It is clear that when banks become too big, it harms the economy. Economist Steve Keen says that “a sustainable level of bank profits appears to be about 1% of GDP”, and higher bank profits lead to a Ponzi economy and a depression.
But most mainstream economists dismiss the idea that wealth inequality among individuals causes economic crises.
Of course, some ideologues will argue that even discussing inequality is waging class warfare, and smacks of an attack on capitalism.
However, the father of modern economics – Adam Smith – disagreed.
And as Warren Buffet, one of America’s most successful capitalists and defenders of capitalism, points out:
There’s class warfare, all right, but it’s my class, the rich class, that’s making war ….
And as I have previously noted, radical concentration of wealth actually destroys capitalism, turning it instead into socialism for the rich.
Is There a Causal Connection Between Extreme Inequality and Economic Crises?
More to the point, most mainstream economists do not believe there is a causal connection between inequality and severe downturns.
But recent studies by Emmanuel Saez and Thomas Piketty are waking up more and more economists to the possibility that there may be a connection.
Specifically, economics professors Saez (UC Berkeley) and Piketty (Paris School of Economics) show that the percentage of wealth held by the richest 1% of Americans peaked in 1928 and 2007 – right before each crash:
As the Washington Post’s Ezra Klein wrote in June:
***
Krugman says that he used to dismiss talk that inequality contributed to crises, but then we reached Great Depression-era levels of inequality in 2007 and promptly had a crisis, so now he takes it a bit more seriously.
The problem, he says, is finding a mechanism. Krugman brings up underconsumption (wherein the working class borrows a lot of money because all the money is going to the rich) and overconsumption (in which the rich spend and that makes the next-most rich spend and so on, until everyone is spending too much to keep up with rich people whose incomes are growing much faster than everyone else’s).
Robert Reich has theorized for some time that there are 3 causal connections between inequality and crashes:
First, the rich spend a smaller proportion of their wealth than the less-affluent, and so when more and more wealth becomes concentrated in the hands of the wealth, there is less overall spending and less overall manufacturing to meet consumer needs.
Second, in both the Roaring 20s and 2000-2007 period, the middle class incurred a lot of debt to pay for the things they wanted, as their real wages were stagnating and they were getting a smaller and smaller piece of the pie. In other words, they had less and less wealth, and so they borrowed more and more to make up the difference. As Reich notes:
Between 1913 and 1928, the ratio of private credit to the total national economy nearly doubled. Total mortgage debt was almost three times higher in 1929 than in 1920. Eventually, in 1929, as in 2008, there were “no more poker chips to be loaned on credit,” in [former Fed chairman Mariner] Eccles’ words. And “when their credit ran out, the game stopped.”
And third, since the wealthy accumulated more, they wanted to invest more, so a lot of money poured into speculative investments, leading to huge bubbles, which eventually burst. Reich points out:
In the 1920s, richer Americans created stock and real estate bubbles that foreshadowed those of the late 1990s and 2000s. The Dow Jones Stock Index ballooned from 63.9 in mid-1921 to a peak of 381.2 eight years later, before it plunged. There was also frantic speculation in land. The Florida real estate boom lured thousands of investors into the Everglades, from where many never returned, at least financially.
Wall Street cheered them on in the 1920s, almost exactly as it did in the 2000s.
But I believe there may be a fourth causal connection between inequality and crashes. Specifically, when enough wealth gets concentrated in a few hands, it becomes easy for the wealthiest to buy off the politicians, to repeal regulations, and to directly or indirectly bribe regulators to look the other way when banks were speculating with depositors money, selling Ponzi schemes or doing other shady things which end up undermining the financial system and the economy.
For example, as John Kenneth Galbraith noted in The Great Crash, 1929, Laissez-faire deregulation was the order of the day under the Coolidge and Hoover administrations, and the possibility of a financial meltdown had never been seriously contemplated. Professor Irving Fisher of Yale University – the Alan Greenspan, Robert Rubin or Larry Summers of his day – had stated authoritatively in 1928 that “nothing resembling a crash can occur”.
Indeed, when enough money is concentrated in a couple of hands, the affluent can lobby to appoint to government positions, pay to endow prominent university chairs, and create think tanks and other opportunities for economics professors who spout the dogmas “everything will always remain stable because we’ve got if figured out this time” and “don’t worry about fraud” to gain prominence. For example, Bill Black has written about The Olin Foundation’s promotion over the last couple of decades of these dogmas.
I believe that the fourth factor exacerbates the first three. Specifically, when the wealthy have enough money to drown out other voices who might otherwise be heeded by legislators and regulators, they can:
- Skew the tax code and other laws so that they can get even wealthier
- Encourage a debt bubble (Bill Black has repeatedly explained that the fraudsters blow huge bubbles, knowing that the government will bail them out when the bust leads to defaults)
- And create new Ponzi schemes for speculation
(Admittedly, there might not always be a direct connection, but all of the factors are at least intertwined.)
Reuters wrote an excellent piece on the issue of inequality and crashes (discussing the first three factors) last month:
Economists are only beginning to study the parallels between the 1920s and the most recent decade to try to understand why both periods ended in financial disaster. Their early findings suggest inequality may not directly cause crises, but it can be a contributing factor.
***
America has one of the largest wealth gaps among advanced economies. Based on an inequality measure known as the Gini coefficient, the United States ranks on a par with developing countries such as Ivory Coast, Jamaica and Malaysia, according to the CIA World Factbook.
***
There is little agreement among economists about what precisely links high inequality to crises, which helps explain why so few officials saw the financial upheaval coming.
Rapid expansion of credit is one common thread.
***
Raghuram Rajan, a professor at the University of Chicago’s Booth School of Business and a former chief economist of the International Monetary Fund, believes governments tend to promote easy credit when inequality spikes to assuage middle-class anger about falling behind.
“One way to paper over the rising inequality was to lend so that people could spend,” Rajan said.
In the 1920s, it was expansion of farm credit, installment loans and home mortgages. In the last decade, it was leveraged borrowing and lending, by home buyers who put no money down or investment banks that lent out $30 for each $1 held.
“Housing credit gave you an instrument to assist those falling behind without them feeling they’re beneficiaries of some sort of subsidy,” Rajan said. “Even if their incomes are stagnant, they feel really good about becoming homeowners.”
Another theory is that concentration of wealth at the top sends investors searching for riskier interest-bearing savings. When so much cash is sloshing around, traditional safe investments such as Treasury debt yield very little, and wealthy investors may seek out fatter returns elsewhere.
Mark Thoma, who teaches economics at the University of Oregon, wonders if the flood of investment cash from the ultra-rich — both in the United States and abroad — encouraged Wall Street to create seemingly safe mortgage-backed securities that later proved disastrously risky.
“When we see income inequality rising, we ought to start looking for bubbles,” he said.
Kemal Dervis, global economy and development division director at Brookings and a former economy minister for Turkey, said reducing inequality isn’t just a matter of fairness or morality. An economy based on consumption needs consumers, and if too much wealth is concentrated at the top there may be times when there is not enough demand to support growth.
“There may be demand for private jets and yachts, but you need a healthy middle-income group (to drive consumption of basic goods),” he said. “In the golden age of capitalism, in the 1950s and 60s, everyone shared in income growth.”
The fact that economists are even examining the link between inequality and financial crises shows just how much the thinking has changed in the wake of the Great Recession.
***Ajay Kapur, a Deutsche Bank strategist, spotted the inequality parallels between the 1920s and the most recent decade, but didn’t see the meltdown coming. The former Citigroup strategist created a stir five years ago when he built an investment strategy around his thesis that essentially divided the world into two camps: the rich and the rest.
Kapur told clients in 2005 that the United States and a handful of other economies were developing into “plutonomies” where the wealthy few powered economic growth and consumed much of its bounty, while the “multitudinous many” shared the leftovers.
Plutonomies come around only once or twice a century, he argued — 16th century Spain, 17th century Holland, the Gilded Age. The last time it happened in the United States was during the “Roaring 1920s”.
***
At least one new arrival to Washington’s policy-making scene, Fed Vice Chairman Janet Yellen, has expressed concern that extreme inequality could ultimately undermine American democracy.
“Inequality has risen to the point that it seems to me worthwhile for the U.S. to seriously consider taking the risk of making our economy more rewarding for more of the people,” she wrote in a 2006 speech.
For further background, see this, this and this.
Note: The graphics above are slightly misleading, as Saez notes that inequality is actually worse now than it’s been since 1917.
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Robert Brenner at UCLA has pointed to the decreasing normal rate of profit for investment in the developed world. This is related to inequality in that you have more investment dollars chasing fewer customers. As the rate of profit declines, there is the need to find abnormal profits and this is done via corruption — using the power that money bestows to allow insiders to belly up first to the government trough, and to perpetrate ponzi schemes that — based on inside knowledge — they bail out of just in time.
This is, I guess, just another function of the underconsumption thesis you describe.
kaleidiscope
That’s not Brenner’s argument. Brenner’s a Marxist (although, it must be said, one of the most sophisticated around), so he’s all supply-side. Brenner believes that underlying contemporary economic stagnation is an ‘overcapacity’ crisis. He believes that due to a massive expansion of investment firms are undercutting each other by employing new technological developments – this is what’s leading to the falling rate of profit… and the subsequent turn to finance.
Here, I did a post summarizing his argument:
http://fixingtheeconomists.wordpress.com/2010/10/29/busted-the-fall-in-profits-and-the-rise-of-finance-part-i/
I’m still not sure if I accept Brenner’s argument – but I think his approach is correct. Inequality is a symptom – not a cause.
