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LONDON – It is generally agreed that the crisis of 2008-2009 was caused by excessive bank lending, and that the failure to recover adequately from it stems from banks’ refusal to lend, owing to their “broken” balance sheets. Illustration by Paul Lachine A typical story, much favored by followers of Friedrich von Hayek and the Austrian School of economics, goes like this: In the run up to the crisis, banks lent more money to borrowers than savers would have been prepared to lend otherwise, thanks to excessively cheap money provided by central banks, particularly the United States Federal Reserve. Commercial banks, flush with central banks’ money, advanced credit for many unsound investment projects, with the explosion of financial innovation (particularly of derivative instruments) fueling the lending frenzy. This inverted pyramid of debt collapsed when the Fed finally put a halt to the spending spree by hiking up interest rates. (The Fed raised its benchmark federal funds rate from 1% in 2004 to 5.25% in 2006 and held it there until August 2007). As a result, house prices collapsed, leaving a trail of zombie banks (whose liabilities far exceeded their assets) and ruined borrowers. The problem now appears to be one of re-starting bank lending. Impaired banks that do not want to lend must somehow be “made whole.” This has been the purpose of the vast bank bailouts in the US and Europe, followed by several rounds of “quantitative easing,” by which central banks print money and pump it into the banking system through a variety of unorthodox channels. (Hayekians object to this, arguing that, because the crisis was caused by excessive credit, it cannot be overcome with more.) At the same time, regulatory regimes have been toughened everywhere to prevent banks from jeopardizing the financial system again. For example, in addition to its price-stability mandate, the Bank of England has been given the new task of maintaining “the stability of the financial system.” This analysis, while seemingly plausible, depends on the belief that it is the supply of credit that is essential to economic health: too much money ruins it, while too little destroys it. But one can take another view, which is that demand for credit, rather than supply, is the crucial economic driver. After all, banks are bound to lend on adequate collateral; and, in the run-up to the crisis, rising house prices provided it. The supply of credit, in other words, resulted from the demand for credit. This puts the question of the origins of the crisis in a somewhat different light. It was not so much predatory lenders as it was imprudent, or deluded, borrowers, who bear the blame. So the question arises: Why did people want to borrow so much? Why did the ratio of household debt to income soar to unprecedented heights in the pre-recession days? Let us agree that people are greedy, and that they always want more than they can afford. Why, then, did this “greed” manifest itself so manically? To answer that, we must look at what was happening to the distribution of income. The world was getting steadily richer, but the income distribution within countries was becoming steadily more unequal. Median incomes have been stagnant or even falling for the last 30 years, even as per capita GDP has grown. This means that the rich have been creaming off a giant share of productivity growth. And what did the relatively poor do to “keep up with the Joneses” in this world of rising standards? They did what the poor have always done: got into debt. In an earlier era, they became indebted to the pawnbroker; now they are indebted to banks or credit-card companies. And, because their poverty was only relative and house prices were racing ahead, creditors were happy to let them sink deeper and deeper into debt. Of course, some worried about the collapse of the household savings rate, but few were overly concerned. In one of his last articles, Milton Friedman wrote that savings nowadays took the form of houses. To me, this view of things explains much better than the orthodox account why, for all the money-pumping by central banks, commercial banks have not started lending again, and the economic recovery has petered out. Just as lenders did not force money on the public before the crisis, so now they cannot force heavily indebted households to borrow, or businesses to seek loans to expand production when markets are flat or shrinking. In short, recovery cannot be left to the Fed, the European Central Bank, or the Bank of England. It requires the active involvement of fiscal policymakers. Our current situation requires not a lender of last resort, but a spender of last resort, and that can only be governments. If governments, with their already-high level of indebtedness, believe that they cannot borrow any more from the public, they should borrow from their central banks and spend the extra money themselves on public works and infrastructure projects. This is the only way to get the big economies of the West moving again. But, beyond this, we cannot carry on with a system that allows so much of the national income and wealth to pile up in so few hands. Concerted redistribution of wealth and income has frequently been essential to the long-term survival of capitalism. We are about to learn that lesson again. Reprinting material from this Web site without written consent from Project Syndicate is a violation of international copyright law. To secure permission, please contact us. Comments (39) You need to login in order to leave a comment. If you do not yet have an account, please register. Dufau Didier 45 minutes ago Inequality is the essence of capitalism. Riches appear first in the pocket of those who create it and then percolate into the different parts of the society, by different channels. Any creation of value creates inequality. So inequality is the consequence of growth (productivity and innovation). The slight lag between creation and redistribution is of no consequences if growth is roaring. The current crisis is not caused by inequality but by imbalances. If one country is allowed to accumulate huge deficits and others huge symetrical piles of excess cash, then the system doesn't function properly. The core responsability of the crisis is to be found in imbalances generated by the system of floating rates of currencies with no whistle blower. Excess money is lended back to the country with deficit where it triggers a spree of lending which creates new imbalances, new return of excess cash and so on. That's why most OCDE countries saw their global indebtness soars from under 200% of global revenue to nearly 400%, some of them rockecting to 700,800, 1400%. As the countries with surplus kill the economy of countries with deficit, a problem of income starts there and componds the difficulty. Revert quickly to the Bretton Woods disciplines, especially prohibition of huge imabalances, and you'll see everything rapidly back in order. Michael Cohen 1 hour ago Housing did not get over priced because middle class people lacked money. It took a perfect storm of incompetence and corruption:
