[PEN-L:28195] summary of credit bubble (continued)

["Devine, James" <jdevine@xxxxxxx>]

Title: summary of credit bubble (continued)

Now that I'm at work, I want to add a little to what I wrote below (see the end).

As Michael Perelman points out, you are wrong in your thinking on this specific point. If you look at my web-site, http://bellarmine.lmu.edu/~JDevine and click on the "papers & talks" button in the upper left-hand corner, you'll find several papers & talks I have published or given that point to the "three bears" encouraging recession. (I predicted recession before it actually happened in 2001, but of course that's what lefty economists do. We've predicted 10 our of the last 5 recessions. Nonetheless, the bears are still there, discouraging recovery and encouraging a second dip.) These ursine marauders are: (1) excessive corporate indedebtedness; (2) excessive personal indebtedness; and (3) excessive US external debt. Not appearing in this picture is government debt, which I see as generally a positive thing (though it's possible that we could have too much of a good thing).

The author of the summary of the credit bubble seems to be pushing some kind of _laissez-faire_ solution: if the Fed had followed a monetary rule or if the US dollar was straight-jacketed to gold, then we wouldn't have seen the credit bubble of the 1990s and the implosion of 2001 and after. So "we" (the Fed) shouldn't have prevented (say) the spread effects of the collapse of LTCM; so a recession would have happened in 1997 or so. According to the free-market gospel which the author seems to adhere to, market forces would have led to relatively rapid recovery. But since we didn't follow that policy, recovery will take a long time. The hangover from the binge requires that we check into the Betty Ford clinic. The author seems to be leaning toward using this to bring in more _laissez-faire_ "reforms," though that's hardly explicit.

I think that this story ignores the basic roots of the crisis in the US, i.e., the world-wide stagnation of wages (so that consumption booms are financed on credit). I'll leave it at a very abstract level because I have to go...

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additions: in my interpretation, I see recent history as a bunch of "stages" (or mini-stages), with the timing being approximate and focusing on the US:

The 1965-1980 era saw the problem of falling profit rate & stagflation crisis. As I've argued before, a falling profit rate (measured at full capacity) encourages either inflation or unemployment (or a combination of these). I interpret this as being the result of accumulation in a supply-constrained and strong labor regime, where profit squeezes due to over-investment and rising raw material prices are hard for capitalists to deal with, due to the ability of labor to resist wage cuts. As Brenner points out, the fact of competition amongst the major capitalist powers also makes it hard to deal with profit squeezes. In some ways, these problems can be seen as results of the nation-state-based "model" of accumulation that arose in the late 19th century.

The "solution" has been the neo-Liberal policy revolution, which is more than simply an increase in the degree of globalization (which had started after World War II) but also moves toward privatization, deregulation (airlines, trucking), anti-trust (AT&T), direct attacks on labor (Patco), etc., encouraging even greater competition. This shifted the economy away from the nation-state-based model of accumulation (as the global ruling class emerges [see the current LBO]) and toward what I call the weak-labor regime. This shift is increasingly global, as different countries compete to cut wages & social benefits and to promote exports to attract transnational capital and to live up to the strictures of the IMF and World Bank and to make debt-service payments.  Though this story doesn't apply to Japan or Europe in an unvarnished way, the latter saw a similar neo-Liberal revolution, which is seen in the way in which the ECB is organized and individual countries are restrained from Keynesian stimulus.

This produced the 1980-1997 era, with gently rising profit rate & increasing instability. (Profit rates rose only gently despite working-class losses because of the rise of foreign competition.) The problem was that the neo-Liberal policy revolution, the world-wide weak-labor regime caused what I call the "underconsumption undertow," so that what accumulation did occur in the US was based on first (in the 1980s) government and then (in the 1990s) private-sector accumulation of debt, increasingly financed from abroad. Private-sector debt accumulation became even more necessary after the profit rate started falling in 1997.

The US trade and current-account deficits have two faces here: on the one hand, it allows people in the US to spend more than they earn, by providing more credit. On the other hand, it provided the world with a "consumer of last resort," so that all of the competitive pushing of exports didn't cause immediate world recession.

In the late 1990s, up to 2000, we saw the bubble economy that the article describes. Though this may have been good for happiness in the rich world (due to the two-sided role of the US current-account deficit), it's hard to sustain debt accumulation for long. (It may make some sort of sense on the macro-level to accumulate debt this way, but the individuals and markets involved can't handle it after awhile.) In 2001, there was a sharp recession, led by private investment, since there had been over-investment (e.g., fiber optics) in the boom and corporations were dealing with excessive debt.

The "solution" has been further private-sector debt accumulation, and a Reagan-style package of increasing government debt, militarization, cronyism and waste, cutbacks in worthwhile government services, and increasing inequality. Given the persistence of the imbalances that eventually undermined the late-1990s prosperity and the relative weakness of the fiscal stimulus, a "W" or an "L" shaped recessionary process is likely.

damn! this is still too abstract.

JD