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84 responses to “Quiggin on social democracy and the current crisis; Obama's epic fail”

  1. Katz

    “Change you can believe in”
    (A Drama in one act.)

    Scene: The Oval Office.

    ZOMBIE BANKS: (Each holding a leg of a whimpering puppy). Hand over the dough Obama, or we eat the puppy.

    OBAMA: OK. (Hands over container loads of taxpayer funds).

    FINIS.

  2. The Easter Spirit

    I don’t recall Obama describing himself as a “social democrat”. Did he? If not, the critique must apply more to K. Rudd, G. Brown and other avowed social democrats, oui?

  3. Adrien

    Is there such a thing as a social democrat in the USA? The government and the corporate sector seemed hard-wired into each other. I’ve read criticisms of what Obama is doing and what Rudd is doing. They both stem from peoples’ blueprints for the good life.
    .
    None of us knows if it’s going to work or not.

  4. John Milton XIV

    “It is therefore, up to social democrats to develop and guide both the response to the immediate crisis and the reconstruction of a social and economic order sufficiently robust to avoid such crises in the future”

    The above is from Quiggin’s “Concluding Remarks”.

    I will confess straight up that “my” response to this statement is “plagiarized” straight from the World-Systems Analysis as associated with the historical political-economy of Immanuel Wallerstein.
    {I strongly recommend people go directly to this source esp. Wallersteins’ World-Systems Analysis (2004); The Decline of American Power (2003); Utopistics (1998); Unthinking Social Science (1991)}

    Quiggin’s position may be described as post neo-liberal neo-Keynesianism. That’s something of a mouthful and might go some way to describing what I think may be some of the confusion in his thinking and in his “third way” policy prescriptions.

    I find it especially peculiar that he thinks that somehow or other national-state governments can “manage” or reduce risk. At the serious “risk” of sounding like a Marxist, I would assert instead that Capitalism is inherently crisis-ridden.

    In addition, Capitalism is an international, global world-system. The ability of individual nation-state governments (even acting collectively in a trading-bloc eg the EU) is extremely limited as they are forced to operate in accordance with both a global market-place (subject to weak and difficult to enforce international regulation) and with the vested interests of transnational corporations or firms.

    This is a fortiori the case post-neo-liberalism. One of the major effects of the neo-liberal assault of the past forty or so years – Wallerstein “dates” this event with the “anti-state uprisings” of 1968 which were led by both the Left and the Right – however, has been precisely the targeting, weakening and delegitimating of precisely the national state or governmental structures in which Quiggin vests so much hope and agency.

    As an example, I recently read an exchange between two English sociologists which appeared in the following An Anatomy of Power: the Social Theory of Michael Mann. (edited by John A. Hall, Ralph Schroeder) (2006). They were discussing how should a “social-democrat” vote on the issue of EU tariffs for European farmers. The dilemma for the two sociologists was that they were both socialists and Europeans. The case for voting against such protectionist measures was due to the “comparative advantage” that it would give to farmers of the global South. However, clearly this would involve them voting against the interests of “their own” (European) farming sector, which furthermore would have been their “traditional” “electorate” as social-democrats/socialists.

    Put another way, if it actually is possible for governments to manage risk – and early twentieth Western Keynesians have tried and failed before – then the global nature of Capitalism necessitates a correspondingly global structure of socio-economic governance.
    Quite simply, until and unless something along these lines is both proposed and gotten put up and running – and such a master is actually capable of “risk-managing” that unruly beast called Capitalism – then I’m afraid I can only see that Quiggin’s proposals might do something for “our” “national interest” by insulating and cushioning Australia but not much at all world-wide.

  5. Labor Outsider

    Actually John, a European social democrat should reject tariffs for EU farmers because, in addition to hurting farmers in the “south” they also raise the price of food in Europe, and food is something that the poor spend a greater proportion of their incomes on. And don’t get me started on the broader payments to farmers under the Common Agricultural Policy, which involves 80% of payments going to just 20% of farmers, most of which have the largest most profitible farms.

    Capitalism is inherintly prone to shocks and cycles of varying intensity. Quiggin is not suggesting that capitalism’s volatile tendencies can be prevented, he is suggesting that they can be better managed so that they have a smaller impact on the vulnerable. Indeed, that has long been the most important role of the welfare state and early social liberals saw the welfare state as a mechanism for saving capitalism from itself.

    You are however absolutely right that there is a significant tension between the global nature of the capitalist system and our reliance on national systems of regualation and governance. Despite the excitement generated at the recent G20 meeting, governments agreed to little new that would undermine their own sovereignty. Global socio-economic governance is of course something we are a very long way from, and for very good reasons. Global institutions often suffer from a significant democratic deficit and because of their need to make decisions consensually (in the presence of extreme differences in views on how to proceed) their responses are usually slow and ineffective. The EU demonstrates how difficult it is to achieve even regional governance among countries with deep cultural and historic ties.

  6. Adrien

    a European social democrat should reject tariffs for EU farmers because, in addition to hurting farmers in the “south” they also raise the price of food
    .
    Um yeah?

  7. MikeM

    Put another way, if it actually is possible for governments to manage risk – and early twentieth Western Keynesians have tried and failed before

    It’s a matter of degree, not success or failure. We’re looking for a reasonably stable position lying somewhere between the stultifying centralisation of the former Soviet Union and the totally unregulated economy of Somalia (although interestingly, Somalia had one of the earliest and best mobile phone service in Africa because there was no government to get in the way). It’s almost a cliche now to refer to Schumpeter’s theory of creative destruction, but we expect incompetently run banks to fail. What we don’t expect is that they have capacity to take the entire financial system down with them.

    We don’t expect governments to offset the risk to shareholders and managers of failing companies but we do expect governments to hedge at least part of the risk to depositors if the intermediation role of banks is to work.

    I think John Quiggin is a little harsh on the Obama Administration as like Rudd (and indeed Bush and Howard before them), they must work within the envelope of what is achievable. This means in Obama’s case, acceptable to the Senate and a subsequent plan acceptable to Congress.

    It is interesting to speculate what a hard-nosed lawyer out of right field with an economic background like, say, Richard Posner, might have proposed instead. On his joint blog with Gary Becker on the proposed ceiling on banking executives’ salaries he writes:

    This is a bad idea, though politically inevitable because of public indignation at financiers, thus illustrating a point I make in my forthcoming book about the depression–for I insist that it is a depression, and not a mere recession, that the country is in–that a depression is a political rather than just an economic event. […]

    It is a bad idea for three reasons. First, it directs attention away from the really culpable parties in the depression, who are not the financiers. They were engaged in risky lending, that is true; but the fact that a risk materializes does not prove that it was imprudent. A small risk of bankruptcy–a risk that almost every business firm assumes–can be, when it is a risk faced by most firms in an industry and the industry is financial intermediation, catastrophic. But the responsibility for preventing catastrophic risks to the economy caused by a collapse of the banking industry lies with the Federal Reserve, other regulatory bodies, and the Treasury Department. A banker is not going to forgo a risk that should it materialize would wreck the economy, because his forbearance would have no consequence, as long as his competitors continued running the risk; it is a classic case of external costs, requiring government intervention. […]

    Becker and Posner are, of course, professors, economics and law, respectively, at the University of Chicago, an institution both feared and reviled by the Left as the stamping ground of Milton Friedman (especially by those of the Left who have never read anything Friedman actually wrote).

