Economics for Everyone

NOVEMBER 1, 2008 -- There's nothing like a good old-fashioned financial panic to inspire a lot of popular interest in economics.  If it weren't for the huge amount of fear and suffering this crisis is imposing on average people, I'd say this was a great time to be an economist!  I'm getting an incredible number of inquiries, from reporters, union members, and readers, all wondering what it means.

Can't pretend I know many of the answers, either.  My general instinct, honed from years of debunking the pompous self-importance of the speculator set, is to downplay the real economic significance of these hissy-fits that regularly disrupt the paper economy.  Contrary to the standard view, stock markets and their like do NOT play a significant role financing real investment.  Average workers do NOT have a big direct stake in the paper markets.  And money managers do NOT pick winners.  To a large extent, the financial sector is a self-contained casino.  There are many occasions in the past when major financial turbulence amounted to very little of significane in the real economy.

But my what-me-worry attitude is clearly not justified this time around.  The size of these swings in paper valuations, the intensity of fear, and the impact of the turbulence on things that DO matter to the real economy (like bank lending, residential construction, and auto sales, for starters) now makes it certain that the current crisis is sparking a major global recession -- and maybe something worse.

Here's a link to an article I published back in the spring in Red Pepper, Hilary Wainwright's awesome new politics mag in the U.K.  It summarizes arguments from e4e that the seeds of financial cycles and crises are planted as soon as we "outsource" the credit-creation system to private, for-profit banks (and hence tie our wagon to the mood swings of bankers), and free up speculators to make as much money as they can by buying low, selling high (instead of concentrating on their supposed job description: facilitating real investment and production).  Leveraging, securitization, and globalization make all of that much worse.

One visitor to this website gently took me to task with a very fair question about my view (expressed in Chapter 18) that we shouldn't automatically assume that financial troubles will result in big problems in the total economy:

"On page 221 you state that the paper economy has little impact on the real economy. In light of the US Fed bail out and the ensuing domino effects around the world, do you think we face a total financial collapse leading to a 30's style depression? Your views would help me very much."

I am still of the view that we shouldn't expect (and certainly shouldn't hope for, as some "worse-is-better" lefties do) an outright collapse of some kind.  Governments will move mountains (not to mention trillions of taxpayer money) to stabilize the system.  Speculators will soon start sniffing for bargains.  Capitalism is always more flexible and resilient than we give it credit for.

The system's ultimate vulnerability, I still believe, is political more than economic.  It will come from large numbers of people saying, "If you can afford to spend trillions to stabilize private banks, you can afford to spend trillions to eliminate homelessness, eliminate preventable disease, and support industries and jobs in the real economy."  Let's not waste any time sitting around waiting for judgment day.  Instead, let's get out and organize around conrete, winnable demands.

The progressive response to the current crisis should emphasize, in my view, the following themes:

• re-regulating finance, to hold private banks to better account and require their credit-creation function to be exercized in the broader public interest (rather than their cyclical profit-maximizing judgments)
• socializing credit creation if necessary to offset the failure of private finance and keep credit flowing (for example, by expanding the mandate and activity of public financial institutions)
• stimulating investment and spending in the real economy, including through an expansion of public spending and support for investment spending by private non-financial firms
• focused measures to protect pensions, which will face intense uncertainty in coming years as pension fund valuations begin to reflect the meltdown
• fighting like hell at the grassroots level to stop plant closures, evictions, and the other ground-level manifestations of the crisis.