In the Time Between Crises

The working premise of politicians and economists in the ‘developed’ world of the West is a basic economic stability has been achieved by way of the depth and breadth of the political-economic institutions created over the last 75 years. The storyline coming out of Washington, London and Brussels is of degrees of economic ‘recovery,’ if halting, from the Great Recession. But missing are the institutions on which stability was based. They were removed in recent decades in favor of ‘market’ based reforms. What remains are institutions—the political establishment and the Federal Reserve, that support and foster the worst excesses of unfettered capitalism. This suggests periods of economic ‘recovery’ are now whatever lies between the periodic crises endemic to capitalism. To be clear, this isn’t a forecast. It is more nearly a look at history with and without the institutions of ‘managed’ capitalism to infer likely outcomes.

By mid-2006 news stories began appearing that a large percentage of mortgage loans made in the preceding few years were ‘no-doc’ or ‘stated income’ and investigation had revealed actual incomes were far less than the amounts stated on loan documents. The practical implication was a lot of people had bought houses they couldn’t make the loan payments on. As subsequent evidence revealed, in many cases loan officers had determined the ‘stated’ income amounts to be filled in on the loan applications by solving for the amount needed to qualify for the loan. The mortgage brokers making these loans and the Wall Street banks securitizing them were ‘earning’ fabulous sums in commissions, wages and bonuses, but the business was unsustainable—not only did it not continue, it set into motion the greatest economic catastrophe since the Great Depression.

From 2006 well into 2007 there was little sense of impending catastrophe. A number of economists who were paying attention understood the risks and set about ringing the alarm bells. But the alarm bells went unheard by the powers that be in Washington and New York. Fed Chairman Ben Bernanke echoed the Wall Street line there hadn’t been a nation-wide decline in real estate prices since the Great Depression. When crisis finally struck establishment reactions took two tracks. The first from the George W. Bush and Barack Obama administrations was to restore the financial system to its pre-crisis state through bailouts and ongoing subsidies. This was accompanied by modest efforts to offset the consequences of the crisis in the ‘real’ economy with economic stimulus. The second track was to recognize the failure of mainstream economists to ‘predict’ the crisis and to look further back in time to ‘depression economics’ for solutions to its economic consequences, but not its causes.

Fast forward to today and the ‘new’ mainstream economic debate centers on...