Enrique Woll Battistini 2 hours ago Bypassing the banks to create demand for credit and revive the economy... March 19, 2013 © Enrique Woll Battistini 2013 Staving off the impending effects of unemployment through increased consumption Enrique Woll Battistini 2013 The Trillion Dollar Platinum Coin financial instrument promoted by Hellen Brown and others in order for the Federal Reserve to fund the Federal Government directly, in my opinion, would certainly not save the economy. The bottom line flaw in such thinking is that the availing of limitless credit or cash to Government, whether Federal or State, by the Federal Reserve, would place the economy -with all it entails- in the hands of Government to an unacceptable degree, and not nearly enough in the hands of the Private Sector, effectively impeding the role of the Federal Government as the main legitimate arbiter and protector of the entirety of society, and ending the key role of the Federal Reserve vis-à-vis the money supply and inflation. The nefarious effects of this paradigmatic shift would not be limited to the United States, but would be felt throughout the globe. Indeed, given that money is power, the Federal Reserve would quickly loose its independence to the Federal Government, be absorbed, and disappear forever, and given that the Federal Government would be synonymous with money in this scenario, it would soon prove, if it has not done so convincingly enough already, the truth and wisdom of Lord Acton’s words, when he warned that 'Power tends to corrupt, and absolute power corrupts absolutely.' Moreover, the mere lack of the need to tax people or private enterprise to fund the Federal Government, and the consequent disappearance of the need for new issues of U.S. Government Bonds, together with the instant and worldwide distrust of the U.S. Dollar that would ensue, would simultaneously cause its terminal devaluation and create immense pressure by countries such as China for immediate redemption of the massive U.S. Government Bond debt that they hold, in kind, if not in gold, at historical values. In addition, of course, the currently conducted open market operations by the Federal Reserve for control of the money supply and inflation, and refunding operations by the U.S. Treasury to meet its bond redemption obligations, would immediately cease forever for lack of a market. Control of inflation would depend on the Federal Government alone, and its only tool would be the careful control of additions to the existing money supply. The immediate consequence of this horrific situation would prove to be a catastrophic dilemma, easy to envision, no matter what choice were made, as no middle ground imaginable would satisfy the parties involved. Moreover, the accompanying notion that States should create State Banks that could pledge State assets such as bridges and roads, and maritime ports and airports, in lieu of Trillion Dollar Platinum Coins of their own, in order to obtain and back their own Federal Reserve loans, is magic thinking of the worst and most dangerous kind, as the Federal Reserve is currently a private institution and as such could end up owning massive and crucial State assets, outright, and under the Federal Trillion Dollar Platinum Coin doomsday scenario described above, as stated, it would be quickly folded into the Government, which, in time, would become the owner of the States, quite literally. Of course, again, this would be a doomsday scenario. Nevertheless, and in any and every case, one immediate reason why placing the economy exceedingly in the hands of Government would be unacceptable is that, contrary to the teachings of Neo-Classical Economics, and Modern Monetary Theory, it does matter how money is spent, and whether it goes to produce shoes or guns always make a difference, but in the case of increases in the money supply, especially the large ones that would likely result from application of the Trillion Dollar Platinum Coin, how it is spent greatly matters, especially in the first go-around of its endless circulation throughout the economy. The question would be then, who should be doing the first spending and the primary spending? The Government or The People? And lastly, obviously, Central Banks should continue to exist, and to exercise their traditional control over the money supply and inflation, until a superior type of institution can take their place. The foregoing would seemingly apply around the globe, but, on the other hand, if unconstrained, if nothing transcendentally efficacious is done, the impending effects of the growing unemployment in the Euro Zone –which threatens the world– would be widespread bankruptcy and, very soon after that, general social disorder, national disarticulation, hunger, and for many millions of people in the Fourth World, it would mean, quite literally, starvation. However, staving off these looming effects carries the obvious need to increase employment, and production, in all currently affected countries, and this in turn requires increased and sustained demand, and consumption, acting in perpetual circular virtuous motion. This much is evident, but empty pockets simply cannot result in increased demand. Thus, clearly, the way to end this conundrum is to find the fastest and surest way to jump-start this life-sustaining process, and it is the consumption of all currently available goods and services, period. And in my view, the only way to achieve this crucial change in attitude, on a world-wide scale, in the immediate horizon, is economic stimulus through an impulse-increase in the disposable income of people, and the assurance of continuity into the mid term horizon; that is, through the implementation of periodic economic –cash– stimuli for as long as necessary as dictated by the natural employment and inflation targets of each affected country. This remedy could take the form of Limited-Life Personal Economic Stimulus Consumption Cards (ESC) issued to consumers across the board on a monthly basis by Governments, and financed by incurring new debt, or by Central Banks, through prescribed increases in the money supply, and implemented in every case through commercial banks in all affected countries. Simply stated, the solution to unacceptable or to widespread unemployment would be the issuance of 30-Day Government Debit Cards. Everyone in possession of this debit card would spend the –cash– purchasing power it granted them on whatever consumer goods and services they needed the most within its 30-day lifespan, given that after its expiration date any unspent amount would be irrevocably lost. In addition, these cards would not be redeemable for cash, and given that they would be personal, and issued to individuals, they could not be pooled, used as collateral, traded, or used in any way other than for personal consumption. And finally, their purchasing power would be subject to automatic renewal at a prescribed value, equal for all, for administrative simplicity, adjusted