Financial Crisis of 2008-2009 and Other Financial Crises: How to Manage Them?
22 Pages Posted: 12 Nov 2009
Date Written: May 10, 2009
This overview of financial crises in the form of ppt slides is intended to familiarize students with the root causes and promising solutions to financial crises recurring in the 20th century onwards.
In conformity with the Keynesian framework, we regard the root causes as originating in the failure of aggregate demand in an economy. Keynesian public spending remedies are advocated as solutions to crises with one important caveat: governments should not go into debt to implement those remedial spending policies but should create their own debt-free money to cope with the shortfall of budget receipts. Under the normal management of such funding system, the fears of inflation are unfounded:
Firstly, it is the modern debt-based money entering the economy as interest-bearing loans that goad their recipients to ‘do or die’: To cover their interest cost by every means, even by general price increases for their production, rather than to suffer the ignominy of default. Implicit in the modern monetary systems is the expansion of credit money under the exponential law of compound interest. However, there is no correlate in the real economy which can expand at the matching exponential rate to ensure the flawless operational parity between the monetary and real subsystems in the economy. Rather the mode of growth of the real economy can be likened to a logistics- curved trajectory, which is not generally acknowledged by development macroeconomists ever since the day of Keynes (though Keynes was quite prescient on this).
However, this disparity between the organic development trajectory of monetary and real subsystems is not without the periods of outer calm and its denouement can be postponed indefinitely: the money subsystem in order to sustain itself finds its vent in the area of phantom economy (the stock market) which, according to proponents of the efficient markets, is said to mirror the real economy. In our opinion, rather than mirroring it, it mirages it and represents a tool for tying up and multiplying all the monetary liquidity whereby it additionally creates superior yields in the processes. Such mirages are not sustainable and now and then a Minsky moment arrives which is then backstopped by another capital mirage elsewhere. Since the monetary system organized along the lines described organically favors capital market mirages with inflationary superior returns over and above modest and declining interest characteristics of the mature real economy, the long-term outcome of the process can't but lead to the accelerating attrition of the real economy and the onset of persistent inflation in the long-term. At this point, wisely-managed Keynesian public spending measures become the only sustainable remedies if funded in the form of non-interest bearing, i.e. non-inflationary, money, wherewith the real economy can bypass its Hobson's choice of subsistence on inherently inflationary credit money.
Secondly, the same tendencies as those that operate against the real production subsystem are also apparent for the final-consumer side of the economy, which due to an organic discrepancy between the flow of prices and the flow of purchasing power in the economy has entered over 1990th into progressively tightening noose of unpayable and unregulated consumer credit. As this consumer credit is organically unpayable, Keynesian measures should broaden their scope to relieve consumers from their entangled state of affairs and find different ways of funding the organic shortfall of consumer purchasing power in modern economies in order to substitute for debt (e.g. in the form of a general dividend or by non-returnable social infrastructure grants). Such spending, provided it is done with non-interest-bearing money and within the limits of the organic purchasing power parity shortfall, need not be inflationary. The ongoing resurrection of the Chicago plan for monetary reform (e.g. by the American Monetary Institute and its Congress representatives) can be among promising means to attain these ends.
We also envisage a re-institutionalization of Galbraith-style price controls and some proposals for value-creating institutions in the area of productive and financial capital to be carried out alongside these measures under the aegis of monetary authorities in order to protect against further erosion of the purchasing power of money outside of the monetary policy means. Such price-control powers are already vested in the hands of international rating agencies which, ostensibly by assessing the quality of debt or other securities, in reality serve as engines of value control and price-creation. Such implicit pricing power authority vested in the rating agencies is too potent a mechanism to be entrusted solely into the hands of a couple of unaccountable commercial entities, but it can be expanded and attached to the service of public interest by formal reintegration into the government-controlled macroeconomic toolbox.
In brief, the monetary and real subsystems of the economy should be managed in such a way as to avoid the persistent disparities between both - with the monetary system being subservient and democratically accountable to the needs of the real economy and consuming public. The real credit of the global society and endowments of the natural environment should represent the true limits to distribution and growth, not the status quo dicta of existing financial credit, scarce of otherwise.
But to be efficient, the advocated Keynesian framework has to unfold globally so that it can be harnessed to progressive causes of the developing world. In this connection, the modern shift of international regulatory emphasis from the G7 to G20 group of countries represents a broadly welcomed and promising attempt of getting to act together -- with a new hope dawning for the clean-slate international monetary reform and the emergence of truly global monetary system devised with the eye to sustainable and harmonious world development (e.g. in the mould of Keynesian Bancors).
Keywords: Causes of financial crises and depressions, Growth trajectories of real and financial sectors, Aggregate demand deficits, Keynesian framework of demand management
JEL Classification: D40, E12, E20, E31
Suggested Citation: Suggested Citation