It is due to an oversupply of credit.
What happens is that when there is too much credit, all kinds of low yielding projects get invested in, then there is vast over capacity and falling margins. However, in the middle of this, the finance and admin sectors do very well, because they are in the new growth industry, manufacturing and distributing credt. Or rather, debt.
I dunno if you’re saying that as your own opinion – or as your opinion of what Brenner’s argument is.
Well, it’s certainly not Brenner’s argument. As I said, Brenner’s a Marxist – so it’s all production for him. The economy relies – for Brenner – on the factory.
In his view, the oversupply of credit is merely a reaction to an underlying stagnation crisis. In this he follows other Marxists like Sweezy and Magdoff (who lay out the argument in their “Stagnation and the Financial Explosion” – written in the 80s, but an extremely timely intervention even today) [Summary: http://www.monthlyreview.org/081201foster-magdoff.php%5D.
Once again, I think that the approach is correct. Credit relies – first and foremost, as any good Keynesian or Marxist will tell you – on the demand for credit. The dynamic you name is simply that of investors who have encountered blockages to profitable investment in the national markets (and the productive markets generally), seeking more and more credit in order to procure profits in increasingly risky environments.
You’ve absolutely nailed it.
Marie Antoinette had nothing on our current inbred aristocracy.
How do they possibly think a 74% consumer driven economy can survive without… consumers?
If an Ivy League education isn’t teaching the corporate tower aristocracy and making them understand the consequences of extreme inequality and how, no matter how much they delude themselves, they will not survive the collapse and backlash, then those schools are overpriced shams.
“Money, pardon the expression, is like manure, it’s no good unless it’s spread around encouraging young things to grow.”
TO which I’ve always added: “Otherwise it just sits around in big, stinking piles.”
In other words, it’s the opportunity cost of there not being enough wealth spread around to encourage new enterprises to start, including no opportunities for young people to start new households, families, etc.
My husband worked his way through college, I had scholarships. We’re now paying more in college tuitions than for our mortgage. This is pretty ridiculous.
There need to be lots more student loans and grants, but overall college costs are ridiculous. And administrators are making half a million or more a year. This has to stop.
It’s not just the abuse of the rich — it’s the whole idea that administrators, CEOs, etc, add enough value to an organization to be paid ridiculous salaries.
We need to start focusing on an economy that creates value for everyone — not wealth for a few and nothing for everyone else.
The thing to fear is not fear itself but that the 60s are going to look like an after school special compared to what I truly fear is coming. That is, the 4 points made above, a political party that has perfected getting people to vote against their own interests and another political party who don’t have any guts – both obviously being bought off in various ways. Where is the radical center party?
Investments are dead ends, what’s left? Ponzi schemes and ‘wealth effects’. Why the dead ends? Lack of innovations or wealth skimming?
Neither. GW is wrong but all the way wrong. All wealth is a surplus and surpluses incur costs which increase faster than the rate of the surplus’ increase. In other words, there really is no such thing as ‘wealth’ only aggregated costs. Think about this for a minute. The ‘uber- wealthy’ don’t have big piles of cash but big piles of sucky, profitless ‘investments’. Increasing costs, I tell ya!
– Investments ‘suck’ because of increasing input costs which render businesses insolvent. Peak oil is real, in money- terms it took place ten years ago and the outcome is the destruction of industrialization. Okay, don’t believe me just watch.
The prob with the rich isn’t their (non) surpluses but their monopolies. This centralizes and institutionalizes bad decision- making which results in excessive risk- taking … and bailouts and moral hazard … and corruption and … you get the idea!
http://economic-undertow.blogspot.com/2010/07/bette-davis-eyes.html
Not “profitless”: they are making profits, as the graphs show very clearly: their wealth is increasing fast (at the expense of the vast majority). But that money is still socially unproductive: it only generates now empty profits while destroying the economic fabric and, with it, the social fabric as well.
This actually illustrates an essential problem of the liberal economic pseudo-science: it cannot really measure the economy because it works only with accountancy tools, which can register money flows but cannot accurately represent the economy as such, in which money is nothing but a tool (a tool that is being perverted and abused).
The problem, he says, is finding a mechanism. Krugman brings up underconsumption (wherein the working class borrows a lot of money because all the money is going to the rich) and overconsumption (in which the rich spend and that makes the next-most rich spend and so on, until everyone is spending too much to keep up with rich people whose incomes are growing much faster than everyone else’s). Ezra Klein
I’ll tell you what the mechanism is; it is theft. When the fractional reserve banks extend credit, the purchasing power for the new money is stolen from all money holders including and especially the poor.
I continue to be amazed that liberals can’t see this.
The Right can shrug off income equality and claim that God has blessed them. But the God of the Bible DOES NOT bless theft:
Ill-gotten gains do not profit, but righteousness delivers from death. Proverbs 10:2
But this theft, or trickle-down, is exactly what liberals want. Liberalism is larcenous economic elitism by definition. Otherwise they’d be socialists.
The only question is whether a particular liberal is really ignorant enough to believe in this do-gooder trickle-down following the theft he supported, or is just cynically lying about it.
E.g. every time I accuse Krugman of the latter, his defenders claim he’s really the former. (I never encounter anyone who thinks Krugman’s world view is actually correct.)
You have nailed it. The question is not whether or not the theft will occur but who gets the loot.
Oh stop it, the both of you, with this childish “liberal”-bashing. The same banksters are in bed with both political parties. Just as they are with the Socialists in Europe (no difference there). Just as they have been with the right-wing fascists and Nazis. Anything to keep the Ponzi schemes and the extraction-fest going.
Capitalism—just like fractional-reserve lending— itself IMPELS exponentially-increasing excess resource extraction. Whosoever is positioned to skim an exponentially-increasing percent of that off the top will do so. . It’s all a moot point, anyway, as capitalism is an impossibility in a system of stable or shrinking resources. It’s always been a sleight-of-hand con game from day one, using resource inputs from outside its system to falsify growth. Since they cracked China, and in the face of Peak Oil, there is no “somewhere else” to get the extra inputs that have been fraudulently fueling capitalism under the table for hundreds of years.
“Liberals” may not be ready to renounce capitalism, but the right sure as hell isn’t going to, and these “liberals” you talk about aren’t real liberals in the first place…they are unrecognizable to me. When I think “liberal”, I think dirty fuckin’ hippies reading the Mother Earth News. I think the banksters set up what you guys take to be “liberals” just to create an artificial choice, like with Old Coke and New Coke.
[I’m a “workers should control the means of production” liberal, myself.]
[I’m a “workers should control the means of production” liberal, myself.] Lidia
I partially agree. Without the government backed counterfeiting cartel to borrow from, I reckon corporations would have to purchase labor (and assets) with their common stock. Thus the workers would have a say in how the corporation was run.
FB, you are on the right track. The whole moral basis of capitalism depends upon scarcity of capital. Fractional (fictional) reserve banking creates buying power out of thin air. The larger banks become the more of this bank created wealth oozes to the top. You get free money for monopolists and speculators and usury for everyone else. My only quarrel with this post and others of its ilk is laying the problem at the feet of the “top 1%”. This scapegoats a large number of hard working, creative and middle class people and permits the truly wealthy to hide behind their skirts. Real wealth in America is concentrated in the top 1/10%. Nobody in the bottom 99.5% is rich.
My only quarrel with this post and others of its ilk is laying the problem at the feet of the “top 1%”. This scapegoats a large number of hard working, creative and middle class people and permits the truly wealthy to hide behind their skirts. Real wealth in America is concentrated in the top 1/10%. Nobody in the bottom 99.5% is rich. jake chase
Well said. I agreed. The top 1% are generally a blessing and we should be thankful for them.
But really, we should not be concerned about wealth inequality per se EXCEPT as a possible indicator that something dishonest is going on. And something dishonest has been going on since at latest 1913.
“But most mainstream economists dismiss the idea that wealth inequality among individuals causes economic crises”.
I does and it has been pointed out by the Marxist school of economics since some 160 years ago. In fact this element is central in understanding overproduction crises, because concentration of wealth in few hands damages the markets massively. Instead distribution of wealth guarantees a sustained demand, which is what drives the economy.
Now, as in the 1930s, we are in the middle of an overproduction crisis, where market (demand) has been destroyed by greed turned outright robbery.
(Sorry I clicked the submit button accidentally without saying all what I had to say, so two posts)
“radical concentration of wealth actually destroys capitalism”
It destroys markets (demand) not capitalism. Capitalism is precisely the process of concentration of wealth in few hands (accumulation of capital). It is interesting indeed how the monopolistic (oligopolistic) tendency of Capitalism clashes with market economy but that is what Capitalism is, let’s not be naive about that: there’s no “invisible hand” and, if there is, it has been amputated in the name of Greed, proclaimed by Thatcher and Reagan as the new God.
“There’s class warfare, all right, but it’s my class, the rich class, that’s making war …”
Exactly (thanks Warren for being so honest): that is what Capitalism is actually: class war of the rich against the poor… and incidentally against free markets and a healthy economy. When the dialectics go too far to the Capitalist side, this is what happens: extreme concentration of wealth in few hands, destruction of demand and collapse of the free market economy.
Only redistributing downwards or otherwise guaranteeing by political intervention that this accumulation does not happen, can market economy exist.
