[url=http://rabble.ca/babble/international-news-and-politics/trouble-bank-lan... from THIS THREAD[/url]
To this day there is no consensus among economists as to what caused the severe depression that lasted from 1929 to 1939. Was it the stock market crash in 1929 that brought about the Great Depression? Was it the subsequent banking panics and monetary contraction? Perhaps it was the reduction in international lending and protectionist policies pursued by the US—such as the Smoot-Hawley Tariff Act—that caused the Great Depression. Or perhaps the “great contraction,” as Milton Friedman used to call it, was caused by the actions of the Federal Reserve, which allowed a decline in the money supply partly to preserve the gold standard. All such explanations are, of course, ad hoc.[url=http://www.counterpunch.org/sasan11142008.html]Sasan Fayazmanesh is Professor of Economics at California State University, Fresno[/url][b]The fact of the matter is that the economic “brains” of the 1920s, the so-called experts, could neither foresee the coming disaster nor, once it was under way, could predict correctly its magnitude and duration….[/b]
Why were the experts so wrong? [b]They were wrong mostly because economics is an underdeveloped discipline dominated by pure, unabashed ideology.[/b] The dominant school of economic thought during the Great Depression was, and remains to this day, the “neoclassical” or marginalist school. But in the “neoclassical” world there is no such thing as a crisis. This is not the real world in which we live. It is a classless world, consisting of “consumers” and “producers.” It is a harmonious world modeled mostly after mathematical physics. In such a world there is no history; there is no past, no present and no future. Nothing of consequence ever happens in this world, especially no catastrophic event. [b]This unreal, insipid and a-historical marginalist world should have been abandoned a long time ago, particularly after the Great Depression. Yet, its seemingly mathematical elegance combined with its unadulterated and brazen defense of capitalism, or “free market” as its proponents prefer to call it, has kept it alive.[/b] Of course, since the Great Depression the “neoclassical” theory has been somewhat amended by a few ideas from the British aristocrat John Maynard Keynes, ideas that tried to add some elements of reality to the unreal theory. But the result, the [b]so-called “neoclassical synthesis” or “neo-Keynesianism,” is no more than a hodgepodge of disjointed, unclear and incoherent ideas that are fed to the students of economic theory under the rubric of “micro” and “macroeconomics.”[/b]
This sad state of affairs does not allow much intelligent analysis of the past or present. It also does not allow one to forecast the future, particularly crises….
Among other things, the 2008 financial woes have been attributed to mortgaged backed securities, particularly those associated with subprime mortgages; the housing bubble, which was made worse by predatory, risky and careless lending; exotic financial instruments or derivatives that were allegedly devised by some wunderkind mathematician or physicist on Wall Street, for example, credit default swaps; the events of September 11, 2001, the subsequent US invasion of Iraq and increase in oil prices; irrational exuberance in the stock market followed by a bear market; the Federal Reserve’s repeated reduction in the discount rate and targeted fed funds rate in 2001-2003, the wrongheadedness of the chairman of the Federal Reserve, Mr. Alan Greespan, who recently found himself in a “state of shocked disbelief” to learn that “the self-interest of lending institutions” might not “protect shareholders’ equity”; deregulation of the banking industry, particularly the Financial Services Modernization Act of 1999 or Gramm-Leach-Bliley Act; liquidity problems in general; lack of confidence in the financial system and the credit market, etc.
While each of these “causal” explanations, or a combination of them, might have some merit and need to be explored further, they are mostly after-the-fact explanations. None of the economists who are popping up in the media today explaining what caused the economic woes of 2008 was able to forecast the crisis a year or two earlier….
Financial panics and severe economic downturns are nothing new in a capitalist economy. The history of this economic system, since at least the age of classical political economy, shows that monetary crises and “gluts” occur relatively frequently. This is expected. [b]An economy in which goods are produced not for use but for profit is bound to have gluts now and then. Moreover, in an economic system where acquisitive behavior is considered to be virtuous and greed is said to be good one should expect the relentless creation of new and exotic financial instruments by those on the Wall Street—and, prior to that, on Lombard Street—to swindle one another. One should also expect to see the persistent and ingenious attempts by the money-lenders and the industrialists to prevent new regulations and circumvent the existing ones. Furthermore, in an economy where the livelihood of the masses depends on the whims and wishes of captains of the industry or the financiers, one should expect the masses to be called upon to “bailout” the same tycoons when they are pinched.[/b] Such measures, as President Bush said in his October 14, 2008, discussion of the economy, are “not intended to take over the free market, but to preserve it.” These are all expected. What is not expected is our ability to predict exactly when this slumbering beast wakes up, shakes off and lashes out. We do not have the theoretical edifice to allow such forecasting. Those who with great confidence explain the causes of the current crises, as well as those who, post mortem, explained with remarkable certainty the causes of the Great Depression, are probably the ones who least understand the nature of the beast.