    Come to think of it, didn’t Obama teach law there too? But he knows that few of his Democratic majority in Congress ever went there.

  8. Russell

    Labor Outsider – if I were a European social democrat I would vote for policies that encouraged as near to EU food self-sufficiency as possible: on environmental grounds (contribution of transport to greenhouse problem etc) and on social grounds (agriculture and the regional economies it supports is a way of life which I think worth hanging on to).

  9. feral sparrowhawk

    Mark, the interesting thing to me is why Obama has been so disappointing on this issue. If he had generally turned out to be either spineless, or a centrist (within the American spectrum) it wouldn’t be surprising. But I don’t think he has. Outside of the financial bailout most of the things he has done look pretty good to me. Sure I’d like him to go further, but within the bounds of what is likely for a US President he seems to have started quite well. Of course there are a lot of issues he hasn’t touched yet, but generally speaking I don’t think he’s moving slowly – plenty is getting done.

    Yet on the most important topic in the short term things look woeful. You can blame it on choosing Summers and Geithner, but that just shifts things back a step – why choose people whose predilections were well known when some of his other choices were so good?

    I would have thought it was far more likely he’d go to water on climate change, for example, so why this instead?

  10. hannah's dad

    http://www.rasmussenreports.com/public_content/politics/general_politics/just_53_say_capitalism_better_than_socialism

    This might surprise you.

    “Only 53% of American adults believe capitalism is better than socialism.
    The latest Rasmussen Reports national telephone survey found that 20% disagree and say socialism is better. Twenty-seven percent (27%) are not sure which is better.”

  11. Bingo Bango Boingo

    Mark, in relation to derivatives: it seems clear that trade in CDSs, etc. will continue. It’s just that the opaque and therefore dangerous aspects of the formerly operating system will be done away with by way of, for example, central clearing houses and exchanges. A little transparency will go a long way. After all, the systemic (as opposed to institutional) failures of global finance over the course of 2007 and 2008 stemmed largely from a lack of transparency, rather than any fundamental problem with the purpose or effect of financial instruments themselves. Wouldn’t you agree?

    As for Obama, I’m not sure why there should be any surprise at this point. This is the man who spent two years banging on about ‘change’ and then within months of gaining office brokered a grotesque package of old-school Washington pork-barreling. He didn’t even try to hide it. Everything from now on is grimly predictable. Still, it’s ‘troops out of Iraq’ and Federal money for stem-cell research so he’ll get a free pass from the lefties who aren’t really paying attention.

    BBB

  12. Mark

    BBB, given the amount of effort that’s reportedly gone into ‘gaming’ the latest Geithner plan, I’m not sure what prospects exist for ‘cleaned up’ derivatives markets etc…

    And Obama gets no free passes from me! The continuity in the national security state, Iraq, Afghanistan, and the lack of any real change in foreign policy – all is worrying. But you’re right, I suspect, that a lot of this stuff won’t be closely scrutinised now.

    @9 – feral, I’m a bit puzzled too. It may be that Obama just doesn’t get all this stuff. Not many pollies really do. I’m not inclined to ascribe all that much of it to the need to conciliate ‘Blue Dog’ Democrats or the odd ‘moderate’ Republican in the Senate. With the rhetorical build up and the oodles of FDR comparisons leading up to the inauguration, I suspect his ambit could have been much more ambitious than it was. It really does seem like politics as usual. There may be a *cunning* electoral plan, but that’s a disappointment too. I’d go back to what I said in the post – aside from all the usual pressures financial interests can exert, I suspect the basic problem is just lack of any real clue or analysis as to how you can run the economy differently from what is now regarded as ‘normality’.

    So I think that’s why the obituaries for ‘neo-liberalism’ – rhetoric aside – might be premature. Whether government is seen as legitimate or markets the fountain of all wisdom does of course make a real difference, but it doesn’t necessarily subsitute for ‘real change’.

  13. thewetmale
  14. John Milton XIV

    The Globalization of the past forty years is the brainchild and property of the neo-liberals. This is also to say is governed, maintained and managed by and for the neo-liberal power-elite classes or strata.
    Now, however a number of the countries of the, say, G20 nations have decided that “third-way” neo-Keynesianism will deliver better outcomes for their respective societies.
    But this runs into two problems.
    1/ International Capitalism in the era of Globalization is still neo-liberal. The major players are still transnational corporations; the major Trade Treaties are still negotiated under the policy and management aegis of the “Washington Consensus” (the IMF, World Bank) etc.
    (To be sure, the world-economy has shifted significantly away from the USA in a lot of ways, but there remains the power of the dollar, but also the power of the “ideal”)
    2/ The neo-liberal offensive of the past four decades has significantly weakened precisely the nation-state governmental structures which the “third-way” social-dems have to rely on.
    And hence, I remain skeptical about the reformist prospects of a “mixed economy”.
    “Labor Outsider” wrote
    “Global socio-economic governance is of course something we are a very long way from, and for very good reasons. Global institutions often suffer from a significant democratic deficit and because of their need to make decisions consensually (in the presence of extreme differences in views on how to proceed) their responses are usually slow and ineffective.”
    But isn’t this something bound to make already miserable people like me even more unhappy for the reasons I outlined above? ?))
    It was my bad and clumsy way of putting it. Ie. global “governance”. Perhaps better would be the sort of “multi-polarity” the Indians seem to like the idea and sound of.(?)

    I think will need to take very seriously such things as Paul Krugman’s writings on international trade. With regards the Obama administration what might be seen as disappointing were the people that didn’t make it into his Council of Economic Advisors ie. “left-Keynsians”: eg Joseph Stiglitz; Paul Krugman; Alan Blinder; J. K Gailbraith. Et al.

  15. Mark

    J. K Gailbraith

    Well, the fact that he’s dead might be sufficient reason for Obama not appointing him. But, in general, I agree that what you call ‘Left Keynesians’ might have been the folk we’d like to have seen get the gigs. And the critique they’re increasingly running of what’s occurring is well worth paying attention to.

    Mind you, now that I think about it – The Economist was pointing out ages ago – quite early in the primaries – that Obama was taking economic advice from Harvard and Princeton economists who got their tick as orthodox. So we probably should have seen it coming. The Clinton connection and the “working with Wall Street” angle probably compound that, on reflection. Though, again, there was a bit of stuff around about Summers et al supposedly having learned from what’s gone on and reinvented themselves or something. That may have just been a sop to the ‘Left Keynesians’ and/or it may reflect some real confusion at the heart of the Obama administration. I suspect both.

  16. yeti

    Well, the fact that he’s dead might be sufficient reason for Obama not appointing him.