“when enough wealth gets concentrated in a few hands, it becomes easy for the wealthiest to buy off the politicians, to repeal regulations, and to directly or indirectly bribe regulators to look the other way when banks were speculating with depositors money, selling Ponzi schemes or doing other shady things which end up undermining the financial system and the economy”.
Very true. They will say it’s “free market”: why not to buy politicians, judges or sell pyramidal schemes? That’s what markets are for: to sell and but whatever for a profit, including your soul (ethics) and empty scams (caveat emptor!)
The Banks are Forcing Debt on the Rest of US
Government issues about 5% of the money that is in circulation. The rest of it is created by banks, when they make a loan.
When a bank makes a loan, it creates the money to loan out of nothing, just adding numbers on their computer. So the total money supply is the principal of all the loans outstanding, P, plus the amount issued by the government, G. This does not include money the government borrows, which, after all, is still just created by the banks.
The banks then charge interest on the loan, on money which they have created out of nothing.
Because of interest, the total money needed to pay off all loans will be greater than all the money loaned, ie greater than the money supply in ratio (P + G + I – E)/(P + G), where I is all the interest, (not the interest rate,) and E is all the expenditures of the financial industry, if I > E. (If I < E, the opposite will be true.) This implies (I – E)/(P + G + I – E) share of borrowers will always be unable to pay off their loans. Only when I = E is the system stable, and all borrowers able to pay off their loans. Where E is less than I, this leads to an exponential growth of both the money supply and debt. Only with an exponential growth in real consumption, and thus necessarily production, can this be maintained. Since this is ultimately impossible, this spiral has no (nice) ending.
So, barring government ‘printing’ at least the quantity I-E, the financial industry, by holding expenditures, E, less than the interest, I, on all loans outstanding, creates a shortage of money. There is simply not enough money to pay off all the debt and the interest. So they force the rest of the system into increasing indebtedness to them, in order to pay off the debts they already owe.. They force individuals, companies, and governments to take out more loans or default. They have simply created a shortage of money needed to repay the loans and the interest, in the real economy, while hoarding the rest of that money to themselves.
The financial industry has been doing this for years. That is why individuals, companies, governments and their countries’ real economies, are gradually being ruined. That is why, in the US, for instance, total indebtedness has been climbing to over $50 Trillion, now about equal to all the US real assets. Great Britain, and many other countries are in worse shape.
Under these circumstances deleveraging of total debt is impossible. Only by one institution assuming debt (government,) can another (households,) reduce their debt.
If the government pursues a policy of austerity, the misery will be unimaginable, the damage to the economy, incalculable.
See http://anamecon.blogspot.com
for more.
Interesting but I’m not sure it’s complete.
Consider that money = property like wave = particle, and money is only a potential and is not actualized until it manifests in property of some kind. The actualization process has a somewhat random character, like the actualization of a photon wave onto a specific point on a receptor screen, although likely the math is not exactly the same.
While Property = Nature, either in a pure state (such as apples) or transformed through Labor and Imagination (such as an apple farm) or in a state of pure Imagination (such as a screenplay text).
So as long as the actualization potential of money in the form of property exceeds money supply, then wealth is being created. Of course, this depends almost entirely on the institutions of social relations and social structures — which sends the analysis off into a very different sphere of inquiry. I would say that money is anywhere and everywhere a social phenomenon, which may be a truism to be sure.
craazyman, except that at some point it has to come back “down to earth”. The screenwriter takes the money she got for the screenplay and buys real food, a real car, real gas, a real house, and so forth.
On paper, the money can outgrow exponentially the supply of real resources and real things to buy with it, but it cannot stay in a “non-actualized” state forever. That would be pointless, although this is what some institutions are actually encouraging: for example, the state of RI is pouring millions of tax dollars into a video-game-producing “magnet” area which is supposed to boost employment by hiring a handful of programmers.
Aside from the scam factor, though, these and many other fake economies are actively killing the real economy, as real resources will be consumed exponentially to satisfy false, ginned-up demands.
Of course, there is no need for the government to issue debt to back its spending. The government can simply create whatever money it needs. There is no need for the government to run a deficit — this is a relic of the gold standard that serves to enrich bankers and makes somewhat easier for the Federal Reserve to control interest rates. Sovereign government debt is not debt in the same way that consumers or corporations have debt. Government debt can always be repaid, and with unemployment at 10% or 17% (as you prefer) inflation is impossible.
So, as we face this colossal debt pyramid and recognize that continuing to rack up more debt will only increase its height, we must look to one of two solutions: 1) default (Depression), or 2) government spending. The problem is our government has been captured by oligarchs, who reserve the government spending for their own bailouts and private wars and force ruinous default on the citizens.
Can there be a better explanation of the growing chasm between what Americans prefer in terms of social and economic policies and what the elites will “consent” to “provide”?
We are witnessing in Washington, some decisions and behaviors from our “elected” officials that reflect a total indifference to the majority and an extreme deference to the special interests. The tax cuts for the wealthiest at a time of severe deficit in public investments is one of those doozy among many.
Or how about the health care bill targeted to help the 9/11 first responders that the GOP thugs have systematically filibustered? As a sample, just marvel at the hypocrisy, amorality, self-righteous, messianic sleaze of bastard extraordinaire Mike Enzi here. The REMF sugarcoat in several layers of pseudo-concern for the public monies, (they’re called “deficit hawks”) what is in reality, a blatant disregard for the “little people” and a maniacal obsession in covering up the disastrous decisions taken the days post 9/11 regarding workers’ safety at Ground Zero.
And do not get me started on the complicity of the media in this particular affair…the urge to hit all of them below the belt kung-fu style 20 times in 10 seconds is very powerful indeed!
Why am I getting so fired up about this particular example? Simple: Pray tell how does one expect to keep a country socially viable with such a display of shameful callousness for fellow citizens who dropped everything to help and rescue?
What do you think will be the reaction next time “Ooops! Isn’t that so sad? I’d love to help but i could be on my own if I have an accident, get sick or something; ya know wattam sayin’ dude? Let the professionals within the proper jurisdiction deal with it. BTW, I hope they got good coverage. They don’t? Hmmm! me think rescue efforts could lack this “je-ne-sais-quoi” spark that can make the difference. Like i said man…so sad!”
Long story short, break the tenets of basic solidarity within a society and see what happens. Trust melts away, politic and social polarization, mercantilism and a mercenary attitude becomes the norm. Alienation from the ideals that were driven the country become widespread and people, realizing they almost have no stake in the success of what was a collective endeavor stop innovating and going the extra mile at work.
Needless to say that economic activity takes it on the chin real bad in these conditions. And that create a positive feedback loop intensifying all the problems discussed above.
It’ll take either a major crisis of epic proportions (yes! MUCH worse than what we went through since 2008) or a 2 to 4 decades of painful muddle through, grinding and stationary running for the status quo to be crushed and the actual elites losing their grip on the socio-economic levers.
Of course, all the above presume a quiet China and India that are stuck with their actual problems. Should they solve their particular issues (getting rid of corruption and malinvestment, creation of a solid middle class) the future won’t be fun to live in.
You should see this here: http://www.dailykos.com/storyonly/2010/12/17/929682/-Update-from-Gillibrand!-9-11-Bill:-Jon-Stewarts-Must-See-Episode
Jon Stewart talked to some 9/11 first responders on Thursday.
One so knows that something is utterly FUBAR to the exponent 200, when a comedy show and the only sane voice at Fox News (Shep Smith) are the ONLY ones denouncing such outrageous behavior. (although I didn’t check if KO and RM did so)
As a party, the GOP must die! It’s that simple because there CANNOT be any excuse for the filibustering of the Zadroga bill. NONE WHATSOEVER!
Alas, the coalition of the immensely stoopid keep them alive.
The first place I ever came on this argument was in Galbraith’s Great Crash book. The problem is that it is confusing symptom and effect.
It is quite true that credit bubbles produce inequality, and its also true that they produce what Galbraith called ‘profitless prosperity’, an environment in which more and more stuff is made and sold but margins fall to barely sustainable levels.
Galbraith appeared to think, along with much mainstream liberal thinking, that you could overcome this by just redistributing money through taxation. If you did this, the argument went, you would then have the working people more able to buy the stuff they were making, and the economy would be relatively healthy.
The problem with the argument is that the real cause is the credit bubble. In the twenties, the credit bubble was largely the result of the change of reserve requirements that accompanies the creation of the Fed. The result was that banks could lend hugely more than before on the same asset base. This, as the twenties went on, they did, and the result was the traditional credit bubble which then translated into an asset bubble in the stock market.
Credit bubble environments like the one we have just gone through do always result in transfers of wealth away from working people. The reason is not however simple inequality and no amount of redistribution will remedy it. What happens is that the credit differentially advantages different sections of the economy. It mainly advantages those concerned with the manufacture and distribution of credit, the finance sector, and secondarily all the white collar fluff industries, advertising, marketing, consulting, also government employment. The state sector unions have a banquet, based on easy borrowing by municipalities and state governments.
This was bound to crash, like all credit bubbles, and did. What then happened in the early thirties was that Hoover did exactly the wrong thing, and Roosevelt’s first administration continued it unchanged. The effort was to freeze prices at high levels, keep up wages, stop companies going out of business and this prevent the consequent redeployment of assets, promote collusion and price fixing. The effect of this was to stablize the economy at an equilibrium in which there was high unemployment and low capacity utilization.
