by Michael Roberts
“Recessions are not inevitable – they are not mysterious
acts of nature that we must accept. Instead recessions are a product of a
financial system that fosters too much household debt”. So say
Atif Mian and Amir Sufi, two leading mainstream economists at Princeton
and Chicago universities in their book, House of Debt, recently
described by the ‘official’ proponent of Keynesian policies, Larry
Summers, as the best book this century!
See my post (http://thenextrecession.wordpress.com/2014/06/14/doctors-without-diagnoses/).
The two economists then make a very bold claim: “excessive
reliance on debt is in fact our culprit… but it can potentially be
fixed. We don’t need to view severe recessions and mass unemployment as
an inevitable part of the business cycle. We can determine our own
fate.” We Marxists would also like to claim that we can fix
recurrent slumps and mass unemployment by the replacement of the
capitalist mode of production. But Mina and Sufi reckon it can be done
by just dealing with debt.
The good thing about this book, apart from its excellent simple prose
style, is that the authors deny the usual mainstream position that “severe
economic contractions are in many ways a mystery. They are almost never
instigated by any obvious destruction of the economy’s capacity to
produce….The economy spluttered, spending collapsed and millions of jobs
were lost. The human costs of severe economic contractions are
undoubtedly immense. But there is no obvious reason why they happen.”
Instead, they reckon they have discovered the secret of the cause of the Great Recession and the Great Depression on the 1930s: “One
important fact jumps out: the dramatic rise in household debt. Both the
Great Recession and Great Depression were preceded by a large run-up in
household debt… And these depressions both started with a large drop in household spending.”
Mian and Sufi make the valid observation that the Great Recession was
not caused by excessive government spending or debt. It was the sharp
rise in private sector debt that was the feature prior to the crash – a
point made by Steve Keen in his work (see my post, http://thenextrecession.wordpress.com/2011/10/07/riccardo-bellofiore-steve-keen-and-the-delusions-of-debt/).
But for Mian and Sufi, it is not the build-up in corporate debt that
was the problem, but household debt i.e. mortgage debt to buy homes,
‘residential investment’.
The authors dismiss the neoclassical and macro consensus that
recessions are just unpredictable ‘shocks’ to an otherwise steady
equilibrium growth path as fantasised by all those neoclassical DSGE
models (see my post, http://thenextrecession.wordpress.com/2013/04/03/keynesian-economics-in-the-dsge-trap/).
And recessions are not just the result of some ‘financial panic’ or
banking crash, as argued by former Fed chief and depression expert, Ben
Bernanke (see my post, http://thenextrecession.wordpress.com/2013/11/11/why-the-crisis-and-will-there-be-another-imf-speaks/).
Instead, the authors lay the blame fair and square with ‘too much
debt’, in particular, the debt built up by relatively poor households in
trying to buy homes during the great housing bubble of the early 2000s.
What caused the Great Recession was a collapse in house prices leading
to defaults by the poorer homeowners. As these people spend more and
save little, this led to a collapse in consumer spending.
Mian and Sufi argue that the recession of 2001 after the hi-tech
stock market bubble burst was very mild because it mainly affected rich
stock market investors who still have plenty of wealth to spend. The
Great Recession was way bigger because it hit those who had little
wealth but their houses and the housing bust wiped out what little
‘equity’ they had. In mortgage contracts, debt losses are concentrated
on the debtors; they take the primary hit any house price collapse, not
creditors.
Mian and Sufi show with a range of empirical studies that the bigger
the debt rises in an economy, the harder the fall in consumer spending
in the slump. So for them, the best predictor of a coming slump is a
fast rise in household debt and the best forecast of imminent recession
is a fall in household spending, which usually precedes the rise in
unemployment.
This is all well and good. The authors are not the first to show that
‘excessive debt’ is a factor in the magnitude and duration of any
slump. They mention themselves the work of the Bank of England and
Charles Kindleberger. More recently, Claudio Borio has shown that debt
moves in cycles so that points can be identified when the risk of slump
is high (http://thenextrecession.wordpress.com/2013/07/18/cycles-in-capitalism/). I have covered much of these studies and offered a Marxist analysis of the role of debt in crises in my paper, Debt matters.
But the issue here is what Mian and Sufi do not address. Credit is
necessary to lubricate the wheels of capitalist commerce. But why does
debt build up so much that it becomes ‘excessive’ and what does it mean
to be ‘excessive’? The authors only hint at the reason. They talk about
the Asian financial and debt crisis of 1998 when huge credit was
ploughed into ‘unproductive’ assets like property which then went bust.
This was caused by a ‘savings glut’. In other words, there savers
(capitalist companies and rich people) did not invest in new
infrastructure, plant or technology, but instead in property or
financial assets.
The term ‘savings glut’ is popular with the likes of Ben Bernanke and
Larry Summers because it hides what is really going on. Prior to the
Asian crisis, savings as a share of national output had not risen
hugely; what happened was that investment in productive assets as a
share of GDP fell. Capitalists stopped investing in value-creating
sectors and instead looked for better profits in financial and property
speculation. And they lent huge amounts of savings to do so. Borrowers
got cheap credit and debt rose ‘excessively’. The assets purchased were
‘fictitious’. They represented titles of ownership to houses, golf
courses and companies that eventually did not deliver real returns and
could not be sold on for more cash.
So the ‘savings glut’ was really just a failure to invest in the real
economy. Why was there a failure to invest? The profitability of the
productive sectors was too low. In the US, profitability of the
non-financial sector began to fall back after the last 1990s (see my
many posts on this), generating the hi-tech bust and forcing investors
to switch to property investment, generating the housing bubble.
Investors bought new-fangled financial instruments that packaged-up
mortgages, ostensibly to reduce risk, but in reality to pass off risky
investments as safe. And the rest is history. Behind the rise in debt
and the subsequent collapse is a crisis in the profitability of
capitalist production. None of this explained, naturally, in House of
Debt.
Mian and Sufi reckon that the Great Recession was immediately caused
by a collapse in consumption. This is the traditional Keynesian
explanation, usually without any explanation of why consumption
collapsed. At least, the authors bring debt into the equation. But
behind debt lies profit, which the authors ignore. Sure, consumption
falls in recessions, but investment falls even more. The Great Recession
and the subsequent weak recovery is not the result of consumption
contracting, but investment virtually stopping (see my post, http://thenextrecession.wordpress.com/2012/11/30/us-its-investment-not-consumption/). And behind investment (whether in productive or unproductive sectors) lies profitability.
As Mian and Sufi just consider debt is the problem, their recipe for
solving avoiding all future recessions and getting out of any quickly
becomes wonderfully simple. When households have too much debt and
cannot recover, the government should write it off. And all mortgage
contracts in the future should share the burden of risk between
creditors and debtors. Any loss in the sale of a house should be shared
with the bank, but so should any profit from sale. “The culprit is debt and the solution is straightforward: the financial system should adopt more equity-like contracts.”
Unfortunately, the likelihood of banks and governments agreeing to
share losses with mortgage borrowers or allowing debts to be written off
and taking the hit is as low as Thomas Piketty getting governments to
agree to imposing a wealth tax or raising tax rates for the rich to
reduce inequality, the other fashionable cause of crises (see my posts
on Piketty).
Nevertheless, Mian and Sufi tell us that recessions are easy to
solve. Why did we not think of it before? We’ve not been smart enough
up to now. It’s debt – stupid!
No comments:
Post a Comment