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Synopsis of the Issue
The issue at hand is the destruction of the neoliberal capitalist economic order during the
economic recession of 2008-09 and the resulting social chaos, including extreme poverty for
some of the increasingly peerless social sectors since the early 80’s. The writer, Paul Mason is an
unbridled critic of the then-prevalent amorality in the economic policy, which he squarely
blames for the financial collapse. The writer laments that the western world would have been
spared this economic catastrophe, evaporation of trillions of dollars of value – (as well as the
export and savings model economies of the dependent developing countries, such as India and
China), had there been Keynesian oversight throughout (Mason, 2008).
The author marks the filing of the largest bankruptcy in US history (that of Lehmann
brothers on the 15th of September, 2008) as an event symbolizing an economic watershed. The
experiment of financial deregulation, for which Mason chiefly blames Alan Greenspan, the
Chairman of the Fed Reserve for an unprecedented five terms, was ended that day. It is to be
noted that the economic brutalization of classes, a class war perpetrated by the rich over the
poor, using the tools of financial deregulation and unbridled capitalism, continued for all this
time: a solid twenty years, during which the poverty plaguing the weaker classes exacerbated
actually and the class divide widened (Woodward, 2000).
The neoliberal ideology that underpinned the chaos concerns most importantly with the
taking away of oversight from financial speculations and investment banking in 1987.
Greenspan, an ardent objectivist and close associate of Ayn Rand, who read Atlas Shrugged
while it was still being written would say in his 2008 testimony before Congress, “I have found a
flaw. I don’t know how significant or permanent it is. But I have been very distressed by that
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fact . . . Those of us who have looked to the self-interest of lending institutions to protect
shareholders’ equity, myself especially, are in a state of shock and disbelief.” Selfishness could
no longer be a virtue. There would no longer be the blind belief that an unfettered capitalist
structure would guarantee the preservation of global credit. State intervention was realized as
importantly needed in the pursuit of social justice, creation and preservation of stable
communities.
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Perverse Aftermath from Neoliberalism
The very first issue is the rising inequality between classes. The author has cited figures
for the poorest fifth of the American social order. While between the years 1947 and 1973 (when
there was regulation and cautionary oversight), the income for this group would go up by a
handsome 116 percent, this growth rate would evaporate into nothingness for the years 1974 to
2004 (a mere 2.8 percent). Neoliberalism as a philosophy was not restricted to America; in fact it
pervaded all of western Europe as well as several asian countries, that adopted it as an infallible
mantra. Correspondingly, in the United Kingdom, the income share begotten by the lowest 10
percent of the population went down from being 4.2 percent in 1979 to being only 2.7 percent by
2002.
The second issue the author puts forth is that of high debt, induced by the use of easy
access to credit cards and debt offerings. Wages and dependence thereon has been reduced
simultaneously. In actuality, the average American man today makes below what he would have
been making in 1979. Incidentally, the lowest 20 percent make even lower than the average
male. Personal debt which was merely 46 percent of the GDP in 1979, today, stands at over 98
percent. Household incomes in UK too have grown at a much lesser pace in the past decades
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than in the boom years post World War II. Debt too has increased, following a pattern similar to
the US.
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Thirdly, profits have greatly mapped from the non-financial sector to the financial sector.
Where in 1960, profits of financial firms as a percentage of all corporate profits were merely 14
percent, they are over 39 percent today. This profit is therefore not generated from any
productive or innovative business. These are more representative of asset bubbles: dot com,
housing and commodity. Speculative capital has been blamed as the cause of ruin for many
companies. Additionally, personal and financial capital has become insecure. Social capital has
been lost as crime has increased over past several decades – all in part attributable to the rising
divide between the haves and the have-nots. Incessant greed has pursued commercialization of
natural resources and other intimate forms and objects of human life.
Model of Economic Theory: Minsky’s Financial Instability Hypothesis
Mason then stresses a reliance on the sidelined principles of the Hyman Minsky
economic model (also called the Financial Instability Hypothesis) – and how all the more they
are applicable in the scenario of today (Uchitelle, 1996). Minsky’s work focussed on the
possibilities of a modern financial crisis. Minsky (1919 – 1996) was a contemporary of Rand, but
stood on the other end of the spectrum in his views on control over capitalism. Minsky predicted
the so called “Minsky Moment”: when the capitalistic modern economy would crash because of
the natural course that capitalism according to him is destined to take. He classes market crashes
– which Mason blames for the social disorder we are living in, as an “intricate” feature of
capitalism. His view was that such a crash would come about when governments will take a
hands off approach to economy and pursue 100 percent employment and high growth by means
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of an unfettered and private financial system.
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He has been described as a post-Keynesian economist. He was for authoritarian
intervention in the Keynesian tradition, while opposing the deregulation of the 1980s. His model
also does not condone debt accumulation. His theory would stress on the fragility of the financial
markets and dwell on the speculative bubbles (for example real estate, dot com etc) that were
endogenous to such markets over the course of a life cycle.
He said in 1974, “a fundamental characteristic of our economy is that the financial
system swings between robustness and fragility and these swings are an integral part of the
process that generates business cycles.” His claim was that in good times, when the euphoria is
building up, with the rise in corporate cash flow, speculation starts to grow.
