Home > Uncategorized > A crisis-prone & fragile financial system

A crisis-prone & fragile financial system

from Asad Zaman

Prior to the Global Financial Crisis (GFC 2007), many senior economists and policy makers expressed confidence that they had finally solved the problem of business cycles, booms and busts, that plagues capitalism. Because of this over-confidence, early warnings of a looming crisis by Nouriel Roubini, Ann Pettifor, Peter Schiff, Steven Keen, Dean Baker, and Raghuram Rajan, were ridiculed and dismissed. Even after the crisis, many economists thought this was a minor glitch, which would soon be remedied. Now however, while conventional economists continue to search for reasons for the mysterious stagnation besetting capitalistic economies, the weak and jobless recovery from the GFC has been labeled as an illusion and a false dawn by Schiff. Like him, deeper analysts are converging on the idea that the problems run deep, and that radical changes in the global financial architecture are required to solve current problems and prevent future crises.

For instance, consider Lord Mervyn King, the Governor of the Bank of England from 2003 to 2013. His experience at the heart of the global financial system led him to the conclusion that   “Of all the many ways of organising banking, the worst is the one we have today. … (can we) think our way through to a better outcome before the next generation is damaged by a future and bigger crisis?” Similarly, Minneapolis Federal Reserve President, Narayana Kocherlakota , after viewing the stark conflicts between the empirical evidence and the macroeconomic theories over the past ten years, writes the economists use “Toy Models” which do not work in face of the complexities of real life

There are two central elements which lie at the core of the fragility of the financial system.  read more

  1. patrick newman
    December 7, 2016 at 6:38 pm

    Gordon Brown, UK Chancellor (97 – 2007 and then prime minister – 2010) imfamously said not long before the GFC that he had solved the problem of the boom and bust cycle!

  2. December 7, 2016 at 9:32 pm

    Let’s call it what it is: Systemic Fraud.

  3. Craig
    December 8, 2016 at 3:47 am

    All that you say about neo-liberal macro is true. In addition economists, who could get their degrees without taking so much as an elementary course in accounting, have also lost track of total actual costs accumulating moment to moment and their increasing ratio to total individual incomes. Hence we see fixed capital assets and their depreciation costs accumulating for literally centuries while the easiest mark for increasing profits, labor costs, have steadily been raided. Now we have robotics and AI becoming increasingly disruptive economic forces that will reduce labor costs/aggregate individual demand especially for the mass of employees probably 30 times faster than it ever has before. And that is why monetary gifting must be integrated into our current monetary paradigm of Debt ONLY, for the individual and reciprocal price gifting to the consumer and then back to the merchant who gave the discount so that the productivity of innovation and AI is not diverted to the monopolistic business model of private finance.

    • December 8, 2016 at 11:09 am

      Craig, I admire your summary of how much worse our problems are being made by robotics and AI, much as happened when steam powered factories enabled 19th century Britain to mass-produce surplus for international trade rather than use. In a way I’m also with you on the need for “monetary gifting”, but how is that going to resolve the problem of ” fixed capital assets and their depreciation costs accumulating for literally centuries”?

      Polanyi’s “The Great Transformation” introduced me to international agreement on an 8-hour working day: see http://bebusinessed.com/history/history-40-hour-workweek/. It seems to me further reduction is needed in industrial work, but to keep up skills and fit in with need for work, involvement in domestic and community life and the restoration of the natural environment, this should probably be by work-sharing over the course of a year or working life. This could work like young people doing some sort of national service, or what I like to imagine: cutting traffic by us all commuting one way only a couple of days a week, with an overnight giving one a break from the wife and kids! But seriously, more local time and days (or years) volunteering at doing what one is interested in or sees needs doing (including on-going care work, crafts, mutual education and natural restoration projects) is what tends to happen when one retires on an adequate pension (however that is provided). I see that as a much saner option than compulsory employment tending machines making for consumption much more than we need. Better right now to use our time and industrial facilities re-equipping our neighbourhoods with the cultural facilities they have had during my lifetime (often provided by churches), but are currently closing as “uneconomic”. Sadly, where leaders don’t organise that, “the harvest is great but the labourers are few”.

  4. December 8, 2016 at 6:13 am

    “I focus on the how economic theory itself has been captured by the top 1% and changed to serve their interests.” “The role of economic theory should have been to clarify and expose the structure of the economic system, so that economists could understand it and make it work better for all. Instead, economic theory has been captured by the financiers and turned into a propaganda machine, which hides the realities of the system.” “Romer notes that economists’ blatant disregard for facts in conflict with their imaginary theories is so extraordinary that it deserves its own label …”

    While expressed somewhat awkwardly and imprecisely, the positions presented, especially those above are important and valid. I don’t see this article as part of a route for improving economics. If that were the case Romer’s article and the dozens before it making much the same points would have produced some movement in that direction. For me, this is more confirmation that economics is compromised beyond saving and should be terminated as quickly as possible. To that end shut down all the economics departments and fire all the economists. No way this does anything but make the world a better place to live. At least we’ll be able to clearly see the asshole rich guys who are trying to kill us.

