). Admittedly, my POV is somewhat U.S.-centric, but the burgeoning U.S. CA deficit, of utterly unprecedented magnitude, and the housing bubble, which were obviously connected by plain economic logic, were obviously there for all to see. Add in the deflationary panic at the FED which led to 1% interest rates,(which, of course, markedly steepened the rate of housing bubble appreciation, though the huge excess of liquidity at the time was not just due to the FED, but to Japanese and EU policy, as well), the failure of employment and wage growth during the Bush "recovery", the dearth of corporate cap ex amidst near record profits as share of GDP, the burgeoning of the financial sector with all its redundant operations, (e.g. CDOs of CDOs), and the pile-up of new-fangled derivatives, and the anomalous and unsustainable picture of the trends should have been obvious. Most of all, the housing lot bubble is about the most glaringly obvious instance of the build-up of fictititious capital imaginable, as real housing prices increased 90% in 9 years on the national index and mortgage debt went from $5 trillion to $11 trillion without any fundamental increases in population trends or income levels. When I first saw that chart circulating around the intertubes of the U.S. total debt to GDP ratio, it stood at 278%, with subsequent iterations at 331%, 349.5%, and now as of 1Q 2009 375.5%. (Yes, the chart has been criticized by Credit Suisse as combining two different data series, but even if the exact number is a bit too high, the trend line is the same, with those notable inflection points around 1980 and at the start of this last Bush 2 cycle). So just how is it that "no one could have seen It coming"?

john c. halasz said...

So I've been puzzled why here or elsewhere there was so little expression of concern. (I was also puzzled by how long the popping of the housing bubble was taking to register in the financial sector and the real economy, since CR called the popping in Feb. 2006 though we all knew it would be like a slowly deflating tire, rather than a sudden blow out. But then even CR was predicting a mild recession with less than 8% unemployment). Perhaps it's that bubbles always go on longer than they "rationally" should because of the peculiar behavioral complicities of their participants, and thus do even more damage than initially expected. And it's true that most of us were focused on the CA deficit and the potential for a US$ crisis rather than the potential for a prior financial collapse, not being familiar with the internecine ins-and-outs of hi-fi operations. (I spent part of Jan. 2007 tooling around the intertubes trying to figure out exactly what a CDO was, which resulted in some quiet belly laughs). That was not entirely wrong, as the $ did steadily decline, which contributed to the oil and commodities run-up that helped to trigger the crisis, and counter-acted any CA adjustment. Perhaps the real unexpected paradox was the run-up in the $ after Lehman, though that was less "flight to safety" than speculative $ unwind, as evidenced by the larger Yen run-up. And like everyone I was shocked by the extreme rapidity of the contagion after Lehman, which, like Credit Anstalt, was the occasion and not the cause of the crisis. But not just the high levels of speculative leverage, but the tightly bound connections between financial asset markets and especially the incalculable build-up of derivatives, (which certainly exacerbated the drain on liquidity as fast as the central bankers could pour more in), were unpredictable wild-cards, the scope and effects of which no mere theory could encompass.

john c. halasz said...

If I can make sense out of the utter failure of the overwhelming majority of credentialed economists to foresee the impending crisis, it would lie in the fetishization of general equilibrium, together with the accompanying cult of monetary policy, as the sole sufficient and legitimate means of policy. For it was clear that the system was "equilibriating" huge underlying disequilibria and that it would eventually blow up, absent other proactive policy measures, corrective, prophylactic, or preparatory, which both theory and ideology, if there is a difference, inhibited or elided. "General equilibrium", meaning both that all markets would clear simultaneously with respect to all other markets and that such complete clearing would be tantamount to optimal efficiency for the system as a whole, is a half-truth at best. But when it becomes the unquestionable a priori foundation for all economic analysis, then the latter becomes blinded to all other perspectives. Add to that, that mainstream DSGE models do not model an independent financial sector, under the fallacy of the "neutrality of money", since, if the sole focus is on nominal price formation via the supposed law of supply and demand, (a truism), then asset prices are on a par with goods prices and commensurable with them, (whereas what primarily determines goods prices are costs-of-production, while financial asset prices are determined by the PV of discounted expected future returns blah blah, which must ultimately mean the rate of profit or the profit share of realized productive surpluses). But then again the sphere of production is also not modeled independently, but simply reduced through mathematical devices to as-if market transactions. But there are a number of reason why the organization of production and long-run real productive investment decisions can not be understood and modeled in terms of market-clearing transactions. (I'll leave it to Bruce Wilder to resume reciting his list of them). But if that point is not appreciated, there is no hope of distinguishing within a aggregate level of investment, which investments are contributing to increased real productive surpluses and which investments are being leeched of into unproductive uses or to leech off an increased profit share at the expense of the distribution of productivity gains into sustainable real effective demand.

john c. halasz said...