    Rumors of James K. Galbraith’s death have been greatly exaggerated.

  17. andyc

    yeti @16: yes, but I suspect that Mark meant the other J.K. Galbraith, James’ father John, who died 3 years ago. James does seem to be an ideological chip off the old block, though 🙂

  18. Mark

    Yes, indeed!

  19. John Milton XIV

    Laughs, my bad.
    The famous John Kenneth Galbraith has a son James K. Galbraith http://en.wikipedia.org/wiki/James_K._Galbraith who is also a fairly prominent macro-economist at Uni. of Texas at Austin.

    I don’t wish to rude, but no-one seems to have provided me any reassurances that the post-neoliberal nation-state governmental structure is capable of doing the pre-1968 or the pre-Bretton-Woods things that “third way” social dems seem to be harking back to. Unless I can reassured of that, I will remain skeptical…

  20. Katz

    This comment by LO is correct:

    Despite the excitement generated at the recent G20 meeting, governments agreed to little new that would undermine their own sovereignty.

    The question remains as to how much national sovereignty must be shed and pooled before one could be confident that an effective regulatory regime for global capitalism could be constructed…

    … and also whether the benefits of such a regime would justify its costs.

  21. Mark

    I’m not sure the narrative that the state couldn’t prevent capital from doing what it wanted to do ever held good – it’s more that neo-liberal states didn’t want to – like any other economic formation, neo-liberalism required active state support to function (and to come into being). The ‘third way’ mob just went along for the ride – for a whole range of reasons, which space prevents me from going into here.

    The point I want to underline here is really the one I’m making in the post – there is an opportunity (or has been recently) for states to re-exert control over the financial sector in particular, but it’s not being taken full advantage of. The question we need to ask is why!

    I should add that I don’t think a return to the Bretton Woods system per se or anything else that pertained before it broke down is necessarily the way to go. We actually need to be a bit more radical than that in shining a light on the financial sector’s functions and working out how it can be restructured to serve social values! 🙂

  22. Russell

    Katz and LO,

    “This comment by LO is correct:

    Despite the excitement generated at the recent G20 meeting, governments agreed to little new that would undermine their own sovereignty.”

    I don’t think that’s correct – the G20 communique states that: “We believe that the only sure foundation for sustainable globalisation and rising prosperity for all is an open world economy based on market principles, effective regulation, and strong global institutions … promote global trade and investment and reject protectionism …”

    The WTO’s neo-liberal mission is to exactly undermine national sovereignty and replace it with rules that suit transnational corporations. Their ideal is that governments can’t treat any sector – education, health, utilities – as something run by government in the national interest. Everything is meant to be open to foreign investment, with no preference or special treatment for state control.

  23. Katz

    Russell, please explain how the sentiments expressed in the communique you quote would undermine the sovereignty of individual nations.

    To clarify, I agree with your observation that the WTO is not interested in constructing a transnational regime to regulate capitalism.

    G20 members have shied away from constructing a transnational regime. Such a regime would require the relinquishment of national sovereignty to a transnational body.

    Thus, in the name of national sovereignty, G20 members have ensured that the neoliberal regime that enabled the globalisation of capital will remain.

    Nationalists and neo-liberals have shaken hands over this. These nationalists are neo-liberals’ necessary idiots.

  24. Russell

    Katz,

    “I agree with your observation that the WTO is not interested in constructing a transnational regime to regulate capitalism”

    Isn’t the WTO constructing a regime that favours unregulated capitalism? The communique says that they agree to promote global trade – presumably along the lines of the last 30 years. As the multilateral trade rounds stalled, the US and EU have switched to bi-lateral agreements, but the thrust is the same: governments are not allowed to interfere in the marketplace, and the whole economy should be a marketplace open to all foreign capital. That erodes national sovereignty – it could mean having to put our state school system, or water utilities out to tender. It could mean letting Chinese or Saudi interests take over our media companies, Russian oligarchs taking over our banks…

    We often hear that a crisis is also an opportunity, and no doubt, at a time when the public is bamboozled by sums of trillions of dollars being used for schemes no one can understand, the corporations have their lobbyists at work trying to convince legislators that a bit more opening up of markets by more deregulation is just what’s needed to kick start the world economy. This is an uncertain time and whether recommended in John Quiggin’s paper or the G20 communique we need to think critically about the dangers of more free trade.

  25. Katz

    Russell, your de facto description of the situation is correct. Yes, in fact, transnational capitalism does erode national sovereignty as you describe.

    However, changes in regulatory regimes are necessarily de jure issues.

    In order to establish a transnational policeman to tread the beat where transnational capitalists consort with each other, first it is necessary for individual nations to relinquish some of their control and some of their sovereignty in order that those transnational cops can collar their quarry without hinderance by national authorities. Then it would be necessary to have a transnational judicial system where these characters would be prosecuted.

    All of the above requires initial relinquishment of de jure sovereignty by individual nations. And this is what G20 members declined to do.

  26. Russell

    Katz – I don’t mean to just go ’round and ’round here, but yes, the summit didn’t agree on measures to extend deregulation of global markets – I’m just pointing out they they advocate doing so, they express an intention of doing so. So, we should look out. And we should start analysing the costs of trade, not just its benefits.

  27. Razor

    I find it laughable that Social Defeatocrats can lecture all and sundry on the failures of the system when it is their pet policies that are the root cause of the financial crisis – if they hadn’t promoted lending to people who couldn’t repay mortgages under normal circumstances then we wouldn’t be in this mess.

  28. Helen

    GOP talking point #36457779. How tired. No-one forced the financial wizards to bundle parcels of mortgages on top of other parcels of mortgages in a house-of-cards game of escalating risk, based on rules many of them couldn’t even articulate themselves. No-one forced the rest of the country to go on a spending spree based on cheap credit. And it is Friedmanite economics, not social democratic economics, which dominated Western thinking and Western government policies up to the crunch time.

  29. Razor

    Helen – once the loans were made, something had to be done with them. What is your suggestion for what should have been done?

  30. Katz

    Capitalism inevitably generates periods of expansion and periods of contraction. On the other hand, suicidal expansion and catastrophic contraction can be avoided by an exercise of prudence.

    Razor implies that the bubble developed instantaneously. This is a self-serving and incorrect characterisation of the evolution of the present financial collapse.

    These loans weren’t all made at the same time. The US sub-prime bubble was many months in the making, and were the product of literally millions of individual commercial decisions.

    If the purchasers of the securitised instruments that bundled these mortgages had exercised reasonable commercial prudence the market in securitisation would have been choked off months before the eventual catastrophe and the bubble would not have blown out to its gargantuan dimensions.

    The lack of prudence was entirely the responsibility of decision makers who thought they were making sound commercial decisions but were mistaken.

  31. adrian

    It’s beyond rational comprehension that anyone could seriously blame those that had no power, either economically or politically for the current crisis.

    Anyone who watched The Cutting Edge on SBS last night would be in no doubt where the blame lay, and it sure wasn’t with the magical left’s ability to influence events over which it had no control.