Starting in about 1936 the Roosevelt adminstration moved to a series of measures which closely resembled IMF orthodoxy of the last quarter of the last century. The result was to allow liquidation and redeployment of assets, make the economy more competitive, and growth restarted. This predated rearmament, its important to notice. Rearmament is often wrongly credited. What actually started the recovery was the abandonment of the earlier counterproductive Hoover-Roosevelt programs.
If you accept this view, then while you may think inequality is a thoroughly bad thing, you don’t think its the thing you can fix. What you have to fix is credit bubbles. If you don’t have credit bubbles, you will not have the underlying force that leads to rising inequality. Go back to the fifties. There were business cycles, but generally, there was reasonable and rising prosperity, and there was not the furious domination of the economy by the credit industry and its hangers on that we have recently seen.
The reason conventional liberalism avoids this explanation is that credit bubbles are always and everywhere created by well meaning government initiatives. Only government has the power to create them on the necessary scale. This leads to the basic problem with conventional liberalism: who protects us against the government, after we have installed big government to protect us against corporations?
Its a very good question, I don’t know the answer, but the thing that is certain is that if you are going to have government created credit bubbles, they are going to lead to gross and rising inequality, and no amount of tinkering with redistribution or regulation is going to make it possible to have a fair and sustainably functioning economy as long as you have credit bubbles. This is the real problem.
Its a bit like a virus. Yes, you can cool the fever. But the patient will still die if you don’t get to the underlying illness.
I’m not sure if you are right or wrong. The last part of your post is certainly coincident with what I think but the early part is IMO quite wrong. An example of of convergent thought through very different paths?
I disagree with the following:
Citing Galbraith instead of Marx shows your bias and hence your incapacity to find the real problems and their real roots. And without knowing where the problem lays there’s no solution.
The problem is not lack of profit but lack of demand. And demand is sustained by the common people, who have real needs, not the wealthy, who mostly hoard in terms of power positions and have no real needs, only luxury demand, which is never important enough. Even Ford knew that.
While WWII rearmament may have been somewhat exaggerated as for the real drive of recovery, it did play a role, generating massive public demand on credit. However there are two more key elements that helped to recreate demand:
1. The New Deal as such (extended into at least two or three decades after WWII in some version), redistributed money downwards, recreating demand.
2. The Plan Marshall created foreign demand in Europe (mainly), massively contributing to post-War US recovery (and to some extent also that of Europe, though here the costs were surely paid by mostly Africa, still struggling to recover 60 years later).
The key issue is demand: no demand means no economy (weak demand means weak economy, etc.), at least in the context of the markets paradigm (planned economy can work in other parameters to at least some extent).
Hence the Thatcher-Reagan cliqué devised a system to (temporarily) redistribute wealth upwards while keeping the demand high: it’s variedly known as Reaganomics or Credit Bubble. But this is an intentional patch to the system, not any error: the alternative would be socialism in some variant. This was the only way they could effectively organize that achieved both goals at the same time: high demand (artificially inflated by credit) and high profits for the oligarchy.
This is the mystery of the Credit Bubble: Why? To make greater profits, to concentrate most wealth in few hands (the essential power drive of Capitalism). How without damaging the demand (at least for a while)? By means of credit gone wild. That way demand actors could sustain the demand without having any major share of the wealth, as they owed everything to the oligarchs.
However, as we know now, it was not sustainable in the long run. Still almost three decades is a notable record for a purely speculative financial maneuver. But it’s over.
And they have no alternative plan. It’s so extremely decadent that I do not know if to cry or to laugh.
Maju, a great comment. The global religion is now capitalism and people are largely blind to the worlds (spiritual/human as well as environmental/ecological) we are sacrificing on its demonic altar. I have shed tears over this; I am in deep mourning.
I wish everyone would stop saying “lack of demand” like that was a *bad* thing. We need less demand; artificially-stimulated demand will just kill us faster.
There are two ways to become rich: one is to acquire more, and the other is to want less.
We need to dust off Schumacher’s Buddhist economics.
Lack of demand is a bad thing for the Capitalist system, whose ever-expanding production capacity requires an also ever-expanding demand. A way to more-or-less secure it was through pseudo-socialist Keynesianism (and variants, precedents, etc.), which emphasized some redistribution (greater demand) and state control (preventing extremes in property concentration) in order to keep the markets healthy. However I understand that it was not without issues. It specially restricted the ability of capitalists to capture social wealth without limit, so they revolted under the banner of Reaganism. A lesser, yet hyped, issue was inflation.
But Reaganism was restricted also by its own need to keep the demand up and instead of using redistribution, resorted more and more to credit – a fallacious system of pseudo-redistribution.
In order not to need ever-growing demand, we’d need a different kind of economy, where the goal is not anymore capital (wealth but also power) accumulation but satisfying the social needs (the baseline demand plus extras). We’d need to accept that 8 or 10 hours journeys around the calendar are not anymore necessary (this is the real “promise” liberated by Capitalism: leisure time in abundance, as described by Paul Lafargue a century ago), we’d need to accept that we do not need a lot of what is in the markets (hence the overproduction crisis) and that we can organize the economy in a much more relaxed and democratic way, and not being at the expense of secretive conspiratorial and speculative cliques known as corporations.
So you really touch a key point but not so much to explain the crisis as such but to explain where the exit of the crisis lays, how to get out of this mess… and still gain a lot.
As you seem to suggest, it’s only intelligent, wise, to do that but we are trapped in an ideological labyrinth in which we are once and again being distracted or even forbidden from looking at the obvious exit: democratic socialism with emphasis on well being, leisure, intellectual development and, last but not least, environmental balance.
If we could create such advanced post-industrial society, the forces of joy of life but also of intellectual advancement would be released in never before seen power. Humankind would be released of its growth pains (so to say) and would become mature and consolidated.
But we still have to achieve that. And now is the historical period I believe.
The alternative, specially considering the much harm being caused to Earth (oceanic destruction, deforestation, global warming, erosion, nuclear risks, etc.), the likely future is extinction – and a painful one.
Maju, thanks for your reply. I think you are right, but why is it so hard to get people to see what is really on the table? What can make a person act against their own interests (to say nothing of the interests of the planet and of future generations)?
If we cannot answer the question of why the majority would consistently act against their own interests, then we cannot hope to “save” humanity as a whole. So be it.
Lidia: because we have been raised in what was (apparently) a successful Capitalist system (Reaganism and the subsequent Bubble), we have lived through the collapse of the USSR (at least I’m old enough to remember), so there has been for two or more decades the repeated slogan of “Capitalism is the best system, nothing can replace it”. With few exceptions (mostly in Latin America and to some extent also South Asia) the anti-capitalist left has been under heavy attack with the USSR failure (which is the failure of a Fordist system in a Toyotist reality in fact) as main element of the discourse.
We have been made to believe in the last 2-3 decades (or maybe more but I was too young) that there is no alternative.
Also people, logically, expect politicians (elected social managers) to solve the problems. Most people still hopes that this is just a temporary downturn, which will be solved somehow as happened in the past. Most people really have little idea of what is going on in fact.
Gradually, as the hard facts of corruption, cronyism and elitist abuse arrive to their yards, they realize to some extent. But it’s been only 3 years into the mega-crisis and people will surely need more time (and more realistic debate) to get real. Consciousness is not built on a day, nor a year… it needs time and continued effort.
In some cases (parts of Europe for instance) some of this consciousness still remains from the past struggles. But it’s still anyhow quite weak and will need some time and more fiery struggles to become able to topple the system.
“If we cannot answer the question of why the majority would consistently act against their own interests”…
Short-sightedness and propaganda manipulation (including education and daily media shower). Also fear of the unknown, as the Spanish saying goes: “better known evil than good to find out”.
Unless the known evil is really evil and unbearable…
Lynn/Ellen, you are right. The hackneyed way of saying it (I don’t have a better metaphor) is “re-arranging the deck chairs on the Titanic”. I fear Yves is prone to this. I have a great admiration for her and think she is smart as a whip, but I get the feeling she thinks there will be a “normal” to return to after all the fraud is cleared out. There won’t be.
The system isn’t hobbled or besmirched by fraud; the system IS fraud.
oops, sorry about posting that in the wrong place. It’s meant for Ellen Anderson @9:33am
lerogue: “Galbraith appeared to think, along with much mainstream liberal thinking, that you could overcome this by just redistributing money through taxation.” That is a distortion of both Galbraith and Keynes, whose thought stands behinds Galbraith’s approach, so extreme as to be bizarre. The thesis has to to with manipulating demand. It’s not clear that you understand the function of redistributing income though it’s clear that you dislike the process. If one simply takes $x from one person and gives them to another, that’s not a very efficient way to boost demand, but it is a way. The function of most redistributive schemes in developed industrial economies is to take $x from one person and use that to build the productive capacity of someone else, so that that person isn’t a cost center at least but ideally has greater productive capacity otherwise. I don’t know whether you like that or not from your remarks over time, but that is the goal.
To what extent interventions can and do manipulate demand or that redistributions can boost productive capacity are both debatable, but the goals of either or both are other than you state. It is notable that _nowhere_ in your subsequent discussion do you raise demand-support as a goal of government action. Thus your ‘summary’ of the goals of many of those actions is not descriptive but more distortive. That is without regard to the value of other points you may raise, some of which are themselves readily arguable. To follow your talk, it’s all about who gets money off of whom. That may be your perspective—I’m summarizing since you don’t make it clear—but that is by no means the goal of others’ policies despite how you choose to characterize those others and their policies.
