On one hand, this whole global financial crisis (is that what we’re having again?) thing is horrendously complex. On the other, it’s quite simple. Let’s focus on the simple.
The meltdown that followed the end of the credit and housing bubbles was addressed by governments stimulating demand. All very Keynesian.
However, there was a second string to the response to the GFC that got forgotten as quickly as you could say “recovery” (and “Goodbye, Kevin Rudd and Gordon Brown”!)… that was the whole “regulate international finance flows and markets and bankers and stuff” bit. Remember what the G20 was going to do?
So we now have the situation where ‘markets’ have demanded, and got, austerity economics. But that has led to continued economic gloom. And states who might wish to continue to stimulate demand would have to borrow further from… markets. So the aforesaid markets display their ‘animal spirits’ and jump off a cliff.
And so it goes.
Keynes’ whole point was that there were very large scale irrationalities at work in market behaviour, even if some of the time it operates within its own rationality. Hence, in his book, the need for states to temper their excesses. None of this, by the way, is or should be particularly radical.
Gordon Brown was actually right that stimulus should have been maintained for longer, and the overweening irrationality of markets addressed at the international level. It’s interesting, now, in some of what’s starting to come out in memoirs, that he faced a lot of opposition from Newer Labourish types in his own party, who wanted to jump onto the ‘cut debt now’ wagon in advance of the Tories.
Tony Blair’s (really weird) memoir Journey, by the way, ends with a call for even more markets.
One for the true believers.