  32. Razor

    So, lending money to people to buy houses which they then couldn’t afford to repay in order to achieve “social justice” outcomes had nothing to do with the financial crisis – nothing at all.

    Katz – where did I say “the bubble” developed instantaneously? It didn’t just take months – it took years.

    Where did I say that the ratings Agencies that failed to accurately rate the debts where free of blame? There are plenty of guilty parties in this disaster, including misguided social democrats.

  33. Razor

    OK, Adrian. Who was it who pushed for policies to make banks lend to disadvantaged and minority groups? If it wasn’t the Left who was it?

  34. adrian

    Er..the greedy banks and financial institutions who saw that they could make a buck out of it, and then hedge the risk. Nobody actually forced them to do it, least of all ‘the left’, who they would hardly listen to anyway.

    Only in your parallel universe did financial institutions whose ony criteria is self interest, get forced to lend to people they didn’t want to lend to out of some imposed sense of altruism.
    Sheesh!!!

  35. Katz

    1. The offending legislation was passed during the Clinton administration. Yet the Bush administration, which enjoyed a Republican majority in the Congress, did nothing to change the situation. The bubble developed during the Bush administration, not during the Clinton administration.

    2. Razor alleges that the bubble “took years” to develop. Perhaps he’d like to nominate a date when it became uneconomic to carry the risks associated with securitised loans.

    3. Nowhere in his first post did Razor hint that the present financial catastrophe had several causes. Rather he blames social democrats (if such folks actually do exist in significant numbers in American public life). He calla “social democrats” the “root cause” of the catastrophe. But as I have demonstrated in (1) above, an accurate understanding of the causes of the bubble would require Razor to de-emphasise “social democrats'” contribution.

    I look forward to Razor’s withdrawal of his silly assertion that “social democrats” were “the root cause” of the catastrophe.

  36. Razor

    The social democratic legislation enacted by the Clinton administration was the root cause of the lending to disadvantaged and minorities who could not afford the repayments.

    Would the bubble and collapse in US house prices due to repossessions from defaulters have occurred without the social democrat policies? No. The social democrats share responsibility. QED.

  37. Razor

    Adrian – there was legislation to make the banks lend to minorities and disadvantaged. Banks were penalised if they didn’t.

  38. Helen

    Like I said, GOP talking point. The ACORN loans were just a minority example of what was going on all over the country.

    Before this talking point switcheroo, neoliberals loved loans – HECS, microcredit – instead of welfare for poorer people. It’s only since the financial profession basically broke the credit system that it has become fashionable to decry giving credit to the poor.

  39. Katz

    That’s very poor historical logic Razor.

    If someone leaves a fire smouldering in your lounge room, which you perceive, but choose to do nothing about it, even though it could be doused with a glass of water, whose responsibility is it when it burns your house down?

    Your insurance company would prosecute you for fraud if you attempted to claim for fire damage.

  40. feral sparrowhawk

    IIRC the loans Razor is talking about represent 3% of the bad loans which caused the crisis (I’ll look around for a link). No doubt without that 3% we’d be in a better situation than we are, and as a social democrat I’m willing to admit to 3% of the problem if Razor will acknowledge responsibility for the other 97%.

  41. Razor

    Helen, katz and Feral – they may have been only a small part of the quantum but it was the methods used to assess, rate and sell those loans that enabled the dodgy lending practices that fueled the bubble/burst.

    At least you now acknowledge that they existed – maybe Adrian will retract his statement that they weren’t forced to make loans to the people unable to pay.

    Who here, thinks it is a good idea to lend money to people who can’t repay?

  42. Razor

    Helen,

    HECS – great system – marginally introduces user pays in an affordable way. Anybody who says that HECs stops them going to uni is too dumb to go to uni. Anyone who says HECS stops them affording to buy a house/car etc are liars.

    Micro-credit – generally a very good idea and is generally backed by a basic but workable business plan – ie the expectation of repayment is quite high. Unlike the subprime issuances.

  43. Katz

    they may have been only a small part of the quantum

    Thanks for the retraction, Razor.

  44. Zarquon

    Wikipedia http://en.wikipedia.org/wiki/Community_Reinvestment_Act:

    The Federal Reserve and the FDIC holds that empirical research has not validated any relationship between the CRA and the 2008 financial crisis.

    According to Janet L. Yellen, President of the Federal Reserve Bank of San Francisco, independent mortgage companies made risky “high-priced loans” at more than twice the rate of the banks and thrifts; most CRA loans were responsibly made, and were not the higher-priced loans that have contributed to the current crisis.[69] A 2008 study by Traiger & Hinckley LLP, a law firm that counsels financial institutions on CRA compliance, found that CRA regulated institutions were less likely to make subprime loans, and when they did the interest rates were lower. CRA banks were also half as likely to resell the loans.

  45. adrian

    From the Group of 20, November 2008:

    During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions.

    The words predatory lending crop up elsewhere.

    Strange, no mention of company’s being forced to make these loans by evil leftists.

  46. Paul Burns

    I suppose I shouldn’t, but, Razor wtf are social democrats? People who believe in democracy who like to mix with a whole heap of different people and hit the piss somewhat hard? Or the opposite to hermit autocrats – like George III or Louis XVI in the latter part of their lives?

  47. Liam

    People who believe in democracy who like to mix with a whole heap of different people and hit the piss somewhat hard?

    I know you’re joking, Paul, but yeah. If I can’t dance, it’s not my Revolution.

  48. Ambigulous

    Let’s drink to the:
    party, party, party Party 🙂

  49. Nabakov

    Here’s some fun reading for Razor as he goes about providing clear proof that ‘social democrat’ driven regulation forced the financial sector to create a collapsing $5 trillion pyramid of credit derivatives.

    http://www.nytimes.com/2008/12/21/business/21admin.html?_r=3&hp=&pagewanted=all
    http://www.businessweek.com/investing/insights/blog/archives/2008/09/community_reinv.html

  50. Ginja

    I’d give Obama a bit of time – FDR very often didn’t move in a staight line either. We’ll know the times really have changed if Obama manages to get the Employee Free Choice Act passed.

    I broadly agree with Quiggin’s emphasis on risk – it’s in line with what Paul Krugman and others have been arguing. Here, and around the world, more risk has been taken off government books and placed on households (hence the explosion in personal debt).

    I do have to take issue with one thing:

    “As class boundaries have blurred…the effectiveness of class-based arguments for redistribution have declined.”

    Aside from being a standard non-threatening motherhood statement, what does that mean? I don’t see much evidence that class boundaries have declined (I see lots of evidence that class lines have become more distinct). Long-term polling shows that the percentages of people identifying themselves as working class hasn’t budged since the late 1960s. The obsession of many upper-middle-class parents with private education wouldn’t seem to suggest any blurring of class lines from the other end, either. Does it seem that suburbs are becoming more mixed in terms of income? I certainly can’t recall growing up with the kind of vicious class bigotry that is around today – put downs like bogan, white trash (sadly to be found on this site).

