GLOBAL CRISIS: LESSONS AND PROSPECTS
L. RANDALL WRAY, UMKC
Recently the explanation for the global crisis has shifted from deregulation and lack of government oversight to fraud and criminal activity. In truth, the US FBIwarned of an epidemic of mortgage fraud in 2004, and my colleague Bill Black has pointed to fraud since the crisis began. (See our recent two part series at However, it is not sufficient to blame bad apples, bad policy, insufficient foresight, and outright stupidity.
We can find a more comprehensive explanation in the work of Hyman Minsky who argued the financial system transitioned from “robust” toward “fragility” over the entire postwar period. Increasingly frequent and severe crises, as well as growth of fraud as normal business practice were a consequence of that transformation. Hence, we should not call this a Minsky moment or crisis but rather a Minsky half-century.
The world emerged from the Great Depression with a combination of institutions, regulations, and financial practices thatencouraged relatively rapid economic growth, high employment, growing incomes, and growing confidence. Finance was kept small, constrained, and relatively irrelevant. Besides, memories of the 1930s discouraged excessive lending as well as borrowing.
Overtime a complex combination of factors changed all that—memories faded, regulations were relaxed or financial institutions defeated them with innovations. Private debt grew. Risky practices emerged. The age of “money manager capitalism” arrived—which put finance first and, importantly, that took a global form. The interests of money managers conflicted with those of Big Corporations and Big Unions—the “leveraged buy-out” was used to strip firms of assets, load them with debt, and bust their unions. Globalized finance also globalized production—with low wage workers in developing nations depressing incomes in rich nations. Thus, financializationconcurrently meantglobalization as well as rising inequality, higher unemployment, and low wage growth.
While many have proclaimed the worst is behind, by all objective measures, the global financial system is, I believe, in worse shape than when it collapsed in 2007. Recognition of rampant fraud brought US foreclosures to a virtual standstill and led holders of securitized products to sue banks for fraud. Where we are heading is unknown but a complete collapse of the financial system is not out of the question.
In my view, the crisis will not end until finance is put back into its proper place—subservient to the needs of business, households, and government. That also means continued losses in financial markets—trillions of dollars worth. The good news is that wipes out debt—restoring a more manageable ratio of private incomes to debts. Until that happens, recovery is illusionary.
Unfortunately, in most nations, government has adopted austerity policies to reduce spending and raise taxes. In some countries this appears to be necessary—such as the so-called “PIIGS” (Portugal, Ireland, Italy, Greece, Spain) that are heavily indebted with hands tied due to constraints imposed by the currency union. In others, such as the UK and the US it is mostly political—a reaction against the bail-outs of financial institutions. Fiscal austerity will add to the headwinds created by financial collapse.
How this will all turn-out I do not know, but another crash and even deeper downturn seems likely.