Further down, you have much to say about credit bubbles. Bubbles do not ‘happen,’ as in your parlance: they are enabled. Fraud is a key factor. But even below the level of fraud comes credit provision where collateral values are shrugged off because credit is simply so readily available. This dynamic isn’t a function necessarily of low reserve requirements as much as it is about defective judgment _on top_ of inadequate requirements.
Everyone has a goal, a bias too, of some kind in commenting or posting. I can’t say that I can reckon yours, leroguetradeur. You are clearly too well-informed not to know that you are shaving critical facts from the way you frame your points. I’ll credit that I don’t see you as a crank, but that requires that I see you as an other-than-honest analyst. The polemical nature, to me, of your distortions by omission flies well below the radar, but that’s not to say that it’s subtle. You don’t like unions, redistribution, or liberals? Better to make that plain than paste up funhouse mirrors of analysis that render completely suspect the points embedded in your remarks which at times seem substantive.
leroguetradeur: “The reason conventional liberalism avoids this explanation is that credit bubbles are always and everywhere created by well meaning government initiatives.” That is a demonstrably false statement. One might be able to argue that most bubbles have a non-negligible component of government facilitation. In many instances I can think of historical, this component was not in any way ‘well-meaning,’ it was special favoring. That is policies like promoting unregulated banks in the 1830s, or the revisitation of that in deregulating the savings and loan industry was pursued by its central agents as a means of enriching their particular cronies and wealthy constituenceis. The fact that _some_ who were liberal were gulled into supporting such policies, and that some of them were further ‘well-meaning’ does not substantiate the claim that the pursuit of those policies was, in the main, either liberal, well-meaning, or done for reason of government policy as opposed to government policy _capture_.
Your desire to blame the fools in the game who you don’t like without reckoning the culpability of the rest is exactly why I end up having little trust for your reasoning, leroguetradeur.
So George, while I accept that all four reasons you advance are valid partial causes for a correlation between wealth concentration and economic instability, with all do respect I wouldn’t advance any of them as a principal cause. Nor the several destabilizing input mentioned in the Reuters piece, though again there these all seem to me well-thought out. Two more are mentioned in comments here already, and while I wouldn’t put them, either, as foremost, I’ll mention them again because I would put them before the rest so far. One is over-production, and the second is declining returns due to concentration of investment. Froma purely ‘optimizing’ perspective, these last two are, to me, far out in front of the rest.
I would raise two other issues not yet mentioned as the most substantive drivers of financial system instability, and both of these correlate directly with concentration of wealth. Before I mention these, one factor I suggest to all to bear in mind is that, by and large, when we speak of concentration of wealth we aren’t referring to any kind of arithmeticly expanding distribution but rather a logarithmically shape. It isn’t that each richer 10% has x more of total wealth but rather the highest tail which has x to the y more: wealth concentration is extraordinarily concentrated, not in the large gains of the few but in the stupendous gains of the exceedinly few. This has important implications for analysis because the reasoning in most of the explanations advanced in the post strike me as seeing something close to a flat slope of the curve of concentration when instead it’s a Golden Spike of the .1%. For the last decade this is well-documented, but by and large it’s true of the other concentration – > crash examples. (And we might be able to add examples of 1907 and 1879 to the list too, where I know that concentration was high but I do not recall off hand if it was as severe as the 20th century instances.)
The first of two drivers of crash-from-concentration I would mention is simply stated: criminality. Normal returns simply will _not_ drive the levels of concentration of wealth we see in historical instances of huge crashes. It takes corrupt pyramiding of debt. It takes skirting or simply flouting the most basic legal and procedural strictures. It takes deliberately gamed prices. It takes cartelization of markets, and deliberarately un-financial structures of transactions by syndicates in the know who stand to profit not from ‘investment’ but from being on the right side of fraudulent transactions. The point I make is that the kinds of extreme concentration we see prior to crashes simply don’t happen from ‘investment’ because returns won’t make that distribution possible under any normal functioning. Normal financial activity has to be actively gamed to drive extreme concentration. This doesn’t mean that in the absolute sense “behind every great fortune is a great crime,” just that this is true for most great fortunes with the rest riding the draft of the robbers. One can look ad the sociological processes of financial criminality, but they may vary from episode to episode. Often the modality of the criminal structures varies. But what doesn’t vary in my observation is that one only gets super-concentration through deliberate financial crime. (Or force, looking more broadly in history, but that doesn’t seem operative at a large scale in the American sequence of examples: it isn’t needed because capital has always been fairly liquid but managed by comparatively few.)
The second driver of financial crash-from-concentration can also be stated simply: correlation risk. We can forget all that nattering about ‘under-consumption by the proles’ or ‘under-utilization by the plutonians.’ (And I’ll say folks, look: you will _never_ get any substantive explanation of economic processes out economic academy because those there simply do not approach a systemic relationship as a system, so they don’t look at anything active or useful in economic behavior. Seriously, you’re wasting your time reading academics because they’re mostly involved in time-wasting exercises. Sad.) As I mentioned above, the signal profile of highly unequal distributions of wealth is that they are arrayed around _ultra-concentrations_ of wealth. And the sheer bigness of those concentrations IS the problem. There aren’t enough places that are even safe to deploy that kind of money, let alone ones that are profitable. So plutonian piles of deployable wealth do NOT spread out over the available range of investment opportunities; they can’t, those opportunities are too small and too numerous to be followed or even necessarily connected with. In essence, wealth-masses of plutonian scale meet from below much the same problem of centrally planned economies, that they are too large to engage with the normal financial activities of commerce and investment.
The result in this second causal explanation is that large masses of money, in my hypothesis (I’m not saying this is proved, only probable) is that they have only a limited set of deployment opportunities to engage with. It doesn’t matter what the set is, really. Some vehicles like hedge funds are likely to be _highly_ unstable; to be multipliers of instability. But some, such as government debt, may not be intrinsicly unstable at all. Regardless, they are destabilized when stuper-large masses of money crowd in because most of the bets run the same way. This is much of the theory behind hedging risk, but plutonian piles are so large that the correlate the hedges, too. This came up repeatedly for discussion here at NC in the past three years, and elsewhere amongst the few to get past more obvious but smaller drivers. The effect is not unlike piling large masses of carpeting in one place. Carpet is r-e-a-l-l-y heavy. Spread one layer thick over an areas, no problem. Spready thirty layers thick (rolled) in a pile (bought in), and the floor collapses. If you really stacked it in the wrong place, you can take out a main supporting member of the edifice, and the whole thing comes a heap [with most of the citizenry inside.]
Large masses of wealth are criminal in the main. Large masses of wealth are systemically catastrophic INHERENTLY, not as a function of how they are spent but that they occur at all. . . . But of course we all want to be rich, right? So we keep looking away from the crime, and hanging around the pile hoping a few bricks will roll to our feet. Nobody’s ever gotten rich acting on the assumption that peepuls r smart . . . .
Plutonian concentrations of wealth should be psychologically and socially approached exactly as one would large concentrations of heavily armed, violently tuberculor, bubonicly infested bunches of people would be, as a certain source of loss and ruin for absolutely everybody else.
One quick suggestion regarding Richard’s point about correlation: mutual funds. Even the not-so-rich contribute to the correlation problems described.
So Doug, yes you are right, and good to point that out. There has been some significant research on the correlation from mutual funds and such which I suspect you know from your comment. Adding this issue, it doesn’t necessarily matter whether plutonian wealth creates the ‘gravity well’ and mutuals fall in, or the other way around. Correllated risk from mutuals might be destabilizing by itself, though their movement may to some degree be mitigated by the fact that there are many other inputs to equity prices and movements, and also many other asset classes. Even so, plutonian weatlh concentrations tend to drive correlations of all asset classes to 1.0 is what I would suggest, following the discussion of others on this.
Richard,
If your hypothesis is correct, it would seem that Congress has just added another layer of carpet on the pile. And the talk of cutting spending in the next session of Congress will only compound the problem.
The inefficacious stupidity of any and every economically dynamic policy we see coming out of Congress at this time cannot be overstated. If they all did _nothing whatsoever_ we would be better off. This is what happens when things fall apart: people start lying to each other; then they lie to themselves; then delusion becomes indistinguishable from lies because inextricable.
There is a significant difference between being rich and being wealthy. The concentration of wealth is a serious problem for any society be it a federal republic, a social democracy, a command economy, or any form conceivable.
When you are wealthy, you control the means of production. Then comes the eternal sins of greed and avarice. Now you need more and upon that need for more comes the rationale for deceit, theft and fraud. Indeed, it is these latter motivations that create the imbalance that is only corrected by catastrophic failure.
But then, who will champion the cause of catastrophic failure? Most probably only the have nots for they have nothing to lose. Could we create the incentives that would operate to constrain the eternal sins? How could we do that?
Richard, I am a fan of all your comments, but I particularly enjoyed your carpet metaphor. What’s most distressing to me is not to see that someone’s accumulating carpet while others have dirt floors; the tragedy is that—whether we recognize it or not, whether it is voluntary or not—we’re all working diligently expressly in order to put our resources into a few giant reeking piles of destructive Orlon that will yield nothing but pain when they come crashing down. The tragedy is that we are yoked into this on purpose.
Richard: It seems to me that you’re mostly right, but you’re getting yourself mired down in the morass of different ways in which allocation problems occur.
Basically, the point to start is with a fairly simple suggestion: in any given economic cycle, you bring together some starting capital to buy the means of production you need to produce goods that you wish to sell during that period.