Debts begin to grow over and above incoming revenues and a financial crisis looms. To
save themselves from risk, banks and lenders would stop lending practices and grow reserves.
This starts to contract the economy, because due to the new lending practices, good debtors are
also turned away. This was Minsky’s chief contribution in the 60s and 70s, in that he linked the
financial markets still fairly abstruse, to the state of the economy. Minsky also underscored a
greater role for the federal reserve in his model – principally as a lender of the last resort, helpful
during times of distress.
In his defense he laid out previous examples where a free market economy had fallen into
cycles of boom and bust, such as in 1907 (“panic of 1907”) and of course during the Great
Depression. Ways that the government could intervene were through increased regulation, action
of the central bank or the federal reserve and through other tools including financial committees
(Barbera, 2009).
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Solutions and Predictions
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Minsky’s solution through his model for this inherent malaise in the private financial
sector was socialization of the banking system. Minsky was never opposed to capitalism. Instead
he merely was trying to introduce sustainability in the system. And saving the system from the
periodically scheduled crashes in a high consumption capitalistic economy.
He said, “As socialization of the towering heights is fully compatible with a large,
growing and prosperous private sector, this high-consumption synthesis might well be conducive
to greater freedom for entrepreneurial ability and daring than is our present structure.” Therefore
his efforts were toward strengthening entrepreneurial ability and the basic tenets of capitalism
but not the Anglo-Saxon model of it, where there were no limits to this entrepreneurial culture
and the associated mindset of freedom from oversight.
One of the first steps that governments the world over took to stabilize falling economies
was derived in part from the Minsky school of thought. Massive injections of governmental
capital and credit into the system would help soothe nerves. This view was supported by
economists such as Krugman, who labelled it “good deficit” because indulging in such spending
was critical. Not only did it convert the government into a major spender, it also stimulated the
economic environment and encouraged businesses to follow suit. The calls for limiting such
spending were rightfully not heeded. Governments also fostered an environment – through
positive intervention as suggested by Minsky, which would again foster speculative credit and
access to easy credit. Given the gravity of the financial situation, intensive intervention in the
form of a “new global order”, as predicted by Minsky was instituted, in essence a multilateral
crisis resolution mechanism. Therefore a return to capitalism is the solution, however, with a
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strong sense of social ethics and responsibilities on the part of the federal reserve.
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As an example, Mason quotes William Cobbett on the example of using child labor in
Lancashire in the mid 19th century, “ if these little girls worked two hours less per day, our
manufacturing superiority would depart from us.” Even after governmental intervention and
reforms, when child labor had been banned, capitalism continued to flourish. Around the same
time period, more humanitarian standards were introduced in factories as well. Around the same
time, Britain took increased regulatory measures to ensure that the economy was safe from
financial upheavals. Principle steps taken included the establishment of the powers of the central
bank and the gold standard in legislation. Therefore the author claims that with new regulations
it is more likely that capitalism will be helped. In any case, letting “the virtue of selfishness” take
off is not going to be feasible.
A shortcoming perhaps in the model is that the work is entirely theoretical. Minsky never
formulated a mathematical model for his predictions and his espousal was verbal mainly
(Minsky, 1974). This also caused his theories to be sidelined. Mainstream economic models did
not derive from his work; private debt as a parameter has pretty much been excluded, resulting in
loss of linkages between economic conditions and the state of the market. Another post-
Keynesian economist Steve Keen has come up with mathematical models of Minsky’s work
which hold potential.
Predictions
Perhaps, Minsky would propose the government not be restricted by the string theory, to
aid in circumstances such as these. Therefore, there would be a monetary tool for the
government to push lending institutions to get off reserves and release credit. This could be a
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reverse concept to the reserve or monetary ratio, which would specify an upward limit to the
reserves. Many of Minsky’s ideas were culminations of thoughts propagated by Stuart Mill,
Alfred Marshall, Knut Wicksell and Fisher.
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In any case, there would be a two-fold impact of this regulation – at different levels.
First, banks and other lending institutions would not be able to simply shudder responsibilities.
When it has been made clear to them that they cannot simply sell the mortgage in a secondary
market without repercussions – (Bank of America, for example, is being sued for selling
diseased loans in such a fashion) – they will take all necessary precautions in doling out loans.
Greed will take a backseat and not everyone will be extended a loan. That also means that banks
would look for able candidates for loans more strongly to get the credit flowing, something in
their interest. This will promote market stability. However such a scenario is only valid for times
when things are looking up – example up until the sub prime crisis, banks were sitting on lowest
level of reserves.
During recessionary times, however, when the idea is to grow reserves because there is a
credit crunch – debtors are unable to make payments and withdrawals are taking off – the reverse
needs to be effected. Banks are sitting on unprecedented reserves and lending rates were
practically zero for a substantial period of time. Therefore the federal reserve needs a mandate to
be able to technically force banks to lend the money out. This will mean that the economy does
not entirely stall.
Governmental intervention will be needed and as much is amply clear – repeatedly after
each bubble has burst. Just so they maintain a tepid presence at all times is far better and less
alarming, than them bailing out behemoth banks and printing moneys to spur spending all at
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once.
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