[Marxism] A Keynisan view of the crisis

[Anthony Boynton]

*Where, oh where, are the orthodox economists now?*

by Ann Pettifor



Ann Pettifor is a new economist and author of 'The Coming First World Debt
Crisis' (Palgrave, 2006) and editor of 'The Real World Economic Outlook'
(Palgrave, 2003). She is a fellow of the new economics foundation (nef) in
London and director of Advocacy International. Her blog is at

http://debtonation.org/



20th September, 2008



In the midst of all this tragedy and chaos, one has to savour the moment.  The
sight of all those free-market capitalists, trained by economists at the
Chicago School of neo-liberalism,  handing over to 'big government' the
financial system of the biggest free market economy in the world.



And in the midst of what will prove to be a prolonged period of economic
failure, one must be allowed to indulge just one feint sense of
satisfaction. For only a couple of weeks ago (see below) Jim O'Neill chief
economist at Goldman Sachs, advised me, and a BBC World Service audience
that this financial catastrophe was no big deal,  'just another periodic
crisis'….. like five that he had already lived through. (He was referring, I
believe, to crises such as that of the US stock market of 1987, the South
East Asian crisis of 1998 and the Dot.com crash of 2001.)



It is now pretty clear that I, without the data, research back-up and
infrastructure that supports Jim O'Neill's analyses – already knew that this
was not at all like the previous 'periodic crises'.  With my background in
Keynesian monetary theory, I had a more sophisticated and accurate view of
the gravity of this crisis than Goldman Sachs's neo-liberal economists.
Regrettably my foresight and wisdom did not extend to earning Goldman
Sachs-like fees. More fool me.



Last year, at a seminar in Cambridge, a prominent economist with a column on
one of Britain's most prestigious newspapers, argued to me that managing the
distribution of money was a little like managing the distribution of bread.
He gaily recounted the story of Kruschev visiting New York in the 1950s –
when he asked to be introduced to the man who so miraculously distributed
bread throughout that city. His American hosts replied that bread was
distributed not by a man or a company, but by 'the invisible hand'. In just
the same way, argued this orthodox economist, money is distributed
effortlessly, and above all efficiently by financial markets. Despite the
'debtonation' of 9th August, 2007, he argued, the management of finance
could be trusted to Adam Smith's terminal, prehensile limb.



It now turns out that Adam Smith's invisible hand was not quite up to the
task.



Money is not like bread, or wheat, I argued. Why? Because it is not a
commodity that can, like wheat, or oil or gas, become scarce. It is not dug
up from the ground like potatoes or oil. Above all, it does not grow on
trees. It cannot become scarce, because it is something created by man - it
is a social construct.



As such it is a very powerful tool in making economies work, and its abuse
and misuse can lead to the kind of catastrophic events of the 1930s and the
ones we are now witnessing.



The distribution and management of money and credit, i.e. the regualtion of
capital; the price we pay for money and credit (interest rates) and the
flows of money across the world – are all so vital to the functioning not
just of the economy, but also of society, that it must therefore be governed
and managed prudently. Above all, money, this social construct, must be
governed and managed in the interests of the whole of society – not just
bankers and the finance sector. What has happened under the dominance of
orthodox economics and the de-regulation of finance, is that the finance
sector now controls the movement of capital, the setting of interest rates
and the creation of credit. And they do so in the interests of – you guessed
it – Finance.



Society must now transform this way of managing our financial sector. Money,
credit and capital flows must in future be governed and managed to serve the
interests of all who need it – both those we would broadly define as
'Labour' and those we would broadly define as 'Industry', which includes
agriculture of course.



And orthodox economists must be shunted to the margins of history.



*Rip it up and start again*

by Ann Pettifor 19th September, 2008:



My comment for the Guardian's site, part of a debate on the Credit Crunch
organised by the new economics foundation, of which I am a fellow…



Bankers have gone to great lengths to damage our confidence in the banking
sector. And loss of confidence and trust on this scale can't be fixed by
banning a few short-selling speculators or by nationalising a bank here, an
insurance company there. Nor is confidence restored when ministers meet up
with bankers on the quiet, and grant them monopoly powers (as with Lloyds).



Or when central bankers flood banks with new loans (liquidity) backed by
taxpayers. We assume bankers will abuse their monopoly power, and
taxpayer-backed loans will not be repaid. That makes us nervous.



Above all, we can have little confidence if interest rates remain so high.
Banks are cracking under huge debts and liabilities (like the outstanding
$60 trillion-plus Credit Default insurance claims hidden away from
regulators as "swaps"). How can they honour claims and debts if interest
rates remain so high?