Now, the only way to sell those goods is when Aggregate Supply is smaller or equal to aggregate demand. If this is the case (that is, if workers/consumers are paid enough), you will see that workers are paid, products are sold, some money is extracted as profits, and some of the income earned by workers is saved. In the next cycle, then, the investor will want to be able to make the same amount of profit on his money as he did last time, and he will generally do this either by expanding the means of production (increasing AS), or by increasing efficiency. However, the last option reduces sustainable AD, while increases in AS are only sustainable if they are matched by income increases. This either means people can save less (which, on the whole, means less robustness when it comes to AD), or that pay has to increase as well.
However, the more there is saved, and the more concentrated those savings are, the less likely it will be this money will return to the circular flow, and the more likely it is that the owners will want to ‘invest’ it, so that it is also mobilized to somehow produce high yields. The consequence of this is that there will be a push to fire people or to lower wages, but this immediately cuts into AD.
Yet the more savings there are, the harder it will become for all of them to produce high yields, and the more desperate its owners become to still get those yields. They then start moving to low-income countries, but this too lowers AD.
So what happens once there is too much money around to invest compared to the amount of money that is available for consumption? Well, one option is of course the lending that took a massive flight starting under Reagan, but really taking off under Clinton. This keeps AD higher than it can be for a while, but then lowers AD even further because of the rent that has to be paid on it, which again goes to the investor class, who then has even more money “lying around doing nothing” (the horror!). So the only option that they then have left is blowing asset bubbles and profiting during the runups, and pulling out before it crashes (which they manage to do as a group), which results in further wealth transfers from pension funds and small investors to the rich, and thus causing additional instability for the future.
Certainly criminal behavior plays a role in this (even apart from the fraud that happens during housing market bubbles such as this one), but on the whole it seems to me that this is fairly irrelevant, as these criminals cannot really gain a grasp on the political system, whereas legalized criminals such as bankers can. (I’m not sure how to fit politics into this story, other than that they obviously affect things such as taxation.)
Remember those moronic GOP members of the FCIC…the idiots who posited the stunningly stupid explanation that the CRA, etc was a main cause of the financial crisis?
This post is simply the Left’s achingly stupid version of the same….
“The poor (ie CRA) caused the crisis!”
“Nuh, uh, the super rich did!”
Gimme a break, GW.
In the GOP/FCIC post, Yves made the fair point that:
“Let’s look at a few inconvenient facts. We had housing bubbles in the UK, Australia, Ireland, Spain, Iceland, Latvia, Canada, and a lot of Eastern Europe. Can we blame the CRA and Fannie and Freddie for that?”
Now, look at this wealth distribution map:
http://www.mint.com/blog/trends/mint-map-global-wealth-distribution/?display=wide
China, Brazil–Unequal.
Spain and Eastern Europe are more equal.
By your logic, China and Brazil should be in Recession and Spain and Eastern Europe should be far more robust in their weathering of the storm.
No, I’m asserting that the US should seek more imbalance.
I am asserting that your post is pandering, ideological nonsense. You make simplistic connections that can just as easily be refuted by another simplistic explanation.
The Financial Sector needs to be reigned in…It has way too much power and it has resulted in massive, unhealthy imbalances that has contributed to the crisis. Addressing this serious problem will help alleviate much of the inequality which many of us do, indeed, lament.
But, Infantile proclamations that— “Extreme inequality is bad!”— does nothing to bring about meaningful reform.
The Right, by blaming the CRA, guarantees that useful idiots on the Left will respond by blaming the rich. And the cycle continues…and we’re stuck in the same interminable circular cause/consequence chicken and egg pissing contest:
Did extreme inequality cause the crisis, or did the crisis cause extreme inequality?
And GW since you support your contentions by referring the reader to “THIS, THIS AND THIS”, which are nothing but references back to your own freaking blog…
I offer as support for my comment here today, the “SCROLL UP” arrow…back to the beginning of my post…and the circle-jerk continues….
I wrote: “No, I am asserting the US should seek more imbalance”…when I meant “No, it should NOT seek more imbalance.”
Shit, now that I think about it, maybe it was a Freudian Slip? Maybe I’ve been so infected by Right-Wing Propaganda that I cannot help myself?
Yes…I’m sure that’s it. You got me. Damn.
And my true intentions revealed, I leave you with this Battle Call for the Ages:
“Extreme Inequality for All!”
GW paints with a broad brush, to be sure.
It is not always Cartesian logic, but it is artistic. :)
Dan, Have you been reading at all about the massive overproduction, non-performing loans issues, or speculative real estate bubble in China? Look at South Africas property market as well, totally astronomical. Brazil, India, or any developing / emerging economies for that matter have hardly been models of a stability per US or European standards. Just because they are at an upturn presently doesn’t suggest that Brazil or India don’t have massive issues or are robust to external shocks. That is a straw man, timing is different in economic crisis. What I see more likely in India anyway is social upheaval.
Furthermore economies are not closed, so it is difficult to say where that excess capital is going to go and where it is going to create a speculative bubble. Where did Swedish banks create a bubble?….Latvia. There is probably a cascading effect, while quite a bit of it has to find something stable to hedge risk (or something that appears stable in this last case), some of it will go to enhancing, productive efficiency or capacity through loans.
Eventually, there will be money there that cannot find an asset that will have a clear return and we will find ourselves within the realm of extending credit to those that cannot pay it back, speculative behavior, etc. We have to remember there have been what six bubbles since the 80s… savings and loan, latin america, telecom, dot com, energy, subprime.
The bigger problem as to why GW unintentionally created a straw man in your book is that we reflect upon inequality in such terribly narrow terms, by a general measure of income or assets. By these standards Trump was poor at bankruptcy, but was he really?
How does GINI coefficient or any other measure of inequality capture the levels of corporate concentration in the banking, agriculture, mining, telecommunications, media, or any other sectors for that matter? How does it capture access to extremely high leverage? or Political access for that matter?
That is the problem here, what we observed was an American and British motivated deregulation of the banking sector. That dismantling of the regulatory infrastructure that was put in place last time we had a banking catastrophy was built upon a concentration of political access, you guys may disagree but I call that inequality, just in the political form. We have pretty much institutionalized what we call corruption in developing countries. The less unequal European countries were simply part of a race to the bottom in terms of copying their English speaking counterparts rabid lust for greater and greater profits from more and more precarious leverage levels.
None of this is encountered if we speak of inequality from a strict sense of wages or wealth.
“Did extreme inequality cause the crisis, or did the crisis cause extreme inequality?”
I’d love to know how the latter could be true when the inequality occurs before the crisis.
At best, you could say there’s a correlation but no causal relationship, i.e., both are caused by something else. There’s no possible way an event can cause a condition to exist before the event. Are we into quantum physics here or what?
Steve from Virginia has got it right, I think. The rest of this discussion is interesting but academic.
Surpluses or profits in an industrial economy result from turning resources (fossil fuels) into waste. If that cannot be done cheaply enough there is really no surplus. The fact that there is no market for the waste (demand) demonstrates that the resources have gotten scarce. All of the surpluses or ‘profits’ sitting in the banks are mere illusions. My guess is that the Central Bankers know this very well. When the rest of us wake up it is game over for everyone.
To stop us from waking up, they will have to create some demand for the waste. That is what we call war.
If any of us survive we had better think of a way to do things better next time.
Lynn
Lynn/Ellen, you are right. The hackneyed way of saying it (I don’t have a better metaphor) is “re-arranging the deck chairs on the Titanic”. I fear Yves is prone to this. I have a great admiration for her and think she is smart as a whip, but I get the feeling she thinks there will be a “normal” to return to after all the fraud is cleared out. There won’t be.
The system isn’t hobbled or besmirched by fraud; the system IS fraud.
This is a great article!
But as Mark Twain said “The past does not repeat itself, but it rhymes.” There are differences between the 1920s and the present. In the 1920s there was no government bank deposit insurance which is not the case today. In the 1920s we were a net exporter which is not the case today.
When the crash came in 1929 the banks were immiediately in serious trouble. Runs on the banks began. The banks went down taking people’s life savings and businesses’s operating capital. Add that to the article to help explain the severity of the Great Depression.
Today we have moved too many well paid production jobs to other countries to take advantage of cheaper labor. In addition include illegal immigrants impact on the lowest 10% wage earners. Add those to the article to explain the severity of our current Great Recession.
Lidia – I know. I think that those surviving what is coming will be very lucky. They also need to be smart. I wish there could be a better understanding of what has happened here so that the survivors don’t try to start the industrial (waste) economy back on its feet with its corporations and banks and regulations “fixed.”
It pains me to see these well meaning and brilliant people missing the point so badly. I’m not sure Yves is really missing the point. I just think that she is in the finance business so she is writing about what is happening. I find the narrative fascinating. It’s the premises and conclusions that flip me out.
Ellen, I don’t know whether I could spend the time and energy she does on trying to call “foul” on the system.
If I had her means, I’d be planning to be neighbors of the Bushes and The Rev. Moon in Paraguay or wherever. If I had had her inside knowledge, I’d be past the planning stage; I’d already be there.
I know what you mean – I’m pretty glad she hasn’t done that yet though. It gives us an opportunity to debate with a bunch of people who aren’t posting on the regular peak oil sites (for the most part.)
Also, I am in a field that is related to finance. Some of the abuses that are taking place are in violation of traditional common law and decency should be called out in any case. Am I saying that we could be/should be collapsing more gracefully? Maybe so.
Yes, quite quite!
Let’s do collapse gracefully, shan’t we?
