Monday, August 13, 2018

The Consequences of the Crash

Interesting note about the political fallout from the 2008 financial crisis; this is Fareed Zakaria reviewing a book by economist Adam Tooze. According to Zakaria and Tooze, one of most important things to remember about the crash is that the intervention staged by the US Federal Reserve and the Bush and Obama administrations worked pretty well:
Before the rescue and even in its early stages, the global economy was falling into a bottomless abyss. In the first months after the panic on Wall Street, world trade and industrial production fell at least as fast as they did during the first months of the Great Depression. Global capital flows declined by a staggering 90 percent. The Federal Reserve, with some assistance from other central banks, arrested this decline. The Obama fiscal stimulus also helped to break the fall. Tooze points out that almost all serious analyses of the stimulus conclude that it played a significant positive role. In fact, most experts believe it ended much too soon. He also points out that large parts of the so-called Obama stimulus were the result of automatic government spending, like unemployment insurance, that would have happened no matter who was president. And finally, he notes that China, with its own gigantic stimulus, created an oasis of growth in an otherwise stagnant global economy.

The rescue worked better than almost anyone imagined. It is worth recalling that none of the dangers confidently prophesied by legions of critics took place. There was no run on the dollar or American treasuries, no hyperinflation, no double-dip recession, no China crash. American banks stabilized and in fact prospered, households began saving again, growth returned slowly but surely. The governing elite did not anticipate the crisis — as few elites have over hundreds of years of capitalism. But once it happened, many of them — particularly in America — acted quickly and intelligently, and as a result another Great Depression was averted. The system worked, as Daniel Drezner notes in his own book of that title.

But therein lies the unique feature of the crash of 2008. Unlike that of 1929, it was not followed by a Great Depression. It was not so much the crisis as the rescue and its economic, political and social consequences that mattered most. On the left, the entire episode discredited the market-friendly policies of Tony Blair, Bill Clinton and Gerhard Schroeder, disheartening the center-left and emboldening those who want more government intervention in the economy in all kinds of ways. On the right, it became a rallying cry against bailouts and the Fed, buoying an imaginary free-market alternative to government intervention. Unlike in the 1930s, when the libertarian strategy was tried and only deepened the Depression, in the last 10 years it has been possible for the right to argue against the bailouts, secure in the knowledge that their proposed policies will never actually be implemented.
The thing that puzzles me most about America over the past fifteen years is that the mood of the people has consistently been worse than circumstances seem to warrant, and our rage has been directed in all sort of strange directions. You will recall that the Tea Party began as a protest, not against Wall Street misbehavior, but against plans to help out homeowners who had lost big because of that misbehavior. Since then quite a few conservative intellectuals have tried to make the whole thing into a parable about government overreach, railing against federal mortgage guarantees and trying to shift the blame from Wall Street to the Federal Reserve. The bailouts have been the object of more ranting than the crisis itself. Fear of Middle Eastern terrorists somehow metamorphosed into panic about the Mexican border, with local officials in Texas and Arizona demanding help against al Qaeda forces they feared would sweep through the desert and attack them. Obama's stimulus plan caused outrage on the right and a sense of unease among many of the apolitical who felt in their guts that the response to such a crisis out to be belt-tightening and retrenchment, not expansive new government programs. As the economy has improved, the mood has hardly gotten better at all. More than a third of Americans think we are still in a recession, and as I often note people on both the left and the right think that their side is losing most of the battles.

I can think of a few explanations. One is the continued decline of manufacturing employment, which slowed for a while in the 1990s but accelerated after China joined the WTO in 2001. Many small cities really have been hit hard by these losses, and many workers have seen their livelihoods yanked away. Another is the news industry, which has been pumping out ever darker stories in a desperate battle for viewers and readers. In this they are only echoing many of our politicians, who talk darkly about the nation sliding off a cliff. Maybe terrorism contributes, and the epidemic of mass shootings, especially in combination with the constant news coverage of everything bloody and bad. Lately there has been a lot of focus on the absence of wage growth, which I am sure is a contributor. It is also a puzzle; so far as I can tell, economists have no clue why wages have not risen at all over the past two years of impressive economic growth. My own take on this comes from experience in my own company, and it is that wages are being held down by savage competition; the thought of my own salary going up mainly makes me worry that I won't be able to win any more projects.

But whatever the reason, the facts are stark: we didn't get an economic depression, but we did get a psychological one.

1 comment:

G. Verloren said...

I think a big part of why we got a psychological depression was 1) people still fell on hard times, even if they never got as bad as they might have, and 2) every last one of the people responsible for the crash walked free.


Imagine if the medical profession became deregulated to the point that doctors were routinely playing around with diseases they knew were dangerous in the hopes of making a lot of money through shady means, and nobody did anything to stop it.

Then, imagine a giant epidemic broke out because of that, and by all appearances it looked like it was going to be another Spanish Flu. But through the power of modern medicine, doctors thankfully managed to avert the catastrophe - not entirely, but substantially. Many people still suffered greatly, though, and a fair number even had their lives ruined or even lost because of it.

And now imagine that none of the people responsible faced any consequences whatsoever. The goverment deemed them "too important to fail", bailed out the reckless pharmaceutical and medical tech companies responsible for the outbreak, and made it so that every doctor and corporate officer personally involved in the reckless endangerment of all human life on the planet not only got to avoid jail time, but also keep their jobs and wouldn't see their salaries dinged one iota.

The Crash signalled clearer than most other events of recent decades that the game is utterly rigged, and that the rich and powerful will happily take insane risks that threaten countless vulnerable innocents, all in the naked pursuit of greed, and that they will make sure they get away clean while the poor are left stuck picking up the pieces of their broken lives.

The Gods up on Olympus engage in frivolous sport, and the mortals below must face the storms and earthquakes that inevitably follow.

"Ahh, but we Gods noticed the catastrophe and interceded, stopping the disasters before they destroyed everything including Olympus itself! So you should be grateful! What's that? You want us Gods to pay for our recklessness, or at the very least work to prevent such disasters in the future? Silly and insolent mortals! Your petty desires do not concern us! We will have our sport, and you shall not stop us!"