It is generally agreed that the economic crisis of 2008-2009 was caused by excessive bank lending and that the failure to recover adequately from it stems from banks’ refusal to lend, owing to their “broken” balance sheets.
A typical story, much favored by followers of Friedrich von Hayek and the Austrian school of economics, goes like this — In the run up to the crisis, banks lent more money to borrowers than savers would have been prepared to lend otherwise, thanks to excessively cheap money provided by central banks, particularly the US Federal Reserve. Commercial banks, flush with central banks’ money, advanced credit for many unsound investment projects, with the explosion of financial innovation (particularly of derivative instruments) fueling the lending frenzy.
This inverted pyramid of debt collapsed when the Fed finally put a halt to the spending spree by raising interest rates. (The Fed raised its benchmark federal funds rate from 1 percent in 2004 to 5.25 percent in 2006 and held it there until August 2007).
As a result, house prices collapsed, leaving a trail of zombie banks (whose liabilities far exceeded their assets) and ruined borrowers.
The problem now appears to be one of restarting bank lending. Impaired banks that do not want to lend must somehow be “made whole.” This has been the purpose of the vast bank bailouts in the US and Europe, followed by several rounds of “quantitative easing,” by which central banks print money and pump it into the banking system through a variety of unorthodox channels. (Hayekians object to this, arguing that, because the crisis was caused by excessive credit, it cannot be overcome with more.)
At the same time, regulatory regimes have been toughened everywhere to prevent banks from jeopardizing the financial system again. For example, in addition to its price-stability mandate, the Bank of England has been given the new task of maintaining “the stability of the financial system.”
This analysis, while seemingly plausible, depends on the belief that it is the supply of credit that is essential to economic health — too much money ruins it, while too little destroys it — but one can take another view, which is that demand for credit, rather than supply, is the crucial economic driver. After all, banks are bound to lend on adequate collateral and, in the run up to the crisis, rising house prices provided it. The supply of credit, in other words, resulted from the demand for credit.
This puts the question of the origins of the crisis in a somewhat different light. It was not so much predatory lenders as it was imprudent, or deluded, borrowers who bear the blame.
So the question arises: Why did people want to borrow so much? Why did the ratio of household debt to income soar to unprecedented heights in the days ahead of the recession?
Let us agree that people are greedy and that they always want more than they can afford. Why, then, did this “greed” manifest itself so manically?
To answer that, we must look at what was happening to the distribution of income. The world was getting steadily richer, but the income distribution within countries was becoming steadily more unequal.
Median incomes have been stagnant or even falling for the past 30 years, even as per capita GDP has grown. This means that the rich have been creaming off a giant share of productivity growth.
So what did the relatively poor do to “keep up with the Joneses” in this world of rising standards?
They did what the poor have always done — got into debt. In an earlier era, they became indebted to the pawnbroker, now they are indebted to banks or credit-card companies and, because their poverty was only relative and house prices were racing ahead, creditors were happy to let them sink deeper and deeper into debt.
Of course, some worried about the collapse of the household savings rate, but few were overly concerned. In one of his last articles, Milton Friedman wrote that savings nowadays took the form of houses.
To me, this view of things explains much better than the orthodox account why, for all the money-pumping by central banks, commercial banks have not started lending again and the economic recovery has petered out. Just as lenders did not force money on the public before the crisis, so now they cannot force heavily indebted households to borrow, or businesses to seek loans to expand production when markets are flat or shrinking.
In short, recovery cannot be left to the Fed, the European Central Bank or the Bank of England. It requires the active involvement of fiscal policymakers. Our current situation requires not a lender of last resort, but a spender of last resort, and that can only be governments.
If governments, with their already-high level of indebtedness, believe that they cannot borrow any more from the public, they should borrow from their central banks and spend the extra money on public works and infrastructure projects. This is the only way to get the big economies of the West moving again.
However, beyond this, we cannot carry on with a system that allows so much of the national income and wealth to pile up in so few hands. Concerted redistribution of wealth and income has frequently been essential to the long-term survival of capitalism. We are about to learn that lesson again.
Robert Skidelsky, a member of the British House of Lords, is professor emeritus of political economy at Warwick University.
Copyright: Project Syndicate
China badly misread Japan. It sought to intimidate Tokyo into silence on Taiwan. Instead, it has achieved the opposite by hardening Japanese resolve. By trying to bludgeon a major power like Japan into accepting its “red lines” — above all on Taiwan — China laid bare the raw coercive logic of compellence now driving its foreign policy toward Asian states. From the Taiwan Strait and the East and South China Seas to the Himalayan frontier, Beijing has increasingly relied on economic warfare, diplomatic intimidation and military pressure to bend neighbors to its will. Confident in its growing power, China appeared to believe
Taiwan-India relations appear to have been put on the back burner this year, including on Taiwan’s side. Geopolitical pressures have compelled both countries to recalibrate their priorities, even as their core security challenges remain unchanged. However, what is striking is the visible decline in the attention India once received from Taiwan. The absence of the annual Diwali celebrations for the Indian community and the lack of a commemoration marking the 30-year anniversary of the representative offices, the India Taipei Association and the Taipei Economic and Cultural Center, speak volumes and raise serious questions about whether Taiwan still has a coherent India
Recent media reports have again warned that traditional Chinese medicine pharmacies are disappearing and might vanish altogether within the next 15 years. Yet viewed through the broader lens of social and economic change, the rise and fall — or transformation — of industries is rarely the result of a single factor, nor is it inherently negative. Taiwan itself offers a clear parallel. Once renowned globally for manufacturing, it is now best known for its high-tech industries. Along the way, some businesses successfully transformed, while others disappeared. These shifts, painful as they might be for those directly affected, have not necessarily harmed society
Legislators of the opposition parties, consisting of the Chinese Nationalist Party (KMT) and the Taiwan People’s Party (TPP), on Friday moved to initiate impeachment proceedings against President William Lai (賴清德). They accused Lai of undermining the nation’s constitutional order and democracy. For anyone who has been paying attention to the actions of the KMT and the TPP in the legislature since they gained a combined majority in February last year, pushing through constitutionally dubious legislation, defunding the Control Yuan and ensuring that the Constitutional Court is unable to operate properly, such an accusation borders the absurd. That they are basing this
RSS