    Where’s the blurring? I can’t see it.

    But good on Quiggin for this.

  51. Ginja

    …staight line?

  52. Helen

    Let me also remind people that the “ACORN loans caused the financial crisis” meme put about by movement conservatives is not only wrong, it’s a racial dog whistle, because what it really means is “minorities caused the financial crisis”. This was supposed to make Obama less attractive as a presidential candidate. Didn’t work – and also, we’re in Australia and have no ACORN to use as a whipping boy.

  53. Ken

    In Australia, we don’t need a whipping boy at all. From a local perspective, one of the startling lessons is how strong our Australian banking system has proven by international standards. Thanks to sensible regulation, which has focussed more on capital adequacy rather than bluntly banning trade in certain products such as securitised notes or derivatives, our financial system has been able to grow both steadily and sustainably.

    Shorter Ken: Aussie, Aussie, Aussie…

  54. David Irving (no relation)

    Razor, fuck off. All that money went on hookers and blow for the wide boys on Wall Street.

  55. David Irving (no relation)

    Oh, just in passing, about $60K of the missing money was mine. If I’d wanted it to go on hookers and blow, I’m sure I could have done it myself.

  56. Nabakov

    Don’t worry David, resititution is at hand.

  57. Jack Strocchi

    49 Nabakov Apr 15th, 2009 at 9:10 pm

    Here’s some fun reading for Razor as he goes about providing clear proof that ’social democrat’ driven regulation forced the financial sector to create a collapsing $5 trillion pyramid of credit derivatives.

    From his earliest days in office, Mr. Bush paired his belief that Americans do best when they own their own home with his conviction that markets do best when let alone.

    Thats true as far as it goes. But, as with most of Nabakov’s sallies, the distance covered is trifling.

    I wonder if he realises that the material he “tosses off” is a little volatile in his his blissfully ignorant hands. The NYT article he points to contains a little stick of ideological dynamite a ways down. It gives a succinct precis of GWB’s sub-prime/GFC fiasco which partially reverses the spin Nabakov is trying to impart:

    [GWB] pushed hard to expand homeownership, especially among minorities, an initiative that dovetailed with his ambition to expand the Republican tent — and with the business interests of some of his biggest donors. But his housing policies and hands-offapproach to regulation encouraged lax lending standards.

    Whom the Gods wish to destroy, they first boobytrap their hyperlinks.

    [sound of Nabakov fumbling with pistol, loosing rounds into his delicate little feet]

    Just to add icing to the cake, the Times summary of GWB’s program sounds very much like my “debtquity and diversity” characterisation of the sub-prime trigger for the GFC.

    But what would I know, I was only in the CA, NA and NY at the time. Cant very well trust my own lyin’ eyes, can I?

  58. Peter

    Yeah, its all the free markets’ fault:

    ‘The disease has spread,” says University of San Diego law professor Frank Partnoy, in remarks to be delivered today at the Securities and Exchange Commission. He’s talking about the sickness in financial markets caused by the federal government’s decision to select certain companies to judge credit risk. Instead of a free market judging the likelihood that a particular bond will be repaid, regulation by the SEC and Federal Reserve forces market participants to use the government’s hand-picked experts at Standard and Poor’s, Moody’s and Fitch.

  59. Katz

    Well yairs, Peter.

    I notice that this situation has existed since 1975(instituted during the Ford Republican regime). No doubt you have a very good explanation for why this weakness has taken more than a quarter of a century to manifest itself. On the other hand you may simply be parroting Republican talking points.

    And then this:

    Mr. Partnoy argues that the financial meltdown could have been avoided if these anointed ratings agencies had never slapped their triple-A seals of approval on collateralized debt obligations (CDOs). Without the comfort of AAA, investors would have wondered how they could possibly have evaluated the mortgages buried deep inside these opaque securities.

    Mr Partnoy’s explanation for why other ratings systems would have been more accurate appears to be missing from the article.

    But you are correct. The Republican-inspired cabal between the SEC and privileged ratings agencies should be smashed.

  60. Andrew Reynolds

    Helen,
    We also do not have Fannie Mae and Freddie Mac with implicit (now explicit) federal government guarantees (and thus able to borrow at preferential rates) and regulated such that they are not only able to, but are required to, operate at obscenely high gearing ratios.
    Oh – and, in 2004, being told to cover Alt-A and sub-prime loans to the tune of hundreds of billions of dollars to achieve (drum roll) more lending to the poor.
    Sure – the banks should have resisted and not made those loans. Several did not. But when the government puts a huge pot of money out there, tells you that you should be lending to the bad risks, subsidises some of it, guarantees others, and creates a regulatory framework that does not penalise you for it and hints broadly that “Nice bank you have there – it would be a shame if we had to regulate to direct lending. Wouldn’t want anything to happen to it.”
    Who, then, is really at fault? Of course it is the banks? Who else could it be?

  61. Katz

    This is a jejune argument.

    The notion that American government and American private enterprise pursue fundamentally different objectives is coming under attack from surprising quarters.

    Thus, Simon Johnson, former chief economist for the I.M.F.:

    If you hid the name of the country [the U.S.] and just showed them the numbers, there is no doubt what old I.M.F. hands would say: nationalize troubled banks and break them up as necessary.

    And:

    The [US] Treasury [under Obama] is trying to negotiate bailouts bank by bank, and behaving as if the banks hold all the cards — contorting the terms of each deal to minimize government ownership while forswearing government influence over bank strategy or operations. Under these conditions, cleaning up bank balance sheets is impossible … only decisive government action — exposing the full extent of the financial rot and restoring some set of banks to publicly verifiable health — can cure the financial sector as a whole.

    And finally:

    The second problem the U.S. faces — the power of the oligarchy — is just as important as the immediate crisis of lending. And the advice from the I.M.F. on this front would again be simple: break the oligarchy.

    This oligarchy referred to by Johnson, once one of the more articulate spear-carriers for this oligarchy, is the interlocked power of US regulatory authorities and the big banks and finance houses.

  62. Andrew Reynolds

    So, Katz – you agree that the government, in this instance at least, is a big part of the problem. So – is the solution to this more involvement or less? You seem to be saying that the government should pour more money in – through nationalisation – and (you seem unclear here) then sell them off again.
    The problem here is that this does not address the major problem you have identified, being the involvement of the government. Surely, if the government is now in the power of the “oligarchy” how is it to be broken? By giving the government even more power?

  63. Katz

    So querulous today AR!

    My non-querulous responses are:

    Yes

    Less

    I’ve recommended nothing of the sort.

    [The rest is based upon some false presumptions].

    My preference would be absolutely no cross-subsidisation. To quote Andrew Mellon, “Liquidate! Liquidate! Liquidate!”

    Simon Johnson adheres to the proposition that in order for things to remain the same everything has to change. At the very least, his skin in this game is his retirement pension.