for attainment of inflation-unemployment equilibrium over time, on the first day of each month for as long as the program lasted. The first effect of this program would be to reduce inventories and create demand for workers of all levels, rapidly reducing unemployment to its natural levels in these countries. Inflation would happen, as always, if unemployment were reduced below its natural level, and vice-versa, and, as always, prices would soon settle, as must be, at a higher level. However, resulting inflation, if any, could be compensated for the infirm, the poor, the unemployed, and the retired, through this very same program, funded, at the end of the day, by the increased production it seeks and would surely find. The second major effect of this program in all affected countries would be to increase personal incomes and savings, and to increase tax revenues, reduce fiscal deficits and national debts. *** Kir Komrik @kirkomrik 28 January 2013 Thank you for a great article, This is very interesting. I agree with much of it but, of course, could expound quite a bit. The systems we have are outdated and unsophisticated, at least as compared to where we are technologically. The neo-liberal western democracy framing of Capitalism is not durable. It's unjust. It's unsustainable. And everything I've heard so far is just a tired variation on ideas that have been failing for over 100 years. It's time for fresh, new ideas that are truly original and not a rehash of old ones, imo. It's time for genuine global rule of law with General Federalism and Fiducial Economics, imo ... or a better idea if I hear one. - kk http://federalism.jux.com http://kirkomrik.wordpress.com ian greenwood 21 January 2013 FAIR POINT (“from inequality is killing capitalism”): 'To answer that, we must look at what was happening to the distribution of income. The world was getting steadily richer, but the income distribution within countries was becoming steadily more unequal. Median incomes have been stagnant or even falling for the last 30 years, even as per capita GDP has grown. This means that the rich have been creaming off a giant share of productivity growth'. HEAR, HEAR! but NOT ONLY THIS BUT Skidelsky is NOT ADDRESSING THE MORE FUNDAMENTAL ISSUE (as we often find with people m0ore and more screen-based in their “activity”): In reality it is mostly growing or making that produce the goods (see below) – the sucking in of goods as imports because of wealthy countries’ exchange rates impoverished the “poor” countries, who in many cases are “happier” than the richer ones) with all their cares in keeping up) especially if the poor have the sun in much of the year and can grow their own. It also distorted away from making, meant practical skills shortages, etc That is what we found in Uganda, former Yugoslavia, Bulgaria, etc. There seemed to be fewer creaming off: Lord Skidelsky can you comment? FOR THE WEST '… Long term because the child will become a taxpaying adult' as Sidelsky says assumes there are jobs in the 'economic' system which is currently far from economical, with all the Western nations’ frivolous expenditure.' The overburden that is squashing down real producers in the UK is more than 90 % and education, for one is squashing down children’s ingenuity leading to “tearaway” behaviour, mental health problems, social costs etc etc. The kids are not being trained to work eg shelf-stacking for unnecessary choice a sensible policy would be 'Dig for Britain' - not only growing (for example easy greens such as nettles for soups) but for super-insulation of the perimeter of buildings to stop heat loss sideways and avoid the need for tearing down buildings to insulate under slabs or “modernise”. Such buildings can be super-THIN super-insulated and become Giant Heat Stores! Especially if Solar (preferably a seamless combination of Solar-thermal and PV power can be installed – economic on East, South and West roofs. Why not be in touch VIA: ian[dot]greenwood@phonecoop.coop (Structural, civil and Finance engineer) Dear Lord: NOW WHAT IS YOUR OPINION ON Commercial-bank-created credit money? cannot the Government divert the base rate of such new money to a ring-fenced fund at local branches of the central bank to assist the Green Deal (otherwise that deal is just a form of financing leading to continued fuel poverty as prices continue to rise. and the investments themselves are too little too late as usual see above for email de Lafayette 15 December 2012 INCOME INEQUALITY IN AMERICA Inequality is generally measured in statistical terms, as regards both income and its consequence, wealth. Various studies have shown that Income Inequality as regards both income and wealth are wholly unfair in the American economy. (As regards wealth, an interesting study has been posted in this site from the UofC at Santa Clara: http://www2.ucsc.edu/whorulesamerica/power/wealth.html However, the causal factor to wealth inequality is, of course, income inequality. The Global Income Database at the Paris School of Economics demonstrates clearly that the share of Total Income of the Top 10% of American households increased from 31.5% to 46.3% over the past four decades: 1960 – 33.8% 1970 – 31.5% 1980 – 32.9% 1990 – 38.8% 2000 – 43.1% 2010 – 46.3% (Data source here: http://topincomes.g-mond.parisschoolofeconomics.eu/ ) That’s nearly half the total income generated by the American economy! We, the sheeple, are left to scramble after the remaining 54% ... Note that the inflexion upwards began in 1980 during the Reagan administration, when marginal and capital gains taxes were reduced drastically. They descended from above 60%, where they had been prevalently since 1917, US income taxation having been instituted in 1913. European social democracies have established harsher taxation schedules in order to obtain what is commonly called “Social Justice”. France, for instance, shows a constancy of around 33% as regards the same tax-class as shown above. MY POINT? Income Unfairness/Disparity/Inequality is a fundamental aspect of any market system, particularly when made to go awry by means of a wholly prejudicial Tax Code as is the case in America. America should be applying far higher progressive taxation, which is a matter of Tax Code revision and putting the marginal income taxation back to where it was pre-Reagan. And why not have both Compensation and Capital-gains taxation at the same percentage? The enhanced tax revenue base would do wonders to reduce the national debt and introduce, for the first time in its existence, an element of Social Justice into the America. Joshua Ioji Konov @joshuak2077 4 December 2012 Market Development Verses Economic Growth The global industrial overproduction capabilities have been gaining momentum accelerated by ongoing globalization, rising productivity, Chinas industrialization, the Internet and mostly by the vastly improving high technologies in manufacturing, communications, and international trade. The Transnationals have been given great advantages to find new cheaper markets that they could relocate