CURRENT CRISIS NO REPLAY OF 1929

By Luiz Carlos Bresser-Pereira and - - Reprint | | Print |

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SAN PAULO, Oct 29 2008 (IPS) - The financial crisis now stalking the world is serious, but not as serious as that of 1929. In essence it is a deep crisis of confidence triggered by a proliferation of bad real estate loans now driving banks and other financial institutions into bankruptcy, writes Luiz Carlos Bresser-Pereira, an economist, professor emeritus at the Getulio Vargas Foundation, and ex-Finance Minister of Brazil. In this article, the author writes that given the prompt reaction of the governments of the affected countries, there is no motive for pessimism. The markets are sure to return to reason, the stock exchanges will make up a part of their recent losses, exchange rates will stabilise. Confidence is certain to return before long, though the crisis will leave scars in the US and damage all other countries, with a recession that could last a year or two. But it will be a very different recession from that of the 1930s, when Washington waited four years to act. Today, implementing Keynesian and an array of pragmatic instruments, not only Washington but also all governments involved are acting promptly and firmly.

Given the prompt reaction of the governments of the affected countries, there is no motive for pessimism. The markets are sure to return to reason, the stock exchanges will make up a part of their recent losses, exchange rates will stabilise, and the inevitable recession will not be comparable to that of 1929.

A number of things are now clear. First, a banking crisis that occurs at the centre of capitalism is different from the balance of payments crisis common to developing countries, which up until the 1990s tried to achieve growth by luring foreign investment, and by running up their current-account deficit and foreign debt. The giant current-account deficit of the US in this decade, together with the soaring federal budget deficits, are not, however, unrelated to the banking crisis. The lack of confidence involves not only banks and the markets but the entire US economy, which has been seriously weakened by irresponsible policies.

Second, the direct cause of the crisis was the reckless writing of mortgages to people who would be unable to make payments after the low introductory interest rate ended -which was often the case- or even immediately. The effect of this would not have been so serious if the financial operators had not used imprudent innovations to “securitise” loans characterised as toxic waste, transforming them into AAA securities, thanks not to the Holy Spirit but to rating agencies anxious to help their clients.

Third, this could happen only because the national financial systems had been systematically deregulated since the mid-1970s and the ascent of neoliberal dogma and market fundamentalism, which holds that the market is self-correcting and is most efficient when left alone and not subject to government regulation.

Four, this ultra-liberal ideology was legitimised in the US by neoclassical economic theory, a school of thought that was dominant between 1870 and 1930, then went into decline and was displaced by Keynesian macroeconomic theory, which prevailed until the mid-1970s and became dominant again in recent decades for essentially ideological reasons.

Five, this economic theory was mostly implemented not by those who set government economic policy but rather by macroeconomic theorists in business and specialised publications, because the neoclassical presumption of efficient markets rejects any economic policy that is not fiscal adjustment. Everything else must be liberalised and deregulated. Because governments have to shape monetary policy, they continued to use Keynesian instruments in a pragmatic manner. Neoclassical macroeconomic experiments were reserved for developing countries. Meanwhile, as the rich countries led by Washington did not escape the command for deregulation, they behaved like the scorpion that bites its own tail.

Today, as we see the resurgence of the state as the only possible salvation, the absurdity of the state-market opposition posited by the neoliberals and neoclassicalists becomes very clear. They can object to the management of the market by the state, but it makes no sense that they oppose the state itself, and seek to diminish or weaken it. The state is far greater than the market; it is the constitutional-legal system and the organisation that sustains it. The state must regulate and guarantee the market and, as we now see, act as the lender of last resort.

All this is clear. Yet why aren’t we seeing a resurgence of confidence in the markets after the major steps being taken by governments around the world? The reason is not clear, but there are two factors involved in depressing confidence. On the one hand there is the weakening of US hegemony from 2000 on, not only because of the twin soaring deficits but also the war in Iraq, human rights violations, and the wielding of democracy as a form of domination. On the other hand, there was a specific error committed by the US Treasury: not saving Lehman Brothers. Major banks should not go bankrupt; when they do, the risk of systemic crisis is very grave. Immediately after this was allowed to happen, the world financial scene underwent a rapid deterioration.

Confidence is certain to return before long, though the crisis will leave scars in the US and damage all other countries, with a recession that could last a year or two. But it will be a very different recession from that of the 1930s, when Washington waited four years to act. Today, implementing Keynesian and an array of pragmatic instruments, not only Washington but also all governments involved are acting promptly and firmly. There is no reason why their efforts will not succeed and confidence will be restored to the markets. (END/COPYRIGHT IPS)