    My modest proposition is that this collapse represents a once-in-a-century opportunity for Americans to understand the nature of their political economy. It would be a shame to waste such an educative experience through the partial use of state power, as puny and inadequate to the task as that state power may be.

  64. Andrew Reynolds

    So you would tend to agree with this one I wrote a few days ago?

  65. Katz

    Yes. I agree with your prescriptions.

    It would be interesting to witness what Americans might come to regard as cures as a result of the salutary experience that you recommend for them.

    My guess is that a new and different America would emerge from the experience, whereas neo-liberals assume that an older, purer America would re-emerge.

    Those neo-liberals are really just old nostalgics at heart! That’s what comes from a poor understanding of American history.

    But if such a poor historical understanding induces neo-liberals to support radical methods to achieve conservative ends, who am I to stand in their way?

  66. Labor Outsider

    To add a bit of perspective to this debate, I’d encourage you all to go to the RBA website and read the recent speech by Luci Ellis, the head of the financial stability department on the causes of the crisis. A multiplicity of factors contributed to the crisis – too loose monetary policy early in the decade, the systematic underpricing of risk by market participants, inadquate regultion of the US mortgage market and the structured product market more generally, and the global saving glut/current account imbalances that kept long rates at low levels and meant that capital was pouring into the US and other booming housing markets.

  67. Ginja

    Labor Outsider: you mention too loose monetary policy. But why was monetary policy loose? Because Greenspan was desperately trying to get the US out of the tech-bubble crash.

    Let’s look at the last 20 years:

    1987 – “Black Monday” stock market crash. Greenspan does his thing and the world avoids catastrophe.

    1990-91 – economists nowadays like to portray that recession as a garden variety business-cycle recession. At the time it felt anything but, and for many of us recession felt like a permanent thing in the 90s (there was also the rise of a little thing called Hansonism).

    1997 – Asian financial crisis. Australian narrowly avoids brush with disaster.

    2000 – tech wreck.

    2008 – we came within a day or two of an “extinction-level” world-wide banking collapse.

    And don’t forget to throw in the various Latin American banking crises.

    I could be wrong, but the point you seem to be making is that we have technical problems to tweak, but more broadly things are sound. At one level, many of the problems are simply of a technical nature i.e. better financial regulation. But that’s only a beginning: so much of this has to do with growing inequality and the wrecking of middle-class societies that neoliberals have wrought.

    I’d encourage people to read Elizabeth Warren. She heads the Congressional commitee overseeing TARP. She wrote a great book on the financial pressures facing ordinary families a few years ago (she’s great at You Tube, too). Warren makes the point that before the New Deal reforms, there was a banking crisis on average every 15 years. But after those reforms, there wasn’t anything like a systemic crisis until the s&L mess in the 80s.

  68. Ginja

    P.S Thanks for the Luci Ellis tip – I’ll look it up.

  69. Labor Outsider

    I’m not making that point at all Ginja. My point was simply that the reasons for the crisis are now relatively well understood.

    It is very clear that there is an imbalance between the reach and integration of financial markets and how they are regulated at both a national and international level. Financial markets are subject to important market failures that make them highly prone to bouts of instability. We have seen the consequences of that over the past couple of years, but before as well.

    But sometimes your desire to fit all events into your neoliberalism=bad framework, that you gloss over some important nuances.

    Financial deregulation occurred in Australia as well, but we maintained a stronger prudential supervisory regime than in the US. That means that households and firms have been able to benefit form the wider availability of credit and considerably lower margins on lending products.

    Australia is not the US. Australia has been better governened than the US for some time, and that the structural imbalances evident there are less of an issue here.
    Australia’s middle class has not been gutted over the past 15 years or so and the trends in inequality evident in the US over that period have not been matched here. Indeed, the last 15 years in Australia have witnessed significant gains in prosperity for most Australians, and those gains were in large part due to the reforms undertaken by the Hawke-Keating governments.

    Take your Asian crisis example. Why did we weather that? Well in large part because we had abandoned our fixed exchange rate regime and monetary policy was able to respond by cutting rather raising interest rates.

    Do I think things are perfect? No. But apart from making it very clear that financial markets cannot be regulated in the same way as other markets, the crisis hasn’t revealed that much that is new to me. Business cycles are part and parcel of capitalism. Governments have a duty to try and moderate the business cycle but we are kidding ourseleves if we think that management can be good enough to prevent recessions altogether. Open markets for goods and services are still a force for good in that they help developing countries to grow and reduce poverty. Governments still have a role to play in providing public goods, correcting market failures and ensuring that opportunities for advancement are available to all that work hard, regardless of their initial starting position. We have a lot of work to do in the latter realm.

    Unfortunately, I’m just not as sanguine as you about how well governments are likely to carry out those tasks. Policy decisions are often taken before adequate research and analysis has been done. Finances and projects are often managed badly. In short, government failure is as pervasive as market failure and I just don’t see that changing.

  70. Ginja

    I’d agree entirely about floating our currency. A floating exchange rate seems to fit in well with Keynesian full-employment policies – at least for western countries. I can’t see why any progressive would have a problem with a floating exchange rate.

    And when did I say anything about open markets? Neoliberals seem to have a caricature of those to their Left – we’re all economically illiterate Green Left Weekly readers. Maybe we’re both missing nuances.

    While you’re not sanguine about government action – even though you just spent first part of your post correctly praising intelligent government action – I don’t share your rosy view about whether the Australian middle-class has been gutted. It’s true that we haven’t faced the kind of assault on living standards that has happened in the US, but that’s not for want of trying. You might have heard of a thing called Work Choices – the only instance I know of where a western country effectively outlawed trade unions. If you separate the aggregate figures, things aren’t as rosy for average families as the Howard governemnt had us believe. Inequality and economic insecurity rose here, too.

    I have a question: you’re not sanguine about government action, but are you inspired by what the Titans of global finance have been up to? It’s something of a counter-factual, but there was one weekend last year when Gordon Brown literally stopped the world banking system from seizing up altogether. If he’d stopped for a cost-benefit analysis and a careful detailed study, chance are we’d all be living in cardboard boxes by now.

    The Rudd Government responded seriously and rapidly to the crisis. That response seems to have been vindicated by the latest economic figures. That gives you no confidence in intelligent government action? Maybe your views are coloured by three decades of right-wing government=bad propaganda?

  71. Russell

    “Open markets for goods and services are still a force for good in that they help developing countries to grow and reduce poverty”. That’s a view even quite a few economists wouldn’t agree with. There’s debate about how much sustainable growth trade can account for, who benefits, but also who loses, in both developing and developed countries, and whether the environmental cost is bearable.

    “the trends in inequality evident in the US over that period have not been matched here. Indeed, the last 15 years in Australia have witnessed significant gains in prosperity for most Australians, and those gains were in large part due to the reforms undertaken by the Hawke-Keating governments.”

    Lucky us for having a small population but a huge country full of resources the world sucked up in the just ending boom/bubble – it would have been hard to escape a boom here. If the recession gets worse, as some predict, we’ll see how well the Hawke-Keating policies have prepared us. Some of the ‘prosperity’ is even now draining out of people’s retirement incomes.