or outsource industrial production, whereas the huge Chinese marketplace has provided them the needed demand to expand and aggregate their capitalization and economic health even in the time of 2007-9 Recession and post recession time. Simultaneously to the rising profit of the transnationals and big investors, declining industrial employment, middle class, and fiscal reserves have been observed in the United States, many European countries, and Japan, the manufacturing jobs that used to replenish fiscal reserves and maintain large middle class have largely disappeared being moved and outsourced, moreover the industrial jobs still left in there have been highly robotized bringing down salaries and numbers of employed. The low paid jobs that have been gaining in post recession time could not compensate to the lost high paid industrial jobs from the past. In general, capitalism relied on industrial jobs and high interest lending rates to raise profits, boost economic growth and replenishes fiscal reserves; however, none of these three points is working under the conditions of most recent market developments, whereas aggregated super-production, moving, outsourcing, the long-term and deep 2007-9 recession and post recession time, and e.g., made these three points, which are founding for the capitalism, obscure and underperforming. Hence, the governments are keeping their discount tier one interest rates close to zero, but the poor transmissibility of the economies is establishing the condition for new market bubbles instead of boosting higher percentage economic growth with high employment and salaries in manufacturing. The idea that manufacturing will come back to the US, or most European countries to employ the high single and double digits unemployed is unrealistic in its nature. The austerity measures in UK and Europe, the quantitative easing and stimulus packages in the US, UK and Japan, and the stimulus programs in China are temporarily economics tools capable of reviving business activities of mostly lower paid jobs in service sector, however the majority highly paid industrial jobs are gone forever being undercut by high technologies, and moved or outsourced elsewhere, therefore the capitalism could not work out these economies to sustain adequate economic growth to balance rising fiscal social and infrastructural expenses. The main carriers of economic growth in the capitalism are big transnational corporations and big investors, which were suppose to stir economic growth by raising productivity supported by trickling down capital. Moving and outsourcing industrial production to wherever cheaper and qualified labor is found, these two economic agents are considered the noise in (1=f noise) formula for every country/market economic development that is suppose to close underdeveloped economies to the developed industrial ones. Hence, low taxes, low regulations, shady not particularly clear business laws, and corporate contracting are the keys to progress, industrial employment, and economic growth. However, for the last 20 years the system of capitalism greatly underperformed the 1=f noise formula has not worked, the middle class deteriorated, the manufacturing jobs are gone, and the business activities are shrinking lacking demand balanced marketplace. Moreover, the economic growth, which was suppose to keep at the least as high as to compensate for the natural energy related price rising could not keep up marginalizing into the very low, or like in EU into the recessionary minuses. The deflationary forces have been gaining strength, whereas Japan is the good example of it. Thus, the market forces pressure has degenerated economic growth into market development, however neither the overall financial system, business laws, lending approaches or market security have been adapted to the natural processes of this ongoing change, thus instead of a sustained market development be succeeded and maintained the economies continue accumulating fiscal debt, and underperforming with high unemployment and underemployment. The ideologies are ruling over the clear indicators of a system, which has exhausted its growth generating powers. Economic growth differentiates from market development by its fundamental change of priority from big business and investors as main economic agent for economic growth to small and medium businesses and investors as main market agent for market development. Hence, the economic tools such as high lending rates, shady business laws, deregulated financial system, tax breaks for the rich, limited liability corporate structures, cutting down on social and infrastructural expenses, e.g. that worked to boost economic growth are to change into more sophisticated deleveraging diverse business environment using market tools such as enhanced business laws, unlimited liability corporate structures (to the decision making corporate structures – not to the investors), higher market security allowing lower lending rates, using social and infrastructural expenses as an extra equity demand, e.g. that overall will provide better balance to demand-to-supply markets. Market development is an enhanced version of the trickle down capitalism that rely basically on market forces to balance markets demand-to-supply but uses indiscriminately market tools to keep this balance in marginal proximity. Working Papers 2011 2001 & 2007 Recessions prompted remaking of the international organizations MPRA Paper, University Library of Munich, Germany View citations (1) Piercing the Veil’s Effect on Corporate Human Rights Violations & International Corporate Crime (Human Trafficking, Slavery, etc) MPRA Paper, University Library of Munich, Germany Joshua Ioji Konov, 2012 Commented Ion-Iulian Marinescu 3 December 2012 In essence your solution does nothing more than redistributing wealth from the efficient entrepreneurs to the political (inefficient) entrepreneurs. Spending extra money in public works given that countries are over indebted is just non-sense. Basically this will generate higher public deficits, more volatile monetary and capital markets and a higher risk premia. The general deleveraging process is logical in the context of financial crises, and I agree it causes unemployment. But unemployment should be addressed with more stable fiscal policies and more flexible labor markets in my opinion. Tenzin Namdhak @tennam29 29 November 2012 Are we witnessing the same era that karl marx observed during the industrial revolution where workers were slaved and employers enjoyed the fruits???? I think rather than government control in many areas, where we are seeing many socialist ideas in the democratic and free countries, Free market concepts should be utilized more so than we would like as the results are better in Free market than under any other forms of government policies... Mark Pitts 28 November 2012 Dignity and self-determination are a result of income, not whether or not someone else has more money (except for people who are pathologically envious). Capitalism creates (1) dignity (2) self-determination and (3) inequality. Mark Pitts 27 November 2012 Despite group-think to the contrary, INEQUALITY has been DECREASING as capitalism has spread around the globe. Consider: 1. In the last 30-35 years almost a billion people in capitalist countries have escaped poverty and entered the middle class. Never before have so many people, or such a large percentage of the world population, come so far, so fast. 2. More recently, from 2000 to 2015 the number of extremely poor (those making less than $1.25 per day) will be cut in half. Don’t believe something just because it is presented as a given. Onkar Sawant 28 November 2012 Points 1 and 2 indicate that poverty is decreasing. Poverty is equivalent to inequality. Onkar Sawant 28 November 2012 I dont think it is. Commented André Rebentisch @agonarch 25 November 2012 Indeed, as always in economics you can turn the argument but that sounds silly. Ravi Bhatta 25 November 2012 Agree with Mr. Skidelsky Inequality could be Killing Capitalism. But, when did we have equality in the history of human being? What other alternatives we have for the economic system other than Capitalism? Communism and Socialism are tested and they have spectacularly failed. Only option we have is to learn from the mistakes and correct the Capitalist sytem to work for everyone's benefit. Carter Pearson 26 November 2012 I don't think Lord Skidelsky is advocating communism or socialism, but rather a more practical type of capitalism. After all, if the majority of the population is indebted to the point where the cannot buy anything of major value, the economy, in any country, will be left with stagnant growth. In essence, he is not pushing for complete equality, simply the reduction of the large gulf between the top 20% and the bottom 20%, as shown by through rising GINI coefficients in much of the developed world. Alexander Antonov 25 November 2012 New Idea - Real Crisis-Proof Economy telan@bk.ru Economics as an exact science has not yet been developed. This is confirmed by the fact that the major economic phenomenon – economic crises – has no comprehensive explanation. This is accounted for by the lack of an appropriate mathematical description of economics, which is natural, because none of the mathematical tools used in economics allow giving such a mathematical description. Firstly, all of them are aimed at the investigation of mass phenomena, because the economic behavior of an individual is unpredictable. For instance, Sir Isaac Newton wrote on the issue that simulating human behavior is a more complicated task than predicting planetary motion. However, try to imagine the development of radio-electronics, if it refused to study the processes in radio-electronic components comprising all complicated radio-electronic systems due to the unpredictable behavior of single electrons. Secondly, the methods for analysis of economic situations widely used at present – graphical, statistical, econophysical – allow defining only states, and not processes. Processes are defined by differential equations, which have found quite restricted application in economics. This is why, using the term introduced by William Ross Ashby, economics can be referred to as ‘the black box’ and studied using the methods borrowed from the exact sciences. In particular, the term ‘the white box’ introduced by Norbert Wiener can be used; it corresponds to the object under investigation where processes identical in terms of their mathematical description to those in ‘the black box’ are observed. Moreover, mathematical description of the processes in ‘the white box’ is available. That is, basically, the analogy approach is used. Unfortunately, ‘the white box’ in the exact sciences has not yet been found for the current market economy. This is how complicated and unique economic phenomena are. Nevertheless, ‘the white box’ does exist for the economy reformed as suggested below. However, to begin with, let us find ‘the white box’ not for economics in general, but for the basic process, which is the ‘goods-money-goods’ process. The author demonstrates that this process is potentially oscillating and can be described with a second-degree differential equation with constant coefficients, similar to the mathematical description of the process in a radio-electronic oscillation circuit. That is, an electric oscillation circuit can be used as ‘the white box’ with regard to the ‘goods-money-goods’ process. However, such an oscillation process is unknown in the economy and has never before been implemented. The matter is that its implementation requires special conditions which cannot be created in a random way. Similarly, for instance, TVs and cars are not assembled at random, houses and bridges are not built in a random fashion, and food cannot get into a supermarket randomly, and so on. Any constructive activities always require certain knowledge, and economics is not an exception. In this respect, it is quite natural to ask whether economics needs these oscillation processes and the respective knowledge about them. Actually, it does, because only in this case money works all the time and most efficiently. Otherwise, there is always either shortage or surplus of money. As for oscillation processes, they are preferred and widely used not only in economics, but in nature and the exact sciences, as well. Here belong, for example, rotation of electrons around the nucleus and the revolution of planets about the Sun. Nothing can exist without the oscillation processes. Therefore, they should not be ignored in any science. However, due to ignorance of these circumstances, the actual economic process ‘goods-money-goods’ is described not with a linear differential equation with constant coefficients, but with a linear differential equation with variable coefficients, which is often referred to as the parametric differential equation. This is accounted for by the aforementioned unpredictability of human behavior, or the human factor, which was referred to as ‘the invisible hand’ by Adam Smith. For this reason, the coefficients of the parametric differential equation describing the real ‘goods-money-goods’ process are not just functions of time, but random functions of time. Therefore, these differential equations have no analytical solution. As for the market economy which is described by systems of these parametric differential equations, it is unpredictable; this is why economic crises in it are inevitable. Consequently, in order to be able to prevent economic crises, it is necessary to reform the economy. To this end, it is necessary to create the conditions providing for minimization of the human factor. The author suggests new economic tools enabling to solve the problem. Here belong business-interfaces, which provide for minimization of the internal human factor, and the new global information network free from the shortcomings of the Internet, which provides for minimization of the external human factor. The latter offers its users numerous business- and intellectually-oriented services. Socialist economy