Oh and by the way, it is really difficult to retain confidence in the system
if politicians assure us that interest rates are very low – contrary to what
our own bank statements tell us. Or indeed that low interest rates caused
the crisis. It is the deregulation of credit creation in the 1970s that is
at the root of this crisis, and it was high, not low interest rates that
made today's vast bubble of debt unpayable. Our politicians should catch up.



So how to fix this catastrophic mess and restore confidence?



First we have to think system-wide fixes, not quick fixes. We have to ignore
the bleatings of the City, and subordinate all financiers to their proper
role as servants of the economy, not masters.



Where do we start? We could begin where Roosevelt did in 1933, and declare a
three-day bank holiday. The Fed, the FSA and the Bank of England could then
take time and check the books of banks for well-hidden toxic waste –
undeclared liabilities. Only when regulators have a proper sense of the
scale of the mess can they take decisive and appropriate action. Right now
they are sloshing buckets of our money about, unsure as to the whereabouts
of the financial "weapons of mass destruction" banks have hidden away.



Next we must end "inflation targeting" – just a cover for keeping interest
rates high. Inflation is falling, not rising, and there is a grave risk of
deflation. Think the 1930s, or Japan since 1990. High interest rates are
great for lenders/creditors, but a killer for debtors, and there are far
more debtors in the economy than savers. And if we are to face the threat of
climate change, we need cheap, but not easy, money to help finance a Green
New Deal.



Third the Bank of England should regain control over interest rates – all
rates. The interbank lending rate (Libor) should no longer be set by a
committee of private bankers meeting daily at the British Bankers
Association. They must be set by a committee accountable to society, and,
when setting rates, must consider the interests of all who make the economy
work – labour and industry – not just finance.



These are the fixes needed to deal with systemic threats. We could expect
them to restore and retain confidence for as long as they did after Keynes
introduced system-wide fixes in the 1930s. That was a golden age of 40
years.



Lehman Brothers and the US as 'a sharecropper society'

by Ann Pettifor 15th September, 2008.



Today's news - of the collapse of Lehman Brothers, the sale of Merrill Lynch
and of the difficulties of AIG - are momentous and of truly historic
significance.  While there is much more to be said about what is going on
within the financial system, today I want to stand back and look at the
bigger picture.



Five years ago almost to the day, and as part of a team at the new economics
foundation (nef) I edited a book intended to shadow the IMF's World Economic
Outlook, whose 'outlooks' we believed to be based on delusional, if
orthodox, economics. We called our book The Real World Economic Outlook
(Palgrave, 2003) and, as noted in an article at the time for Open Democracy
on 1st September, 2003, "released provocative new research … which argues
that the "first world" is approaching a major debt crisis… The reckless
financial policies of leading western powers in the last two decades make it
likely that the next seismic debt crisis will be in America, not Argentina."
I leave you to imagine the sniggers with which our prediction was received
within Washington, Whitehall and the City of London.



In our book we explained how the international financial architecture - or
'globalisation' -  was structured in such a way as to enable the US to
'hoover up' money from the rest of the world, and use these resources to
live beyond its means. I wrote that "It is this financial system which makes
US financiers so confident that the rest of the world will continue to
finance their nation's extravagant spending binge.  In the words of David
Goldman head of debt research at Bank of America Securities: "America is at
little risk for the foreseeable future, simply because the world's capital
has nowhere else to go"(Wall Street Journal, 13 August 2003).



Well the fall of Lehman Brothers shows that the world's capital does now
have somewhere else to go. This event therefore, marks the beginning of the
collapse of the international financial architecture, as constructed, on
very shaky foundations, by Richard Nixon in 1971. It was then that the US
unilaterally dismantled the Bretton Woods system and began to shape a new
system - 'globalisation'.



Why? What has happened to mark the collapse of this system?



Simply this: Lehman Brothers expected to be saved by the state-run Korea
Development Bank, and to the astonishment of its shareholders and investors,
Korea - South Korea that oh-so-reliable US ally -  last Tuesday, 9th
September, refused to fund a bail-out.



The fact that sovereign wealth funds, as these state-run financial
institutions are known, are now no longer willing to finance reckless US
institutions, is of itself of the greatest significance. It implies a lack
of confidence in the solvency of US financial institutions, and indeed of
the US as a whole. This will lead to a fall in the dollar, which will have
profound economic implications for the global economy, and for
globalisation.



In his letter to shareholders in March, 2005, Warren Buffet predicted that
in another 10 years' time the net ownership of the US by outsiders would
amount to $11 trillion.  "Americans … would chafe at the idea of perpetually
paying tribute to their creditors and owners abroad. A country that is now
aspiring to an 'ownership society' will not find happiness in - and I'll use
hyperbole here for emphasis - a 'sharecropper's society'."



He is right. And so the thing we must fear most now, is not just the
collapse of  banks and investment funds, or of the international financial
architecture, but of a sharecropper society, angry at its downfall.