Over my morning coffee and International Herald Tribune (paper edition) I had an epiphany about the "experts". They don’t know nothin’. At least, if they do, they sure don’t want to talk about it.
The Trib has an extended article by David Leonhardt, who tries to find the reason for the mystifying crisis now ravaging the world economy. Only thing is, he’s looking in the wrong place, he is seeking the origins of the crisis in the epiphenomena that are currently visible.
Leonhardt starts his article warning us that he is going to mystify, rather than enlighten:
Raise your hand if you don't quite understand this whole financial crisis.
It has been going on for seven months now, and many people probably feel as if they should understand it. But they don't, not really.
I'm here to urge you not to feel sheepish. This may not be entirely comforting, but any confusion you might have is shared by many people who are in the middle of the crisis.
I spent a good part of the last few days calling people on Wall Street and in the government to ask one question: "Can you try to explain this to me?" When they finished, I often had a highly sophisticated follow-up question: "Can you try again?"
Yeah, this whole mess is just too abstruse to contemplate, so don’t even bother to try. But, he assures us, nonetheless, that it’s all going to work out just fine:
[T]he crisis isn't close to ending. Ben Bernanke, the Fed chairman, won't be able to wave a magic wand and make everything better, no matter how many more times he cuts rates and cheers Wall Street. As Bernanke himself has suggested, the only thing that will end the crisis is the end of the housing bust.
And there is the fallacy. The problem is not the housing crisis. The fact that Humpty-Dumpty fell off the wall over dodgy mortgages is merely a particularity of an historical process with its origins in the early 70s.
It is well known among economists, but seldom discussed in public, that, the OECD countries, the main consumer economies, became saturated markets in the late 1960s, bringing Long Post-War Boom to an end in the early 1970s. As an immediate result, the ROI on productive investments headed south. Increases in gross domestic product (GDP) started to decline and have never come close to the heights of the period from 1960-1973. Furthermore, the rate of growth of fixed (productive) capital formation and of private consumption both eroded in parallel with GDP.
Now we reach the crux of today’s problem: what are investors going to do with their capital, if productive investments are becoming increasingly unattractive? Let’s turn to British economist Harry Shutt’s The Trouble with Capitalism to explain how capital reacted to this quandary:
The increasing maturity of most consumer markets in the industrialised countries was becoming a noticeable constraint to economic growth in the industrialised world by the end of the 1960s. This meant that in addition to static demand for non-durable goods ... the markets for most durable products ... tended more and more to be governed mainly by replacement demand rather than by the continuous opening up of new groups of first-time buyers, which had been possible throughout the 1950s and early 1960s. Hence demand for goods generally began to grow more in line with population ... rather than at the rapid rates recorded up to the mid-1960s. - Chapter 3.
After a discussion of companies’ attempts to shore up their profits, despite declining demand, he concludes:
Naturally an important consequence of the slowing growth of consumer demand was that competition for market share intensified, leading to a drive to cut costs and hence in turn to a squeeze on staffing levels and higher rates of unemployment in most OECD countries in the late 1960s and early 1970s... Yet predictably this process, by squeezing purchasing power, did nothing to reverse the decline in the marginal propensity to consume of the population as a whole.
Of course it didn’t, and as we very well know, salaries for the employed have hardly changed since the early 1970s. The greedy farmer and his wife killed the goose to get more gold faster. Obviously, that didn't work, so what did the owners of capital try next?
The inevitable result of twenty-five years of sustained profitability in the corporate sector up to the early 1970s ... was a more or less continuous expansion in the volume of investible funds. This was true notwithstanding a progressive reduction during this period in both the rate of return on capital achieved by the corporate sector and the share of corporate profits in total value added. Coupled with apparently unshakeable confidence in the durability of economic growth ... this fuelled an explosion of bank lending from the mid-1960s... Yet it is striking that this surge in lending was not matched by a corresponding growth of fixed investment during the same period... Aside from fixed capital [plant and equipment], moreover, the demand for funds to be employed as working capital [day-by-day operating liquidity] also began to diminish from the 1970s.
So, the boom years produced an increased volume of capital; banks were lending like there was no tomorrow; productive investment was declining. Peter Drucker remarked on this situation in 2004:
What's more, there is an enormous amount of surplus capital in the world for which there is no productive investment. The supply greatly exceeds the demand. So there is a very jittery body of excess money that is desperately in need of returns, and it could become panic-prone. We have no economic theory or model for this.
Where could all that capital be invested? Shutt replies:
Inevitably this coincidence of a continuing steady growth in investible funds with slowing demand for both fixed investment and working capital meant that a significant proportion of such funds were channelled into speculation – that is, into assets that held out greater prospect for gain from capital appreciation than from earnings yield... In such a climate [governments committed to expansionary fiscal and monetary policies] it was entirely rational to suppose that the value of assets such as real estate would be unlikely to fall for any sustained period... [It was also believed] that governments could and would intervene to support financial markets and thus protect investors from risk of serious disaster, thereby contributing to the intensity and recklessness of much of this speculative investment.