also provided for the successful suppression of the human factor (at that, contrary to business-interfaces, human rights and freedoms were suppressed, as well). Nevertheless, it was a prosperous economy. Therefore, business-interfaces must provide for linearization of the actual ‘goods-money-goods’ processes, i.e., for minimization of non-linear factors. The economy reformed as suggested above will become crisis-proof, and economics will become an exact science similar to the theory of electric circuits and systems, which is ‘the white box’ with regard to ‘the black box’ of economics. Dear top managers of global economy, this is the new idea which you look for. Nathan Coppedge @nathancoppedge 24 November 2012 I don't think inequality is metaphorically killing capitalism, but I think capitalism should make room for more superficial opportunities, to support the 'metaphor of capitalism'. srinivasan gopalan @geeyes34 24 November 2012 Prof.Skidelsky's contention that we need not a lender of last resort but a spender of last resort, asking the governments to go on a spending spree smacks of socialistic mind-set where the State crowds out available investment into huge projects! Even countries that shed socialistic pattern of development such as India are being accused of piling up massive government borrowings for unproductive and subsidy-expenditures, leaving hardly any funds for private sector to lean on. On top of this hard money policy of keeping the interest cost inordinately high has rendered productive segments of the real sector from accessing funds from banks a difficult job. If the quantitative easing of the U.S or the credit easing of the UK in recent times are the means by which developed countries keep their rocket fuel of credit available in ample amount to their industry and consumers, countries like India find it increasingly difficult to ensure ample credit at affordable cost to domestic industry, trade and consumers who seek loans from the banking system. This is primarily because banks find it convenient to park their money in safe haven of government securities, apart from subscribing to the massive public borrowing programmes of the government. Given this sort of reality, any call to make government end up being a spender of last resort in situations like the one in emerging economies such as India would only compound the problem. A credit-driven economy like the US or developed country may find return of the governments to be spender a novelty but this pabulum has lost its nutrient value in the developing world long ago! G.Srinivasan, Journalist, New Delhi, Inde Moritz G€d1g 25 November 2012 Maybe there is a credit/saving/funds shortage in India but in Europe and the USA there is no lack of credit, but a lack of need for it. The interest-rates are not that low because of the CBs, but because of the lack of lending. Banks not only invest in government bonds because they are forced to, but because there is no one else that can borrow all that money at a reasonable risk. 100% Carlos Avendano @untiroalaire 23 November 2012 Brilliant article Mr Skidelsky. Borrowers should also be blamed for not assuming their co-responsibility in this financial mess. Why should those who have not incurred in serious leverage (mortgages, cars, creditcards...) bail out those who have? Banks have seldom forced clients to gobble up debt just for the sake of it. That is a childish bickering, a simplistic interpretation of today's capitalism. Yet, you fail to draw a strong, compelling argument to strengthen your initial thesis: on the contrary, you expect the soaring inequality to gradually be tamed by applying a classic mix of Keynesian policies. Unfortunately, the West is immersed in a 'new normal' scenario, where the financial markets have been sequestered by the trillion-dollar Ponzi scheme cooked by governments and central banks alike. Global central banks' assets now comprise at least 1/4 of all global GDP - up from only 10% in 2002 (Kyle Bass, Hayman Advisors, 2012). As simple as it is to grasp that a family should not overleverage itself, why on Earth should we allow our governments to break the implicit social contract signed not also in between economic agents, but also with the next generations? The great Alexander Hamilton stated: 'A national debt, if not excessive, will be to us a national blessing'. But not if you owe ¥1,000,000,000,000,000 like Japan! (yes, 15 zeros). Japan can be a fenomenal example for Western Keynesianists: the lost multidecades, the dwindling, aging population, the 'needless dams' and the 'roads to nowhere', the unstoppable deflation... yadda, yadda. Long story short, despite relying on a colossal public works spending, Japan's Gini coefficient is still above 0.30; low in OECD standards, but higher than 20 years ago. Simon Johnson has been advocating for the breaking of the 'too big to fail' banks for years, as a natural way of allowing Schumpeter's 'creative destruction' of doing its job. Now, extrapolate that to the central banks: it took the US 193 years (1789-1981) to create $1Trn of Gov debt. It then took them another 20 years to add $4.8Trn more. In the last 10 years, a whopping $9.8Trn of debt will crush the US for the years to come. Unfortunately, there's no easy way out of this mess, but debt restructuring. Only those with strong balance sheets will be willing to invest in a sound economy: there's a wall of cash in corporations and commodity-rich countries alike. Bond vigilantes, beware... Nando Hoffmann 23 November 2012 Additionally to the inequality that made it hard for large parts of the population, I think it is important to look at the psychological perception of debt. In the US a large population gets directly a credit card for free, takes huge loans for studies and building/buying homes. this has to be questioned and maybe copying a more conservative view such as credit has in most parts of western Europe might help. Dave Thomas 22 November 2012 I disagree with the Professors first premise, that the failure was caused by excessive bank lending. An alternative explanation is that legislation that set quotas for sub-prime loans led to banks exploiting a new territory of predatory lending. Fannie Mae and Freddie Mac kept buying these sub-prime loans so banks to write more. Then Clinton and the Republican Congress exempted real estate sales from capital gains taxation and turned domiciles into speculative investments that coupled with the sub-prime mortgages created a bubble fed by weak dollar policy at the Fed. Banks are lending again, but only to the most sound borrowers. Prudent policy after a decade of poor underwriting. The real problem is government interference in the market and flawed public policy ideologies that believe government is capable of social engineering without detrimental unforeseen consequences. Dr. Skidelsky strikes me as an adherent to the ideology that the government is capable of successful social engineering. I do not share his faith in a limited number of government bureaucrats and 'experts' crafting solutions for 300 