Economics: Crises and their Resolution

by Michael Roberts

The Resolution Foundation in the UK does important economic and statistical analysis in highlighting the exploitation of labour, inequalities in wealth and income and failures of the welfare system to defend the poor (http://www.resolutionfoundation.org/). It recently hosted the UK book launch of House of Debt, with both authors (Mian and Sufi) on stage alongside Martin Wolf, the Keynesian FT columnist and Stephanie Flanders, formerly the BBC economics editor, but now taking a pay packet from JP Morgan, the American investment bank. (see
https://www.youtube.com/watch?v=UmSU0jCGt6k&feature=youtu.be)

It was standing room only to hear praise heaped from those present on Mian and Sufi’s book, increasingly regarded in the mainstream as important an explanation of the global financial crisis and the ensuing Great Recession as Thomas Piketty’s book, Capital in the 21st century is seen by the leading mainstream economists as offering the best explanation for the growing inequality of wealth and income in the major economies.

I have critiqued Mian and Sufi’s book in a recent post (http://thenextrecession.wordpress.com/2014/06/28/its-debt-stupid/). For them, it is excessive debt that was the cause of the US housing bust, the banking crash and then the recession. The answer is to introduce measures that control excessive credit and all will be well.

I criticised this view from two angles: the first was that Mian and Sufi provided no real explanation for why debt got excessive except that central banks let it happen through a lack of regulation. As I argued in my post, behind the rise in debt and the subsequent collapse is a crisis in the profitability of capitalist production. Not surprisingly, this explanation is ignored by Mian and Sufi and, of course, by the likes of Wolf and Flanders.

The second point is that Mian and Sufi’s solution to future excessive debt is to get creditors and debtors to share the risk of any default, thus making the bankers more careful about lending to people who cannot pay it back.  This policy would be a major interference in the free market for credit and in the profits of the financial system and has as much chance of being adopted as Piketty’s policy to reduce inequality through a global wealth tax.

Both the House of Debt and Capital in the 21st century deliver the worst of both worlds – they don’t identify the real cause of crises and inequality in modern capitalism, but at the same time offer utopian and unrealistic policies to solve these problems because they want to sustain the capitalist mode of production. So it is no surprise that Keynesians like Wolf, the economists of the Resolution Foundation and subtle supporters of the financial system like Flanders and her mentor Larry Summers, reckon the House of Debt has the answer.

Wolf himself has just published his book, The Shifts and the Shocks: What We’ve Learned—and Have Still to Learn—from the Financial Crisis (see an interview with Wolf in http://www.newrepublic.com/article/119403/qa-martin-wolf-his-new-book-financial-crisis). In it, he argues, as do the Keynesian wing of mainstream economics, that the cause of the Great Recession “was a savings glut (or rather investment dearth); global imbalances; rising inequality and correspondingly weak growth of consumption; low real interest rates on safe assets; a search for yield; and fabrication of notionally safe, but relatively high-yielding, financial assets.” There is little explanation for the occurrence of these bad things, or why they keep recurring over the history of capitalism, except to lay the blame on lack of banking regulation.

So, while Wolf backs Mian and Sufi’s policy answer, he also calls for a return to the deep regulation of the US Glass-Steagall Act of the Roosevelt era that broke up huge universal banks so that none were ‘too big to fail’ (i.e. would cause a systemic collapse). Wolf demands that banks hold more capital (equity) on their books from investors, so that they can withstand any future crises. But such ‘heavy’ regulation has already been bypassed or rejected by national governments, the IMF, the BIS and the World Bank. So again Wolf’s explanations of crises and policy prescriptions are both wrong and utopian at the same time.