  72. Ginja

    P.S. You say the current crisis “hasn’t revealead that much that is new to me”. Are you kidding? You might have guessed that I already had a healthy degree of scepticism when it comes to our corporate betters, but I couldn’t be more shocked about the GFC if someone doused my undies in petrol and set me alight.

    We should be shocked that we didn’t learn a damn thing from the Great Depression. And that goes doubly for economists! Maybe that should be a course at uni: how to be suitably shocked and terrified.

  73. Labor Outsider

    Ginja, how is it a shock?

    Asset booms and busts, banking crises, currency crises, etc, etc, have occurred as long as capitalism has been around. Longer in fact.

    Perhaps you need to read more economic history?

    Gordon did no such thing last year – have you been writing his press releases? His response to the crisis has been a real mess so far and his responses, in their totality will quite probably made things worse in the longer run. UK banks are still poorly capitalised, the competitiveness of the UK banking sector has been shredded, banks are gaming the various support schemes and moral hazard problems have become even larger.

    I think Rudd’s banking guarantees were a mistake because the majors aren’t paying enough for the effective insurance they are receiving, competition has been reduced significantly, which is contributing to rising margins on loans, the corporate property guarantees were another disgrace, the green car program is an appalling waste of money, the government has committed $43b to a broadband project that it hasn’t bothered to take the time to analyse fully, its climate change strategy is falling apart at the seems and the education revolution has proven to be anything but. So no, Rudd’s actions so far have not given me more confidence in intelligent government action.

    You might want to read the OECD’s latest publications on trends in income inequality. You are letting your own hatred of Howard get in the way of an objective interpretation of the data. Most of the increase in wage inequality in Australia occurred during the 1980s, largely because of the Accord. However, because of the earlier wage overhang, the Accord facilitated significant employment growth and the Hawke-Keating governments largely made up for the impact on broader income inequality through well targeted social transfers.

  74. Ginja

    Sorry about that last joke. Poorly timing – I hadn’t heard reports of the Colin Barnett controversy when I made it.

    C’mon, you saying it wasn’t just a bit of a surprise? I think I’m reasonably up on my Great Depression – it’s one of the many reason why I’m a social democrat. I’ve given up waiting for neolibs to murmur something in the way of contrition.

    I’ve gotta defend Gordon Brown against ill-informed nonsense. I wouldn’t go out of my way to defend the Blair-Brown Governments, but there was a weekend last year when the world was on the precipiece, and the Brits rushed capital into the banks and Brown convinced the Europeans to do likewise. The US followed with a similar capital-injection plan shortly thereafter. Besides, isn’t he your kind of New Labour PM?

    You do tend to repeat a lot of Tory one-liners for a “Labor Outsider”. Is it the banking guarantee that is reducing competition, or is it the smaller players are either paying more for credit or flat-out couldn’t get it on the world market? Give be a reduction in financial competition over a banking collapse any day. Thankfully, we have a PM with a sense of priorities. In any event, it really wasn’t Rudd’s choice – not when everyone else is doing it.

    Rudd announced his stimulus packages in the “phony war” phase of this crisis – before the damage started showing up in our economic figures. The data trickling vindicate him completely – especially against Turnbull’s wait-and-see approach. Doesn’t impress you? Real-world economics isn’t always a genteel affair.

  75. Ginja

    …I meant poor timing.

  76. Andrew Reynolds

    Ginja,
    The “real world” data trickling in shows one thing very well – all of the Australian banks are well capitalised, have plenty of liquidity and no need (at all) of any government guarantee. All that the guarantee did was to (briefly) make it cheaper for banks to borrow, made it very expensive for non-banks and state governments to borrow and made it very hard for the government to ever withdraw the guarantee, meaning that future Australian government will have to stand behind any tin-pot little institution that may go out on a limb.
    Great outcome.
    As for the “neolibs” giving any contrition for the Great Depression, perhaps you can start by having a good look at who was actually to blame. For a start, I was not aware that any “neolibs” had anything to do with the monetary or fiscal policy at the time. The US Federal Reserve was hardly a haven for them.
    Perhaps the “social democrats” could have a look at which of their policies may have started or prolonged the depression – massive borrowings, minimum wages, tariffs and subsidies. Too introspective, perhaps?

  77. Ginja

    The U.S. did have one federal minimum wage increase in 10 years – socialism out of control, obviously the cause of the world-wide financial collapse (I was referring to this recession, by the way, not the big D).

    Ever heard of a bloke called Hank Paulson – a neolib with a bit of influence at the time.

    Things were very dicey for Australia’s banks last year. It would have risked a shut-down in inter-bank lending or even a run on our banks if we hadn’t gone where the rest of the world was obviously going and provided a guarantee. Banks run on credit – confidence – that’s why they used to be made out of marble, to reassure people. Confidence can disappear with frightening speed.

    It’s a harsh education for people who were not up on the finer points of banking regulation, but people who had money in less-regulated financial entities got a good return for years. That’s because unlike highly regulated banks, these entities didn’t have to pay all the cost of regulation – capital requirements, etc. Lots of people got a good deal for years (the ungenerous would say that compared to bank depositors they got a free ride), but they’ve now seen the downside of that deal.

    Restoring competition to the financial sector is something we can work on later. It pales in comparison with trying to clean up the mess from a serious banking crisis. Lots of financial types said at the time that the bank guarantee had little to do with the problems non-bank players had.

    Yet again Paul Krugman’s right: if an institution acts like a bank or has to be bailed out, it should be regulated like a bank, no exception. There should be no shadow banking sector – that’s the heart of this crisis.

    The thing that prolonged the Great Depression was that governments didn’t borrow enough. When Roosevelt tried to return to balanced budgets after his second election the Depression returned with a vengeance – then ww2 came along, proving the soundness of Keynesian economics. Your economics are extactly wrong.

    Now I’ve been to the pub. I’ve had enough, and if you all want to go and live in your nutty alternate right-wing universe, be my guest. I’ll stick with Rudd.

  78. Ginja

    Extactly?

  79. Leigh

    Oh Dear

  80. Labor Outsider

    Ginja, you have to be kidding. European governments rushed capital into the banks? All most of them did was announce that they would recapitalise banks some time in the future. Very little actual recapitalisation occurred and European banks, including UK banks are still woefully undercapitalised. How long was it before the collapse of Northern Rock before Brown recognised the full seriousness of what is happening? Who was responsible for light-touch regulation in the UK in the first place? Who’s call for another round of fiscal stimulus had to be repudiated by the BoE governor because it simply wasn’t affordable because the UK is going to run budget deficits of over 10% of GDP over at least the next two years and the government has no credible medium term fiscal framework?