million Americans. So the basic choice is between the unforeseen consequences of government bureaucrats advised by 'experts' running the housing sector or the unforeseen consequences that result from self-interested individuals freely buying and selling homes in a transparent free market. I'll reject Skidelsky's policy of making reduction of inequality a priority because I see inequality all the time among human populations. Inequalities in talent in basketball (Lebron James), baseball (Derek Jeter), Football (Tom Brady) Entrepreneurship (Mark Cuban) Software (Bill Gates), work ethic, discipline, self-control, intuition, creativity, ect. etc. I'll take the unforeseen consequences of self-interested freedom over government bureaucrats and their 'experts' any and every day. 100% Chris Gedge 23 November 2012 Before commenting maybe it would be useful to read the full article. I appreciate that is against the trolling ideology, but it surely makes for a better discussion of the issues. Tim Chambers @bonalibro 23 November 2012 You get your information from FOX news and use it to challenge someone who is better positioned than you to understand these issues. No one was forcing the banks to make those bad loans, they made for the same reason they did in the previous real estate bubble, because some one else would if they didn't. You seem to forget that when you went to the bank to refinance at a lower interest rate, they would tell you what your house was worth and how much they would lend against it and sell you on the idea of buying a renovation, a deck, anew SUV, a big screen TV or paying down your credit card card debt. The more they could get you to borrow, the more they would have to sell off to the bond packagers for a fee. most of it occurred in areas that were not redlined. And many borrowers in those areas have far better records of paying their debt than you can imagine. To say it was all the fault of borrowers in redlined areas is just another way to it into an issue of race, and those others, not us, being the guilty parties. It's despicable. Jon Swenson 22 November 2012 This article has a better take, but it fails to lay the blame on Congress, especially Barney Frank and Chris Dodd. http://washingtonexaminer.com/another-place-where-republicans-keep-failing/article/2513971#.UK7PCIbpV2s Jon Swenson 22 November 2012 Why did banks lend more money then they had? They were reassured by the US govt via Freddie and Fannie they could not lose on bad loans. And, US govt policies motivated Freddie and Fannie to buy bad loans. Until politicians experts understand their 'good intentions' have consequences, any fixes will not end the problem. But then maybe that is what the politicians really want, more self created problems so they can usurp more power. What's killing capitalism is statist socialism. 80% Zsolt Hermann 22 November 2012 Although the article describes the situation very sharply, the recommended solution cannot be successful since it does not address the main problem. Social inequality, exponentially increasing debt burdens are simply the necessary and inevitable consequences, or even conditions of the profit oriented, constant quantitative growth economic model. If a system only uses what it has it cannot grow, only to maintain its present state. Thus it has to go beyond what it has in this case it has to borrow, take credit. On the other hand human nature is such that if today I am happy with 100 dollars tomorrow I want 200 and the next day 400 otherwise my inherently pleasure oriented nature will not be satisfied. Thus those on top of the economical, financial pyramid are only motivated driving the system if their profit is constantly increasing, which inevitably leads to the growing inequality. Both above mentioned factors would be manageable if we lived in a constantly expanding, infinite system but we do not. We live in a closed finite natural system, where general balance and homeostasis are the basic laws. And although previously humanity was sort of running in a 'loose' system where these laws were not totally obvious, by now we evolved into a closed, interconnected network within humanity, and humanity within nature. Thus the whole constant quantitative growth, expansive, profit oriented model has become self destructive as we can evidently see it from the deepening crisis. There is only one solution, a total system change, adapting ourselves to the natural conditions, anything less than that is 'cheating the system', and since we are part of the vast natural system around and the system is not going to change we will lose. Commented Paul A. Myers @myersbooks 22 November 2012 This has seemed breathtakingly obvious to me for five years. I work as a CPA with small businesses in California's Inland Empire and lack of demand, in particular lack of demand originating in public infrastructure projects has been beyond crippling. Part of that is the Republican party, but another big part is that the Democratic party is no longer the party of the Big Shoulders. In California it is all caught up in clientele and identify politics, completely unable to move a Big Agenda. John Brian Shannon @@JBSCanada 22 November 2012 Hi Robert, Other than I don't like the phrase 'imprudent, or deluded, borrowers, who bear the blame for the financial crisis...' this is a really great read. Complete with a nice, logical conclusion. The reason I don't like that sort of characterization, is because it is the banks responsibility to decide who is credit-worthy and who is not credit-worthy. Blaming consumers because the banks failed to uphold proper lending criteria is dead wrong. As for your point that the government must be the one to get the ball rolling again, agreed!! Too much easy money in the economy, or too little is dangerous -- but for different reasons. Either wreaks havoc with the normal flow of the economy, as we have seen. A grand national infrastructure renewal should now be one of the administration's top priorities. The sooner, the better. Best regards, JBS http://jbsnews.com Jon Swenson 22 November 2012 Govt caused the problem in the first place. Why will they do anything to fix it? John Brian Shannon @@JBSCanada 25 November 2012 Hi Jon Swenson, Why would the government do anything about the government created problem, you ask? I realize there is a rhetorical component to your comment, however it may interest you to know the following. I assume that you know that which all economists know, which is; All money entering the economy as actual government stimulus money, gets spent, taxed, spent again, taxed again -- almost endlessly. In the U.S. economy, it has been proven that all stimulus money gets recovered by the government in just under 15 years time (through taxation). Therefore, stimulus means the government is lending money to the economy which gets repaid in full within 15 years. I don't see anything wrong with that. Of course, the alternative is to not spend the stimulus, enter a full-blown depression and take perhaps 10 years to fully recover. As long as stimulus is added early