Re: [Pen-l] Great Depression III??

["Jim Devine" <jdevine03@xxxxxxxxx>]

Carrol Cox wrote:
> All discussions I've seen simply take for granted that it is strictly a
> financial crisis and can or should be resolved within the financial
> system. Could it be that the financial crisis is 'merely' (?) an
> expression of a 'deeper' crisis, and that purely financial actions
> cannot touch it?

I don't know about "all discussions," but it's generally recognized
now that the crisis is more than financial. It also has to do with the
popping of the housing bubble, causing housing prices to fall relative
to the value mortgage debt, so that the "rot" is more and more
extending far beyond the sub-prime sector.

Well, maybe the housing market should be seen as financial too: after
all, it has pride of place as the last two initials of FIRE, while
what is housing but an asset? But why did we see a housing bubble? I
think it reflects an underlying problem with the real ("Main Street")
economy.

The proximate cause of that bubble was Greenspan's (and Bernanke's)
response to the collapse of the previous (dot-com) bubble, where they
cut rates very low in order to fight deflation and to keep politicians
and financiers and "Main Street" happy by mellowing out the recession.
Oh no, that simply shoves the blame back to an _older_ financial mess!

The basic problem, I think, is that our Brave New Economy _needs_
bubbles in order to enjoy a modicum of GDP prosperity. With wages and
thus mass consumption stagnant, something has to be done to keep
private fixed investment going. High profitability helps, but a profit
and investment-led boom is inherently fragile (prone to recessions,
which damage profitability).

In the 1990s, the government wasn't helping (as it was running
surpluses), so what was needed was something like the dot-com boom,
fed by foreign funds. (Meanwhile the high dollar kept inflation down.)
In the the current decade (the "uh-ohs"), we needed credit-based
consumption, housing investment, and some profit-led business fixed
investment. A lot of this was based on the housing bubble, though
there were assists from the rising government deficit (wars and tax
cuts for Dubya's cronies) and rising exports (due to the falling
dollar). (The falling dollar has also encouraged inflation, including
due to oil prices.)

In sum, the financial crisis might be seen as the result of forces
that temporarily solved the underlying under-consumption undertow. It
delayed the stagnation, but at the cost of foisting a tremendous
amount of debt on US consumers and financial institutions. Those
imbalances will likely get worse as the recession gets deeper. The
chickens are coming home to roost.
-- 
Jim Devine /  "Nobody told me there'd be days like these / Strange
days indeed -- most peculiar, mama." -- JL.
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