When the crash hit us in 2007/8 the great confidence that somehow we had found the way to keep the economy stable and in equilibrium (abolishing boom and bust) according to neo-classical theory was replaced by a Keynesian rush (as Nobel Prize-winning economist, Robert Lucas said, 'Everyone is a Keynesian in a fox hole') of fiscal stimulus to try to keep economies going.
There was also a huge bail-out of the banks. Some of this was done by governments in cases like RBS and some by central banks. According to Nouriel Roubini and Stephen Mihm in their 'Crisis Ecomomics', because Ben Bernanke, the Chair of the US Federal Reserve, had studied the Great Depression in the 1930s in detail and was determined such a crash should not happen again, he authorised the Fed to buy up huge quantities of distressed commercial bank's assets to prevent them from failing. A similar policy was carried out in the UK and many other countries. The result is that many central banks have large quantities of assets of unknown quality (that's why nobody else would buy them) on their books which they have yet to try to dispose of - which is worrying.
Once the immediate crisis passed, normal service was resumed in the economics profession and the monetary theorists insisted that the public sector debts that had been accumulated must be reduced, largely through austerity programmes of either raising taxes or cutting spending. This takes money out of the economy and as the private sector has failed to respond to this removal of 'crowding out' by growing and employing more people we continue to struggle. I say this not to be political, as there is not a great deal between government and opposition policy in real terms behind all the rhetoric, but many Keynesians would now sadly say, 'I told you so' - and I feared as much in an article I wrote in early 2010 for the William Temple Foundation website.
One of the criticisms that has been made of the Keynesian position on which I based that argument - that by providing stimulus we enable the recovery of economic growth quicker - is that unlike the 1940s, when the deficit was much bigger because of WW II, the US economy is weaker and in long-term decline. It is no longer the powerhouse of the world economy and able to overcome such deficit spending so easily.
So if neo-classicalism can only heap austerity on austerity and the amount of debt we already have makes Keynesian fiscal stimulus difficult (of course, if we had followed true Keynesian counter-cyclical theory correctly we would have accumulated a large surplus in the good times to cushion us now - but we believed the good times would never end) then what might be the alternative? The thinking of Hyman Minsky and his financial instability hypothesis is gaining some interest (see Martin Wolf in the FT - it is possible to view a limited number of articles a month free). This is an extension of the theories of Irving Fisher, whose debt deflation theory was an alternative view of how to analyse and get out of the Great Depression of the 1930's. The Australian economist Steve Keen is the current leading proponent of this theory and has recently published a book entitled Debunking Economics. I had hoped it would expand on his debt deflation theories but apart from one chapter most of it is centred on destroying neo-classical economics. (He says he has taken out the diagrams for the benefit of the ordinary reader - though you can download them - so they don't suffer from something I'd not heard of before, but have struggled with sometimes, called MEGO - My Eyes Glaze Over!).
Given the huge overhang of debt we still suffer from that I alluded to in a previous post (13 December 2011) I wonder if the kind of solutions suggested by this theory may come to the fore in some places where the levels of debt are extreme and may become un-repayable. The graphic in the link suggests that you are damned if you do (do austerity) and you're damned if you don't (and the markets take fright). This question is sharpened by the news as I write that as well as France losing its AAA credit rating with fears about the effect on the EFSF bailout fund, negotiations between Greece and its private sector lenders over the 50% 'haircut' on its debt required to secure the next tranche of bailout money have broken down. If Greece (or indeed other EU countries like Italy or Spain) eventually defaulted in an 'uncontrolled' way the consequences for their peoples would be catastrophic and very serious for the rest of us.
However, in the last paragraph I've fallen into the trap of the obsession with government debt when a significant part of the problem why demand is so weak in the economy is because private individuals and other parts of the private sector are also up to their eyeballs in debt. Given that the household sector in particular is debt-saturated and any short-term increase in credit to them to stimulate demand will only lead to a cycle of deleveraging again, Keen in his book (p. 354) suggests what in some eyes would be controversial: the unilateral writing-off of debt. He reminds us of the concept of Jubilee in ancient societies. Christians are familiar with the Biblical concept; he speaks about Mesopotamia in 2,000 BC and Babylonian expectation of extortionate interest which became unsustainable for the economy as a whole.
Clearly there are parts of our economy where interest is extortionate, but Keen is thinking in the modern time of sub-prime loans where the lenders wrote loans when they knew - or should have known - that borrowers could not repay them. In general terms the writing off of debts goes strongly against the grain of capitalist society, where paying off your debt is seen as a social obligation, but this perhaps raises the question against the rich and powerful of whether all of the responsibility of indebtedness lies with the debtor. Those lending the money must also act responsibly.
This perhaps brings us back to Greece and those who may have to take a 'haircut' on their loans to the Greek government. No one would deny that there is much that is dysfunctional about the Greek economy and parts of its society too. One might say the same about some aspects of other southern European countries too. And whilst Germany famously buckled down in the early 2,000s and cut costs and has held down wage costs to maintain competitiveness whilst southern Europeans are said to have had a ball with the relaxed credit conditions within the Euro, none the less the north Europeans were quite happy to recycle the money they were getting for their exports back as loans to enable the southerners to buy more of their goods. Should not the burden for the crisis now taking place in the Euro-zone be apportioned more equally than the severe rectitude that is being enforced by those who hold the power?
Whilst Jubilee in the Old Testament was about putting people back on an equal footing to where they started, Christians might also have some things to say about forgiveness and reconciliation that is not just about wiping away mistakes as if they don't matter. Within forgiveness and reconciliation there is a learning process, perhaps on both sides (one thinks of the parable of the prodigal son in Luke 15 vv 11-32) and perhaps there might be some humility on each side too (e.g John 8 vv 1-11) but note that Jesus tells the woman to go and not to sin again. Forgiveness is not a licence to carry on as before but to transform one's life and particularly in the Christian tradition seeing God's love for us and wanting to emulate that.
We also know that we are flawed people and change takes time, and so change to individuals' circumstances is more complex than simply writing off their debt, similarly structural changes in countries will take time too. But perhaps as in the case of the Jubilee 2,000 debt campaign that enabled the writing off of much of the un-repayable debt of developing countries and allowed them to redirect their economies into providing better education and health care, some form of jubilee now could be similarly transformative if we can take a more creative view of our economic relations than them simply being about narrow financial obligations.
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