Tuesday, February 24, 2009

the Great Repression

One thing we have in this economic crisis is the internet. Hence, we can search for an economist who knows what they are talking about far more efficiently than in the past. My current search has led to niall ferguson who is entertaining and imaginative as well as knowledgeable
... There is something desperate about the way people on both sides of the Atlantic are clinging to their dog-eared copies of John Maynard Keynes’s General Theory. Uneasily aware that their discipline almost entirely failed to anticipate the current crisis, economists seemed to be regressing to macroeconomic childhood, clutching the multiplier like an old teddy bear.

The harsh reality that is being repressed is this: the Western world is suffering a crisis of excessive indebtedness. Many governments are too highly leveraged, as are many corporations. More importantly, households are groaning under unprecedented debt burdens. Average household sector debt has reached 141 per cent of disposable income in the United States and 177 per cent in the United Kingdom. Worst of all are the banks. Some of the best-known names in American and European finance have balance sheets forty, sixty or even a hundred times the size of their capital. Average U.S. investment bank leverage was above 25 to 1 at the end of 2008. Eurozone bank leverage was more than 30 to 1. British bank balance sheets are equal to a staggering 440 per cent of gross domestic product

The delusion that a crisis of excess debt can be solved by creating more debt is at the heart of the Great Repression. Yet that is precisely what most governments currently propose to do.
Beyond the Age of Leverage: Alternative Cures for the Global Financial Crisis
His solution is to nationalise the banks and to convert American mortgages to lower-interest rates and longer maturities

Another speculative piece by niall ferguson is entertaining with a perhaps unlikely happy american ending:
That was the true significance of the Great Repression which began in August 2007 and reached its nadir in 2009. It was clearly not a Great Depression on the scale of the 1930s, when output in the US declined by as much as a third and unemployment reached 25 per cent. Nor was it merely a Big Recession. As output in the developed world continued to decline throughout 2009 – despite the best efforts of central banks and finance ministries – the tag “Great Repression” seemed more and more apt: although this was the worst economic crisis in 70 years, many people remained in deep denial about it...

If proof were needed that the US constitution still worked, here it was. If proof were needed that America had expunged its original sin of racial discrimination, here it was. And if proof were needed that Americans were pragmatists, not ideologues, here it was. It was not that Obama’s New New Deal – announced after the Labor Day purge of the Clintonites – produced an economic miracle. Nobody had expected it to do so. It was more that the federal takeover of the big banks and the conversion of all private mortgage debt into new 50-year Obamabonds signalled an impressive boldness on the part of the new president...

The “unipolar moment” was over, no question. But power is a relative concept, as the president pointed out in his last press conference of the year: “They warned us that America was doomed to decline. And we certainly all got poorer this year. But they forgot that if everyone else declined even further, then America would still be out in front. After all, in the land of the blind, the one-eyed man is king.”

And, with a wink, President Barack Obama wished the world a happy new year.
An imaginary retrospective of 2009


Mark Miller said...

I share Niall's frustration with the return to Keynesianism. It's like we've forgotten our economic history. This economic model stopped working in the early 1970s because of globalization. We should not retreat from open international trade. Isolationism was a factor that led us into the Depression in the 1930s. Niall's suggestion of restructuring debt is being considered here, both in terms of "writing down" principle, and lowering interest rates. Some have said this still won't work because they say even if we did this there would still be people who would not be able to afford their mortgages. They're people who should have been renting all along.

There was a good 3-part documentary produced by PBS several years ago on the history of economic thought and policy in the U.S. and Europe during the 20th century, called "Commanding Heights". You can watch it online at the link. Each part is divided into chapters. When you bring up the viewer for each part it'll start with Chapter 1, but after that you have to click on the next chapters to view each of them, by using the small chapter selector at the top of the viewer window. Not the most intuitive interface...

The series covers the development of Keynesianism, its rise to dominance in the Western world, its failure, and the turn to the economic theories promoted by Friedrich Hayek and Milton Friedman, of the "Chicago School".

John Dougan said...


Perhaps this was just a bad phrasing in your comment, but I would put Hayek in the Austrian school rather than the Chicago school. While he had a position at UChicago and was friends with Milton Friedman, his views on monetary theory are those of the Austrian school. http://hayekcenter.org/?p=354

Mark Miller said...

@John Dougan:

Re: Hayek of the Austrian School, not Chicago School

I must admit I only know about Hayek through "Commanding Heights". What I remember is they used both terms with him. He came from the Austrian School of economics (speaking metaphorically, though he was from Austria), but he had a strong affinity with the economic philosophies espoused in the Chicago School as well. My understanding is he ended up in Chicago. I was giving an "American flavor" to his philosophy.