;-))
All the reasons in the article are valid but the answer is actually far simpler. People simply get tired. They have to work very, very hard just to survive. They don’t have the freedom to start small businesses because they don’t have spare cash but more importantly they don’t have the excess energy needed to make a business work. They cling to their jobs even thought the work isn’t providing a good life.
This is basically “animal spirits”. The poor and middle class have none now. People with capital still have plenty. But a small class of winners can’t power a society forward. You need risk and energy to come from all sectors.
What this post ignores is an even more revealing statistic. Every depression, include the Great Depression, came on the heals of federal surpluses, almost every recession came on the heals of reduced federal deficit growth and every recovery came during increased federal deficit growth. See: http://rodgermmitchell.wordpress.com/2009/09/07/introduction/
In short, a growing economy requires a growing supply of money.
Rodger Malcolm Mitchell
Demographic mountains: total U.S. population by individual years of age, 1900-2050
American Demographics, May, 1996 by Karl Hartig
Once upon a time, there was this brilliant idea to make everyone in the world rich. The figuring was if people were busy making money they wouldn’t have time to have civil wars, and the world would be forever at peace. So all the movers and shakers in the world got together and invented globalism.
The rich saw an opportunity to make a buck on Le Nouvelle Colonialisme and jumped in with both feet. With money and jobs going overseas at a feverish clip, the developed nations compensated their citizens dwindling wages and loss of structural jobs with easier credit and promises of a virtual Information Age. The “smart” ones opened business with the free money, while the “dumb” ones bought houses. In the end it really didn’t matter, everyone was dumb. Now we read endless speculating on what really happened, as if that will somehow return our wealth.
What is interesting to see are the developing countries weathering the storm quite well, while the rich nations suffer increasing civil unrest. How can that be? What’s the secret key?
Just remember, nothing happens by accident in politics.
Charts…A depressing point to consider is that the income growth chart does not show that we have reached the end of this cycle. It is quite possible that things may get even worse. Circumstances are now much worse than in 1928 in that there is much less individual ownership of land and assets. Do not expect things to change without popular intervention…
I mean You! You will actually need to do something! If you continue to play the game and play by the rules set out for you, then nothing will ever change.
There is much denial in the world. There is a popular “myth” that things cannot get worse and that the pendulum will now swing the other way. Can any of you quantify such hope with evidence from your personal lives?
When I post about “The Economic Singularity”, I’m not joking. That is the logical progression of these times. Yes, the number of billionaires is growing rapidly. But, where does the wealth come from? Certainly not from other billionaires. In Japan the process is nearly complete, about 5 people own the country. Not that they know what to do with it, they were just better at playing the game and understanding what the trends were. Eventually these very rich people will have devoured all the low-hanging fruit (ordinary people), then they will turn inward to a really nasty dogfight.
It is not only our financial system which is broken, but the entire fabric of civilization. With apologies to Yves and all the other financial people posting here, I believe you mean well, but you are naive. The system you would repair (and hope to prosper in), is only a part of a larger failed system. Unless mankind can evolve to escape our animal mentality and roots, we are doomed. Our doom may be an early extinction, or as an illiterate scavenger species. It does not matter.
Every aspect of our civilization needs to be replaced or at least reformed.
1) Our governing systems need to be changed so that order can be restored. When our laws are like a rubber playing field where the goalposts are constantly moving and even the surface is twisted and bent, it is not possible for ordinary people to make rational decisions. Our value systems need to revert to a utility driven basis, defining our needs largely on the basis of comparisons to other people dooms them to failure. In a comparative wealth system, only one person can ever be satisfied.
2) Our social system is much the same. It is based largely on envy. An ‘envy driven system’, enshrines the status quo. Envy driven systems are based on perception rather than value or contentment.
3) Our financial system doesn’t need to be expanded as it is based on the previous two.
If we cannot reform/evolve from our present mess, then eventually the power and financial leaders age and die leaving civilization free to follow the laws of nature and devolve to the lowest common denominator. Unless we can evolve quickly, the only solution I see is to promote the growth in the lowest ranks of society that when we reach the tipping point, at least the bottom is higher than it might have been.
“There is a popular “myth” that things cannot get worse and that the pendulum will now swing the other way. Can any of you quantify such hope with evidence from your personal lives?”
I really think we are only beginning to feel the damage. I can really see the system collapsing into a total disaster in this decade that has just begun. The main hope is popular awareness and popular reaction, as is happening in some parts of Europe already.
All the good stuff that has been accumulated in the 20th century (human rights, freedom of speech, right to unionize/strike, minimal redistribution of rent, etc.) was achieved through popular struggle and where there is none of this, these freedoms and rights will be removed (they are already being removed). For example, the USA, where popular struggle is still very very weak, is likely to become something the Brazil of the 1970s in no time (mutatis mutandi), with slums all around and even maybe a military dictatorship (or similar) if the elites deem it necessary.
“When I post about “The Economic Singularity”, I’m not joking”.
You are absolutely right. Just that singularities do not exist except in black holes (they are unreal limits), so the result is actually unpredictable (but in any case not smooth).
“In Japan the process is nearly complete, about 5 people own the country. Not that they know what to do with it”…
That’s an impressive fact I did not know.
“It is not only our financial system which is broken, but the entire fabric of civilization”.
Absolutely. We desperately need a solution, a way out of this corrupt nightmare.
“Unless mankind can evolve to escape our animal mentality and roots, we are doomed”.
I agree that unless we evolve socially (and economically/ecologically) and we do it fast we are doomed. But I disagree with the “animal mentality” being the problem. Actually human instincts are mostly social and largely altruist.
It is only this paradigm of greed and corruption, so called “free market” which needs to be radically modified. Capitalism has done a rather “good” work in destroying the old regime but has been unable to create anything of its own other than rot (rights, democracy and such are actually achievements of the Working Class antithesis, not of the Capitalist thesis). We are therefore left with only our raw humanity, for good and for bad.
I believe we can actually build a better system based mostly on our raw humanity, our (largely social and cooperative) “instincts” and our reason (also largely of collective nature). I don’t think it’ll be easy but I do think it’s a better option than allowing this Capitalist decadence to reach its logical bottom, the singularity you mention.
“Our financial system doesn’t need to be expanded”…
Right. But the USA in particular (and other developed economies probably too) believe that their position in top of the global food chain is now founded on financial domination. They do have a point, even if this status quo is obviously unsustainable and should collapse in a matter of years, maybe even months.
“the only solution I see is to promote the growth in the lowest ranks of society that when we reach the tipping point, at least the bottom is higher than it might have been”.
Sounds good but it’s a mislead reasoning. We are at a revolutionary stage: the system is trapped in a vicious spiral, as you (and often Yves and others) point out, and does not seem to have anywhere to go. There is no Capitalist plan other than to keep looting until there’s absolutely nothing else to loot. When such situations happen, revolutions are almost unavoidable (but there’s no destiny to them: they are open solutions that must be generated by human action). Someone said that revolutions only can throw down rotten buildings. It is probably true. Someone else said that revolutions are the emergency breaks of a society heading at high speed towards a catastrophic collapse. It is surely true as well.
We are in this situation now. And we do not just need revolutions but we also need an emergency plan for the day after them (it can be improvised, I guess, but it’s always better to have some ideas beforehand).
Presumably the article is for those of us with memory problems, since it has been known for some time that the wider the gap between the have’s and have-not’s, the bigger the boom-bust abyss to be traversed. And, pray tell, what causes “extreme inequality”? Why, none other than successful capitalism, such as the unfettered, “capitalism with the gloves off” so vibrantly imposed since the Reagan Revolution. And now it’s a bipartisan consensus! Ergo, Jamie Dimon was only bringing in the mail when he said that “we” should expect financial and/or economic crises every five to seven years; by which he meant, of course, that Too Big To Fail is part of the social contract of the corporate capitalist/imperialist elite with their government.
@solo said “And, pray tell, what causes “extreme inequality”? Why, none other than successful capitalism,..”
I disagee, mostly in the matter of scale. I think it is a criminality issue. Capitalism has merits in a democracy, if the laws and the government are not available for purchase.
The system fails when democracy fails. Competition can be very healthy. However, when competitions are not open to all within the rules of the game, then one has niether democracy or free capitalism.
And where, Mr. Repstock, do you find that the USA is a “democracy”? Is that word in the US Constitution? Is “democracy” a synonym for “plutocracy” for you? Also, please note that your “criminality, not capitalism” distinction is a false dilemma: We in fact have both. Capitalism in today’s USA is indeed a criminal enterprise, scornful of the rule of law and, of course, contemptuous of “democracy” by any respectable definition. I should not have to add that the government of, by, and for the capitalist/imperialist elite is also systematic exercise in lawlessness, great and small. (How ’bout those mass murders, a.k.a., wars? How ’bout the Arms Export Control Act vis-a-vis such as Israel? How ’bout international law anytime our rulers perceive it an obstacle? And so on.)
Paul: wealth is power. That is the problem in fact. Democracy is not any Capitalist achievement: maybe early “democracy” (where only some privileged classes, always men, could vote) was conceived as part of the Bourgeois revolutions, but most of it has been conquered through decades of class struggle, in which the Working Class has managed to impose conquests, later often downgraded. Capitalism needed to canalize the anger of the oppressed and to calm it down by some means, for that they accepted some reforms, once and again, and incorporated ideals of the popular struggles such as human rights, civil rights, freedom of speech, right of strike and unionization, popular representation venues, etc.