There in a nutshell is the economic history of the industrialized world over the past three decades. We have suffered from stagnant incomes for most of the population, speculative bubbles that have cost us hundreds of billions of tax-payer dollars to save the hide of the guilty, increasing uncertainty and demoralization in our lives. And all of this has been foisted on us behind the curtain of "respectable" economic opinion, lies and obfuscation. Leonhardt’s article simply contributes to the obfuscation, and he even ends it with a call to reward the crooks:
Many economists, on the right and the left, now argue the only solution is for the federal government to step in and buy some of the unwanted debt, as the Fed began doing last weekend. This is called a bailout, and there is no doubt that giving a handout to Wall Street lenders or foolish home buyers - as opposed to, say, laid-off factory workers - is deeply distasteful. At this point, though, the alternative may, in fact, be worse.
Bubbles lead to busts. Busts lead to panics. And panics can lead to long, deep economic downturns, which is why the Fed has been taking unprecedented actions to restore confidence.
"You say, 'My goodness, how could subprime mortgage loans take out the whole global financial system?' " Zandi said. "That's how."
Well, we have been in a "long, deep economic downturn" for three decades, and there is no end in sight. As Robert Brenner concludes in The Boom and the Bubble,
[N]either the transcendence of the long downturn, nor indeed the avoidance of deepening stagnation or worse, can be expected in the foreseeable future. This is, most generally, because during the length of the late 1990s the advanced capitalist economies taken together were unable to perform even as well as they had during the course of the 1980s, not to mention the 1970s or 1960s. This was so, even despite the enormous stimulus provided by the US boom [1995-2000]. It is, more specifically, for two reasons. First, the stock market bubble that was providing the main impetus for US and international expansion in the later 1990s, and especially from 1998 onwards, has burst and cannot make a durable comeback. Second, neither a path of internationally oriented growth characterized by complementarity rather than redundancy in the manufacturing sector, nor a sustainable investment boom in the non-manufacturing sector, will be easy to achieve in either the short or longer run. - Chapter 11 [irony?]
Shutt concurs, in even more dramatic terms:
[E]ven though the growth rates recorded by OECD countries since the mid-1970s have been low by the standards of the 1950s and 1960s, they appear to be very much in line with the norm for industrialised countries over the hundred years prior to World War II. Despite this, as we have seen, they have been insufficient to prevent either a growing underutilisation of both capital and labour or, largely because of this capacity surplus, a rapid rise in both public and private indebtedness. It follows that a revival of growth will have to be sustained at a rate high enough to permit the elimination of capacity surplus and the existing debt, while at the same time being consistent with continued high returns on capital, if a disastrous fall in financial asset values is to be avoided. It is difficult to estimate exactly what the minimum average growth rate needed to meet all these requirements would be. Yet there can be no question but that it would have to be at least as high as the 5 per cent average real rate recorded in the 1960s – and perhaps even higher, assuming a continuing rise in the productivity of capital and labour. Furthermore, it would probably need to be sustained at that average level for at least ten to fifteen years before something like balance was restored.
Thus an assessment based on historical evidence and analysis of the more recent conjuncture of economic forces leads us to the conclusion that only a veritable miracle could avert an eventual (and perhaps quite early) world-wide financial and economic collapse such that the organs of state ... will be too impoverished to prevent. For in order to continue paying for the consequences of the surplus of capital – by bailing out insolvent institutions (and countries) and otherwise subsidising profits – as well as that of labour (through higher welfare bills), governments would be forced to raise taxes substantially. Yet this could now only be done at the cost of either sharply reducing corporate profits, thereby undermining asset values anyway, and/or further squeezing personal incomes, thus engendering still weaker consumption growth and greater social deprivation. Faced with such an insoluble dilemma, political attention must soon begin to focus on alternatives to the profits system. - Chapter 12
In other words, we are living in an era in which non-producing capital (finance capital) has overwhelmed the ability of the industrial economies to function as economies must – providing food, clothing and shelter for actual human beings. The burst stock market bubble that Brenner saw as unable to provided sustainable growth has now been replaced by the burst real estate bubble. No doubt there will be another bubble in our near future, as redundant capital tries again to find an adequate return, but that won’t improve the economy nor will it help people to live better. We can, of course, close our eyes to this situation and continue to suffer the consequences. Or, we can take the bull by the horns and rebuild the economic superstructure (find "alternatives to the profits system") and release the infrastructure from its subservience to the demands of dead capital.