    • December 9, 2016 at 11:24 am

      To paraphrase John Dewey, a test of the value of any scientific or philosophical activity, including economics: Does it end in conclusions which, when they are referred back to ordinary life-experiences and their predicaments, render them more significant, more luminous to us, and make our dealings with them more fruitful? Or does such activity terminate in rendering the things of ordinary experience more opaque than they were before, and in depriving them of having in “reality” even the significance they had previously seemed to have? Today’s economic discipline seems to fall squarely into the second alternative. The problem with economics and economists is their “investigations” begin and end with themselves and their theories. They never touch the sources of economics and economic theories, ordinary life-experiences and those who live them. On that basis, it is foolish for anyone, even economists to use what economists say and write as a basis for better understanding or improving the life of the ordinary citizen. A straight forward failure for economics and economists.

  5. December 8, 2016 at 1:38 pm

    I agree with Ken that modern economics is beyond repair. The wrong fork was taken in the battle of the methodologies when a quantitative, scientific (that is search for universal invariant laws) approach won out over the historical and qualitative approach. To fix the problem, we have to go back and accept temporary and approximate truths, valid only within a particular historical, institutional and social context — instead of searching for idealist perfections of geometric truths valid across time and space without any particular historical referents. That means that when we start micro by saying consider a consumer (abstracted from a real person, all of whom are different) contemplating purchase of commodities represented as a vector of quantities in n-dimensionals, by maximizing a utility function subject to a budget constraint — we have already lost the game. This abstraction does not represent ANY real world situation, and those who study consumer theory in business schools know this model and have firmly rejected it as being too naive and simplistic a definition. They worry about concrete particulars like putting attractive items near the checkout counters — very specific, concrete, culturally situated. In my series on studying Keynes, I am trying to explore how one might go about doing a historically situated study of economics. I am now entirely clear that one must study theories within their historical context — both are necessary — theories AND history. One cannot dispense with either.

    • December 8, 2016 at 3:54 pm

      Asad, while I agree with you that both theories AND history are necessary, I don’t agree that
      “To fix the problem, we have to go back and accept temporary and approximate truths, valid only within a particular historical, institutional and social context”. You and Ken need to understand that the meanings of “theory” and “truth” have been misconstrued since the time of David Hume. Real theories are causal (i.e. involving transformations of energy) and not mathematical formulae for the reconstruction of measurements, while geometric truth is a criteria by which (literally) worlds can be measured, not an agreement between implied and true measurements.

      The criteria which Hume took for granted was the right angle (established by symmetry) between Cartesian co-ordinates, but this doesn’t account for the world-like curvature of Hubble’s Bubble: the limit of expansion through time of our energetic universe. C.f. Keynes’ reference to a non-Euclidian universe and mine to the mathematics of topological transformation, whereby a circle can become a triangle, straight lines can curve and real lines have an inside as well as an outside (forming channels in which things can happen). Cartesian coordinates have enabled us to locate regions of the world, but they don’t tell is what is in them. Theories based on these and our observations amounts to a claim that some smaller spatio-temporal region is located within a larger one, which if the coordinate system is true can be true (or not true) itself; but as with map-reading this doesn’t tell us what the smaller region does; it merely tells us where to look for what we are interested in, so we can go and look at it for ourselves, if necessary following Bacon’s earlier method of taking things to bits to see how they work (this having been triumphantly vindicated by Harvey’s discovering the circulation of blood).

  6. Craig
    December 8, 2016 at 10:59 pm

    Viz the financial system perhaps we could have an integration of both partial and complete change in that the particle of truth of the current system, Debt, is integrated with an entirely new financial idea, Gifting, and this integration is so deep and sweeping that an actual third system arises out of it. This way the virtual financial monopoly of credit creation curiously enjoyed by private finance would be balanced, and additionally the complete restriction on the idea and vehicle of that creation, Debt and Loan Only, would be balanced by Gifting as well.

    Dave, I think the idea of integrating employment with more leisure is an excellent one. Number one, combined with monetary Gifting it would enable more rapid change in the economy and economic theory and number two it simultaneously begins a positive and constructive acculturation of leisure which is not idleness, but self determined and directed purposeful activity. Perhaps we could also have an integrated effort by government, the helping professions and the clergy in making individuals aware of the multitude of positive, constructive and satisfying purposes available to them in addition to employment.

    I think we should embrace the financial and economic effects of innovation and AI. Technology has been trying to lift the so called “curse of Adam” for centuries, and embracing that fact along with monetary Gifting could enable not only resource efficiencies but actual resource reductions. And even though with Gifting I’m sure we would see an increase in consumption at first (the reality even in advanced economies is relative austerity for a large majority) rather quickly I think we’d see a balancing there, especially if we are smart and comprehensively emphasized man as homo sapiens sapiens, wise and discerning man as opposed to homo economicus.

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