The tendency to monopoly and corruption is however intrinsic to the system. It’s moderated by two different forces: a reactionary one (the former ancien regime thesis, for which Capitalism is victorious antithesis) which can never succeed, as it’s always corrupted by Capitalism and has nothing to offer, and a revolutionary one that goes with Capitalism against the old regime remnant forces (fundamentalism, fascism…) but that wants to go further, to break free of the Capitalist corset of dehumanization and corruption.
In this struggle Capitalism has so far played the role of “king”, mediating and manipulating the old regime reactionary forces and the “utopic” revolutionary forces, much like absolutist kings did between aristocracy and commoners. However nowadays, like the kings of the late 18th century, it has clearly become a liability and is not anymore able nor willing to push the change forward anymore except in its own vicious circle of uncontrolled greed and destruction of ethics (incl. law but not only: it’s more than just law what is being destroyed: it is the annihilation of any sort of social morals, of social responsibility, solidarity with each other).
In this Capitalism has outdone its implicit “mandate” of destroying the old regime ideas and social structures and now is also attempting to destroy Humanity (both in the physical and ethical sense). This is clearly excessive and that’s why Capitalism has become obsolete and unable to produce any more social value. And that’s why it has to be removed from its throne.
Paul, the issue is that capitalism itself is a system that cannot be sustained. And really, both democratic and non-democratic totalitarian systems have blindly embraced capitalist models.
I see it exactly the other way around from you: I think democracy will fail when capitalism fails, because the system that enforced excess production and raised standards of living will do so no longer. When production becomes subsistence level and below, then all bets are off for democracy in the remainder of our lifetimes, I have a feeling. For nation-states, I think the trappings of democracy are a luxury.
In this I disagree, Lidia: democracy is no luxury, it’s a need to fight corruption and power abuse. Even in today’s degenerated state, the somewhat limited freedom of speech helps a lot to expose abuses and to explore alternatives. Without some degree of democracy this would not be possible and the situation would be much worse in all aspects.
Besides, we know that non-democratic planned economies fail. So if we are to devise an alternative to this failure, we need total transparency and total democratic participation in decision-making.
In fact I think that the issue is now to democratize the economy by putting the tools of it (industry, services, even markets for whatever they are worth) in the hands of the people to be managed by participative means, instead of being private fiefs as they are now.
Democracy remains a luxury, imo, because it requires a lot of resources that are going to be in ever-shorter supply. It requires education. It requires freedom of information, and free or cheap technology for communication and for the dissemination of information. It requires setting aside resources and time and people to do the constant “unproductive” work of arguing and governing (see Brussels!!!). Even *with* all those inputs, we’re doing a pretty sucky job at it.
You want to democratize the economy, but “the economy” does not belong to the people **and it never has**. Arguably, though, the economy is “democratized” to the extent that we vote with our dollars for McMansions over modest homes, for SUVs over bicycles, etc. I’m not sure what greater democracy would do to change that.
The only economy that truly exists, anyway, is the Natural Economy, which is at odds with our Un-Natural Economy, democratized or not.
How many republicans does it take to screw in a light bulb?
NONE, the market does it by itself.
How many republicans does it take to screw in a light bulb?
None, it is better to keep people in the dark.
How many republicans does it take to screw in a light bulb?
None, Jesus Christ is the light of the world.
How many republicans does it take to screw in a light bulb?
None, there are no light bulbs in the Constitution.
From the forth coming book “1001 Republican Light Bulb Jokes or The Smartest People in the Room Finally Figured it All Out”. Edited by Yves Smith.
Your constitution was one great shining light till the “Smart People” ran it through MERS and had some Robo signers go to work on it.
@Maju and Lidia – It has been a pleasure to read your comments. Especially the points about the “religious” assumptions that provide the intellectual foundations of the globalized economic system. It is important to keep pointing this out to the very very smart people on this site. Keep talking. At some point enough people will get it.
I keep thinking about what to do (as opposed to simply preparing myself and family.) Honestly, I believe we are going to have to work through the established political process at some point. I know- ROFL- but I think the only political party in America that has a chance of getting the word out is the Green party. It has the advantage of being organizationally global while intellectually local. And, it could provide an antidote to the state “religion.” I am going to re-register…soon.
I understand that the Green Party got 20% of votes in Illinois, what is promising. A working class Labor Party in one of the Carolinas gathered 3%. All this, very shyly, seem to announce some major shattering of the twin-party system but it’s surely too early to say.
However I’m wary of Greens. I admired a lot Petra Kelly and others (fundies?) in the 80s but nowadays most Green parties seem to lack revolutionary intent (realos). But whatever because, as its said in Basque, “ezina ekinez egina”: the impossible is done by action. There are no master recipes, so I send you my best wishes: almost anything (of good will) is better than this paralyzing and destructive cronyism of the oligarchs.
Is there any data on income inequality in Japan in the late 80’s? I think income inequality is a symptom rather than part of the disease. Just a guess.
Come to think about it did not Keynes want to tax more those who made money through investment and speculation.
“Paul, the issue is that capitalism itself is a system that cannot be sustained. And really, both democratic and non-democratic totalitarian systems have blindly embraced capitalist models.”
What’s the evidence? The evidence seems to be that authoritarian socialism cannot be sustained, because it has not been. But what we might roughly called democratic capitalism, evolving to social democracy as in the West European model, what is the empirical evidence that it ‘cannot be sustained’? This is a prediction of collapse of some sort, but there’s no evidence it is likely.
It is true that authoritarian anything, not just socialism but also authoritarian capitalism cannot exist anymore, much less be efficient. At least not in developed societies (and this is something China will find out soon, very soon).
But identifying democracy with capitalism is a fallacy, nothing but a propaganda commonplace.
And “evolving to social-democracy” is a total fairy tale. Social-democracy has evolved to right wing liberalism: today it is “social-democrats” who implement the IMF ultra-liberal plans in Greece, Spain and other countries, in a context in which all redistribution is being sacrificed to pay the banks, who circulate veiled threats of military coups if the bloody tributes are not paid.
This the ugly reality of Capitalism once the cover has been blown. It is not at all better than the ugly reality of post-Stalinism in 1990 and hence the result will be the same, it is already being the same: collapse.
20 years of difference in the rhythms of excess and collapse, specially considering that the USSR model was stuck in pre-1968 concepts (Fordism) and did never adapt, and that the Soviet bloc was always the smaller one, do not make any meaningful difference from the economical historian. They are the very same process of Capitalist accumulation at the expense of Earth and the Working Class.
If the USSR would have dared to reform itself or would have been forced to do so by a popular revolution that was quelled in Prague the very same night I was born, then maybe (only maybe) it could have been able to become a true popular power system (socialist participative democracy). But I understand that the Working Class in Eastern Europe was never really well developed (Central Europe was special in this aspect), so this was not possible.
It is also not realistic to look too much at the (otherwise interesting) processes in Venezuela and other Latin American countries nor to the Maoist uprising in South Asia. The change will have to take place primarily where Capitalism has been exhaustively developed and reached its absolute limits, where Working Classes are educated and interconnected, where there is no further way ahead without a radical revolution. That is Europe and North America (and maybe Japan).
Ah, Maju, but I don’t believe that I was identifying capitalism with large-scale democracy. I just think they are both made possible by surplus wealth extraction.
You are looking at things from an ideological point of view; I am more prone to look at things from a scientific or logical point of view. The USSR collapsed because it no longer had the resources to maintain its empire; the US will collapse because it no longer has the resources to maintain its empire.
It seems to me that leftist ideologues have long been stuck (as are the capitalists) in an industrial model. You say that the Working Class was not “developed” enough to form a “true popular power system”, like that would have been a good thing. The problem, perhaps, is another: in the concept of a Working Class altogether. Have you ever thought of that?
What I see coming is a post-industrial world, and so we will have to come up with means of dealing with that, giving up the current, untenable, societal forms to take up new ones likely to be borne, perhaps unfortunately, of expedience. Whatever happens in the interim, I think a devolution to smaller city-states or tribes is likely at some point. For better or worse, tribes are a very strong organizing principle (viz. Rom/gypsies). These are just my feelings based on what I have read about Peak Oil, plus dusting off my college thermodynamics. The problem with modern politics and economics is that they ignore the laws of mathematics, along with most natural laws.
I also said nothing about “evolving to social democracy”; maybe you are responding to someone else?
“I also said nothing about “evolving to social democracy”; maybe you are responding to someone else?”
Sure: look at the structure of the conversation: I’m replying to Leroguetradeur, not you.
Lerogue, I am flabbergasted that you ask for evidence. The evidence is all around us. Localities tearing up paved roads and reverting them to dirt? Abandoning fire and police services to sections of cities? That is collapse. It’s not a matter of “predicting” it any longer; it’s here.
Were that not in evidence yet, I still just use my powers of reason to imagine: can a system based on exponentially-increasing inputs continue infinitely within a finite system? The answer is no.
Since capitalism requires exponentially-increasing inputs, when inputs lag, capitalism will fail. This is a mathematical conclusion, not one borne out of my political leanings or the results of this or that popular social dialectic.
I’m sure many of Yves’ readers have seen the “Money as Debt” cartoon. Well, fractional reserve lending is entirely analogous to capitalism itself. For capitalism to seem to work, its rents/profits/dividends/interest need to come from outside its own system. Now that the system is global, the game’s over. There is no more “outside the system” from which to glean these extra, exponentially-expected gains. Capitalism cannot even work in a system of stable inputs, much less one of dwindling resources.
You cannot will things to be otherwise, any more than you can will the suspension of gravity.