The light dawns … on the failure of austerity to overcome recession

CAPITALISM IN CRISISA complete understanding of great events will often have to wait until well after the shouting and the tumult die away and a longer perspective permits a more objective assessment of what really happened. Even then, though, greater elucidation proceeds at a glacial pace.

Today, we may well find ourselves again at the beginning of just such a process. Just as it took a decade and a Second World War to achieve a broad consensus as to what had really caused the Great Depression in the 1930s, we can now begin to survey the events that led to the Global Financial Crisis, and the response that has been made by orthodox policy to the recession that followed, and to assess them in the light of the accumulating evidence of actual outcomes since those events.

The evidence is surely mounting that the remedies to recession proposed by orthodox policy have failed. The German insistence on austerity, smaller government and eliminating deficits has led directly to the travails of the euro zone and the real threat of renewed recession, with the result that countries like Greece and Spain are in desperate straits and the continued viability of the euro itself is at risk. Continue reading

The causes of the next crash are clearly visible

In hindsight it is extraordinary that the warning signs of the 2008-9 crash were almost universally missed, largely because the hoped-for fantasy of bull markets continuing uninterrupted blinds investors to the nature of the capitalism they’re riding on. But lessons are rarely learnt, and the signals of over-exuberance and over-reach are apparent again today, with the same blind eye failing to register them.

Most obviously of all, excessively leveraged loans to private equity have now reached dangerous levels. More than a third of leveraged loans this year have lent more than 6 times earnings before interest, tax, depreciation and amortisation, which is only slightly below the proportion at the peak of the 2007 credit bubble. Bank exuberance is shown by loans with less lender protection than usual. The proportion of these ‘covenant light’ loans is now above 60%, the highest ever. Continue reading

The housing bubble shows this “recovery” is fatally short-sighted

Amid the arguments that the UK is headed towards a new housing bubble, it seems clear that the so called recovery is simply a “return to normalcy”, with none of the lessons from the crash being learned and dooming us to make the same mistakes.

At the time of the crash, the bailouts themselves seemed to be as much about letting the banks carry on with their damaging behaviour unencumbered as saving the country from economic catastrophe. In a reversal of the old demand “nationalisation without compensation” the government simply gave the banks money to cover their bad debts whilst not using its shares to influence the governance of the banks and direct it towards investment to aid the recovery. Continue reading

Who is to blame for the crisis? Not unions, immigrants or ‘scroungers’

a man pushing over the word "crisis"A crisis is an objective fact to which there can essentially be only two responses. The cause can be identified and addressed, or some other explanation can be advanced which effectively shifts the blame for the crisis elsewhere. The government and the supporters of austerity are increasingly bent on the second course.

A succession of scapegoats have been offered for the crisis, including perniciously both immigrants and ‘scroungers’, and now unions. However, as these cannot begin to provide an economic explanation for the crisis, the supporters of austerity also persistently claim that the cause of the current crisis is weak exports, effectively blaming foreigners for the British crisis. Continue reading

The FT, hedgehogs and the scale of the crisis

13 05 29 Anatomy of a recession Chart 1In analysis of any issue it is crucial to distinguish between factors that are of primary or decisive importance and those that are secondary or lesser matters. This applies to economic analysis as much as other disciplines. There is a vast amount of economic data which is produced by innumerable public and private agencies internationally, and an almost endless number of ways of configuring the data supplied.

The most important issue facing the British economy is how to end the slump. No other issue, employment, incomes, government finances or anything other question can be resolved without it.

Therefore it is extremely important to analyse the trends and prospects for growth in a sober fashion and to focus on the most decisive factors. It is unhelpful or even misleading to focus primarily on secondary matters. Continue reading