So in addition to over-financialization with credit bubble induced asset inflation and global trade imbalances, there is a third fundamental factor underlying the build up to crisis: a declining wage-share in global output. Wall St. and MNC sponsored globalization of both finance and production supply chains have operated to reduce wages and increase profits under deflationary pressures more than to increase output and real productive surpluses. There is no global savings glut, since, gloabally, both the savings and investment share of output has somewhat declined. Rather there has been a decline in real productive investment. Yes, the wages of Chinese workers have risen mightly with rising Chinese productivity. But in actual fact, Chinese industrial employment has been declining with rising productivity and the estimated wage share of Chinese output has declined this cycle from 40% to 35% of GDP. Rising global inequality in the distribution of output has led to massive over-capacity and deficient real aggregate effective demand. Yes, it has been known at least since the days of John Law that a credit bubble can stimulate the real economy and result in real productive investment and employment increases, but when the bubble pops, what source of demand is there to replace it and take up that increased productive capacity, when the latter has been entirely structured toward bubble induced demand?

Finally, it's worth considering the role of the IT revolution in the development of the last 3 decades of globalization and financialization. It seems to me likely that IT has lowered the costs and increased the flexibility of real productive capital goods, and thus increased the substitutability of capital for labor. Even more, it has radically transformed corporate organization, especially expanding the scope and increasing the {extractive) control of those at the top of the hierarchy. And such technology has been deployed by them not just to raise productivity, but to devalue and disqualify, if not completely de-skill, labor and increase corporate managements' control over labor processes. (Deployments of raw computational power, of course, have played a large role in the development of increasingly abstruse financial instruments and operations to leech out further profits from whatever obscure corners of markets they can find). So long as technical development, ("the forces of production"), remains entirely in the control of oligopolistic corporate elites and operates at their behest, then it will operate to reduce costs and increase profits by reducing the wage-share in output. The oddity then is that the absence of wage pressure reduces incentives to improve productivity, even as increased productive potential meets up with declining effective demand. It should be obvious that markets do not somehow automatically conduce to an equitable and sustainable distribution of increased productive surpluses. There is a paradox of productivity to go together with the one of thrift. Yet most economists, in their unrestrained (and unreflective) technophilia, are loathe to consider the limits of an entirely privately controlled and profit-directed process of technical development and its distributional consequences, when, indeed, they deign to consider distributive issues at all, as part of their remit. That might be because they are fundamentally confused about the meaning of "efficiency" together with its sources.

Brenda Rosser said...

John C Halasz, this is quite a comprehensive article! I have to agree with you about the crisis in economics.

The intellectual crisis is a key component of this economic disaster.

Have you heard Eric Weinstein's outline of this situation?

Eric Weinstein, "A science less dismal: welcome to the Economic Manhattan Project"
The mp3 of this lecture can be accessed via:

It looks to me like you have plenty of good material to inject into the 'Economic Manhatten Project'. Care to participate?

You mention, amongst others, the following two factors that contributed to this unfolding economic disaster:

(i) The forces of production remains entirely in the control of oligopolistic corporate elites and operates at their behest.
(ii) Wall St. and MNC sponsored globalization of both finance and production supply chains.

I would add that perhaps the most important factor has been the emergence of the non-market. International trade could now mostly be inter-corporate. This raises deep questions not least about whether the US is (mostly) in debt to its own corporations rather than - as most economists would believe - to other nations.

What is trade? etc

It's not international trade, don't be fooled.


60% of Chinese exports to the US are from foreign-owned corporations
Brenda Rosser. Friday, May 29, 2009

Is it true that foreigners finance American debt? - Update 2
Brenda Rosser. Monday, December 1, 2008. Econospeak said...

John C.,

A year ago last summer I laid out here (picked up by Thoma) my analysis of how different bubbles operate. I noted that there are genearlly three different time paths. They go up and crash suddenly after the peak, which often happens with commodities, such as oil last summer. They go up and then they go gradually down, which has been the path for housing prices, or they go up, peak, drift down for awhile during a "period of financial distress," and then crash.

I noted that Kindleberger had shown that this last has beebn by far the most common pattern. I speculated at that point that this was what was going on with the global derivatives market, which had peaked in August 2007 and appeared to be in a drifting period of financial distress and thus could crash suddenly, wreaking widespread havoc. It did so in mid-September 2008.

BTW, this was a major moment of my "calling it."

Brenda Rosser said...

Michael P,
I wonder if the abuses are part of a 'market society' or part of capitalism. 'Capitalism' isn't 'markets'.

The abuses incorporate a rapidly increasing commodification of the planet which is drawn into transactions that are shaped in the interests of a global capitalist network.

Brenda Rosser said...

Congratulations, Barkley!