and aggressively at the first sign of recession -- and then, any accumulated government deficits begin to be repaid during the 'good times' -- I am in complete agreement with it. Just as John Maynard Keynes suggested. (Stimulus during recession -- debt pay downs during periods of growth) 'The Problem' as you call it, is merely a consequence of other faults in the economy, none of which have the slightest thing to do with stimulus or government debt. Those things are consequences only, of an unbalanced economy and wrong-headed or unenforced financial regulation. Not to mention many other outside factors, such as but not limited to, the uneven transition to globalization and the economic competition between nation-states. In economics especially, great care must be taken to differentiate between the symptoms of a malady and the cause of the malady. Otherwise, we are merely treating the symptoms instead of the causes. Best regards, JBS http://jbsnews.com 100% PROCYON MUKHERJEE 21 November 2012 Robert Skidelsky has hit the nail, but the nail still holds ground; inequality is here to stay and distributional transfers can hardly be the way of getting the engine of growth to be brought back on track. The point is well taken, but markets on their own cannot play the role of distributor, neither can the government assume the same; I doubt whether regulators can make any difference. Rather the focus must shift to wage-price stickiness, caused by the distortions which has acted in a manner that in the run up to the crisis when the seemingly peevish unwinding was about to be orchestrated a full-fledged recession was caused and when credit induced growth experiment after the crisis saw its limits, the government spending mechanism was found to be highly flawed in terms of generating employment. Procyon Mukherjee 100% Venu Madhav 21 November 2012 Excellent and Awesome representation of the inner workings of capitalism! I just fail to disagree on any of your points. I am a firm believer in the fact that during a downturn the governments can focus their spending on infrastructure, education/research and healthcare that can serve spectrum wide demographics, bring in an almost assured growth and a gradually reclining wealth inequality. 50% Ken Peterson 21 November 2012 If you would reinvigorate the markets, give to the homeless, the naked, and the hungry. They redistribute their wealth. The wealth of nations is in the labor and industry of the teeming masses upon which the economic pyramid is founded. The pyramid has become inverted. All the wealth has been accumulated and stored at the top. The labor of the masses no longer has any value according to Adam Smith and Keynes. 'While Capitalism 'embodies all the vices of Mankind wrapped in the mantle of necessity' that necessity will only exist until we have generated enough goods to satisfy the needs of the masses', they said. That time has apparently come, we have enough 'stuff'. Labor has apparently outlived its usefulness. It no longer has a value. Which is unfortunate. We have been replacing Labor (people) with Capital (labor saving devices) for hundreds of years and now people are no longer necessary...except as as 'market'...(Whatwhich means they must participate in the process...somehow...doesn't it? Wait, I know! Let's have a revolution, kill all the rich people as we have done for thousands of years and redistribute their stuff...like a 'potlatch'...! Or a progressive tax policy... And when I say 'redistribute', I don't mean a diversified portfolio! R. Jamil Jonna 25 November 2012 My, my, Ken, you seem to be frothing at the mouth. 'Let's have a revolution, kill all the rich people as we have done for thousands of years and redistribute their stuff...' Apparently you've been watching a bit too much scifi lately. (Indeed, you act as if the rich have never killed to retain their power…sigh.) In any case, your point about technology would make sense in a society geared toward the satisfaction of needs. But that's not what we live in. The purpose is profit, which is why 'needs' themselves must now be manufactured. I very much agree that we all could have a very short workday in a rationally planned economy. But to get there we'd have to kill all the rich people ;) Seriously though, you should take a look at David Noble's _Forces of Production_ before you recite that argument again. Hopefully you'll modify it a bit. Peter Palms 21 November 2012 Inequality is the result .But the initial crime is stealing through inflation then life savings of 99% of the population and sheltering the earnings of those who can save enough to risk investment in stock market a deferal of taxes until the proift is ealized instead of annually on the income and then after decades of no tax paying half as much. Also not making health and education non-profit industries. You are absolutely correct in everything you mention. Remember inflation is theft. Fiat money is theft. Fractional banking is theft. Commented 50% Leo Arouet 21 November 2012 La salida no está en restringir o incluir en las políticas económicas, medidas de austeridad, sino de estimular la economía mediante el crédito... El dinamismo del mercado se da debido a la inversión y ésta depende del créditos y préstamos de los bancos... Con medidas austeras reduces el crecimiento de un país y contribuyes a agravar la recesión... Debemos aceptar, en este momento, que Keynes tiene razón e implementar sus consejos. La salida es política Keynesiana. 100% J St. Clair @@jaestclair 21 November 2012 capital....ism....'public works & infrastructure'...ism......sooo....all in all the construction industry is the money making business....for all the men out there.... x RECOMMENDED FOR YOU Robert Skidelsky Feb. 19, 2013 The Rise of the Robots LONDON – What impact will automation – the so-called “rise of the robots” – have on wages and employment over the coming decades? Nowadays, … Raghuram Rajan Nov. 12, 2012 Is Finance Too Competitive? NEW DELHI – Many economists are advocating for regulation that would make banking “boring” and uncompetitive once again. After a crisis, it … Mohamed A. 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Nowadays, … Raghuram Rajan Nov. 12, 2012 Is Finance Too Competitive? NEW DELHI – Many economists are advocating for regulation that would make banking “boring” and uncompetitive once again. After a crisis, it … Read more at http://www.project-syndicate.org/commentary/the-need-for-redistribution-of-wealth-and-income-in-order-to-save-capitalism-from-its-current-crisis-by-robert-skidelsky#iaSktCtaA5Bd4jG9.99 |
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Robert Skidelsky ...
Robert Skidelsky, Professor Emeritus of Political Economy at Warwick University and a fellow of the British Academy in history and economics, is a member of the British House of Lords. The author o…
Nov. 21, 2012 |
| The text being discussed is available at http://www.project-syndicate.org/commentary/the-need-for-redistribution-of-wealth-and-income-in-order-to-save-capitalism-from-its-current-crisis-by-robert-skidelsky |