    The banking guaurantee has certainly reduced competition. Overnight the government initiated a policy that has lowered the cost of funding for a set of institutions that already had lower costs of funding than their competitors! The Australian banking system was not going to collapse because it was better capitalised than its counterparts elsewhere. Rudd panicked and gave a guarantee that was well in excess of what was necessary to stem outflows of deposits. You might be aware that Rudd was virtually alone in giving a guarantee to all deposits of AFIs – most other governments stopped short of that by simply partially extending existing guarantees. You might also want to check out the literature that exists on the impact of generous deposit insurance schemes / guarantees on longer term risk taking by financial institutions?

    How do the data trickling in completely vindicate him? The likely multiplier from the first round of stimulus was almost certainly tiny. And are you seriously going to defend the increase in the FHOG for existing dwellings? Really?

    For some reason you seem to turn your brain off when it comes to critically evaluate policies initiated by left of centre governments. You also seem to see economics as primarly a political project rather than an empirical project. That allows you to read and pay attention to only those economists that have views that are consistent with your own world view. The endless quoting of Krugman is consistent with that. It is as though you are not aware that Krugman is a specialist in trade and the new economic geography, and not a macroeconomist. A lot of what he says is insightful, but you cannot take it as gospel in the way that you seem to.

    The reasons for the prolonging of the depression are far more complicated than your throw-away line that governments didn’t borrow enough. Yes, trying to balance the budget in 37 made things worse, but so did the wages, price control, industrial and trade policies initiated by Rooseveldt.

    As for the idea that it was government spending during WW2 that ended it here is Christina Romer, Obama’s head of the Council of Economic Advisers:

    “This paper examines the role of aggregate demand stimulus in ending the Great Depression. A simple calculation indicates that nearly all of the observed recovery of the U.S. economy prior to 1942 was due to monetary expansion. Huge gold inflows in the mid- and late-1930s swelled the U.S. money stock and appear to have stimulated the economy by lowering real interest rates and encouraging investment spending and purchases of durable goods. The finding that monetary developments were crucial to the recovery implies that self-correction played little role in the growth of real output between 1933 and 1942.”

    So, again, things are more complicated than you seem to think.

    My conclusion would be that we still have only a partial understanding of the impact of fiscal policy on the economy and particularly which fiscal actions are most effective during recessions. In part that is due to the difficulty of identifying statistically the impact of fiscal policy, and in part it is due to the fact that the current set of economic circumstances is quite unlike what we have seen in the past (see Axel Leijonhufvud, a Keyensian economist, for why the current circumstances are actually very different from those confronted by Keynes during the 1930s). Do I think that expansionary fiscal policy was necessary in Australia? Yes. Do I think that vindicates everything Rudd has announced? No.

    Just incidentally Ginja, can I ask what you do for a living? I’m particularly interested in how you would discriminate between two economists with different views on what the correct policy prescription is? Are you equipped to critically evaluate their theoretical or econometric frameworks?

  81. Ginja

    You’ll find that in banking crises, even very prudent banks that are well-capitalized get swept up in the crisis. It makes no difference when a tsunami-sized panic is on. The same goes for countries: contries with well-regulated banking systems get swept up in the chaos, too. Rational behaviour gives way to “animal spirits”.

    That seems to be at the heart of our disagreement: in normal times, the points you make would be good ones. But in times like these we need responses that a big and rapid (and sometimes ugly). The economic damage done by dithering would dwarf any problems that might arise because we didn’t have the most elegantly-designed bank guarantee. It’s sort of like worrying about the carpet getting wet when the house is on fire. People aren’t stepping back and seeing the big picture. That’s what I meant when I accused you of living in the 80s. Non-economists can see that – maybe economists are too close to the nuts and bolts.

    Moral hazard is always a consideration, but the heart of this crisis has to do with the “shadow banks”. They had no deposit insurance or the rest of the formal government guarantees to fall back on, yet they behaved recklessly.

    Yes I would defend the FHBG for existing dwellings – to prop up housing prices, to stop them falling precipitously in a crisis. Like financial competition, housing affordability is something we can work on when the crisis has passed. The government is obviously worried about a reverse “wealth effect” and lots of people sitting on negative equity.

    On Roosevelt and self-correcting markets and all the rest of the Amity Shlaes revisionism, I’d say economies exist in societies made up real people who get angry. Remember the famous quote by Keynes – “in the end we’re all dead”……or go fascist or communist or Hansonite. Governments can’t wait. One of the good things to come out of this crisis is that it’s respectable for economists to study “animal spirits” and not assume we’re always rational actors – that goes for the world outside economics, too.

    P.S. I’m not convinced you’ve actually read Krugman in any detail – give him a go.

  82. Labor Outsider

    Yes Ginja, it is where we disagree. Short-term reactions have long-term consequences. We saw that very clearly in the wake of the end of the tech bubble where the Fed used the same sorts of arguments to defend cutting short-term rates well below what would have been warranted under a Taylor Rule and then kept them there too long, helping to inflate the housing bubble. I don’t know where you get your confidence that bad policies will be unwound after the effect but there is little evidence that governments will do so. Your defence of the increase in the FHOG is astounding given that it offers another subsidy to distort Australia’s housing market and acts on the demand side of the housing affordability problem rather than the supply side, where the problem actually exists. It is effectively a transfer from future owners to existing owners and will simply be capitalised into the value of homes and make it even more difficult for future owners to break into the market. In that way it is a regressive policy as well. If you look at the data, as I have, you will see that there would have to be an enormous fall in house prices for negative equity to be a widespread problem in Australia. The increase in the FHOG was a political fix and had nothing to do with good economics.

    As I said, I have read Krugman in more detail than you given that I read his academic papers as well as his populist books. Perhaps you should go and get yourself a post-grad degree in economics seeing as you are so interested in it. It might help you to better understand the implications of some of the things you write about.

  83. Ginja

    Get over yourself.

    Um, prices have fallen steeply in many US housing markets – even though lots of economists dismissed talk of a housing bubble a few years ago.

    Our obsession with real estate doesn’t seem to have reached quite the mad proportions of those in the US, and there’s no sign of an oversupply of housing, but I have friends who have jaw-dropping mortgages. Homebuyers here may have needed a decent deposit, but many have since added to their mortgages. It wouldn’t take much to add to our economic headaches. I’d be willing to bet that there’s a document in treasury that comes close to my view – with econometric models, of course. By the way, depressions tend to be quite regressive.

    And why the political fix? Rudd’s numbers were sky high and money lots of stimulus cash was going out anyway.

    Ever wondered why Keynesians were so dominant in the post-war world? They had lived through the Great Depression, understood how bad things can get, and knew, often from direct personal experience, the human cost. Less “econometric models” and more history of the Weimar Republic.

    The great Keynesian Joan Robinson – who I’ll hazard a guess you didn’t study in your post-grad degree – said it best:

    “I don’t know mathematics, therefore I have to think.”

    And let’s not forget this gem:

    “The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn to avoid being deceived by economists.”

  84. Ginja

    The last line should read “…, but to learn how to avoid being deceived by economists”. It really is a gem!

    Anyway, I think we should wrap this thread up. Pointing to a degree to win an argument really is the last refuge of the intellectually bankrupt.