Simon Wren-Lewis — How China beat the Global Financial Crisis

Basic macroeconomic theory says that a negative shock to GDP, caused for example by falling exports, can be completely offset by a monetary and fiscal stimulus. China is a good example of that idea in action. What about all the naysayers who predicted financial disaster if this was done? Well there was a mini-crisis in China half a dozen years later, but it is hard to connect it back to stimulus spending and it had little impact on Chinese growth. What about the huge burden on future generations that such stimulus spending would create? Thanks to that programme, China now has a high speed rail network and is a global leader in railway construction.

Now of course people will say that China is not like an advanced democracy, and it was not part of the global banking network that caused the GFC. But the US and UK stimulus programmes could and should have been larger. Those close to the action tell me that the UK was running out of things to spend more money on in 2008/9, but I cannot help think this amounts to a failure of imagination: it is not as if UK infrastructure is great, there are no flood defence projects left to do etc. Above all else China’s example tells you what a huge mistake 2010 austerity was.

Mainly Macro
How China beat the Global Financial Crisis
Simon Wren-Lewis | Emeritus Professor of Economics, Oxford University

See also

The strongest argument for the adoption of any governmental system is success and the potential for greater success in the future. This is what the history changing Chinese reformer Deng Xiaoping meant when he stated, “It doesn’t matter whether a cat is black or white, as long as it catches mice”. Deng’s adoption of Market Socialism With Chinese Characteristics looked to bring the values of his predecessors into the future by creating an industrial revolution in a primarily agrarian economy which during Deng’s initial period in power had a poverty rate of 88%.

Today, Xi Jinping Thought on Socialism With Chinese Characteristics For a New Era looks to reduce an almost all rural poverty rate of 2% to 0% over the next two years while in the next decade China looks to become a moderately prosperous society for all its citizens. Furthermore, the drive to Create in China seeks to transform the country’s economy from one aimed at efficient production to one where production is increasingly mechanised and guided by artificial intelligence while Chinese entrepreneurs are encouraged to pioneer the next great leaps forward in technological, pharmaceutical and transport innovation on Chinese soil.

At a fundamental level, market socialism combines the individuated penchant for innovation in both utilitarian and luxury sectors that is associated with capitalism while regulating the inflow and outflow of capital in order to re-invest the proceeds of wealth back into the people and infrastructure of the nation. The result is a win-win internal developmental model which since 1978 has helped China to bring more people out of poverty in the shortest period of time in modern history.

Eurasia Future
China’s Win-Win Market Socialist Model Baffles Western Capitalists and Communists Alike
Adam Garrie

Bill Mitchell — Mainstream macroeconomics – exudes denial while purporting to be progressive

Bill deconstructs the conventional explanation for the Global Financial Crisis (GFC).

Toward the end, Bill discusses ISLM.

Bill Mitchell – billy blog
Mainstream macroeconomics – exudes denial while purporting to be progressive
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Bill Mitchell — It is fuelled by stupidity … That’s not stupidity that’s fraud

Yesterday, we saw the movie – The Big Short – which is entertaining to say the least but depressing in its message that widespread corruption in the corporate and public sectors not only goes unpunished, but is handsomely rewarded. I have also been watching the documentary series Making a Murderer – which follows the stunning and mystery-laded treatment of an American man caught up in a corrupt criminal justice system in the US state of Michigan. In that series, it appears that the criminals are those on the wrong side of the bars. 

I thought The Big Short was the macro version of Making a Murderer, which is a microscopic account of a small town and its nefarious police and legal fraternity. But apart from the corrupt and plainly unethical conduct exhibited by Wall Street, the rating agencies and the bank that fed on all the ridiculous products that were created to make complex what, in fact, was a simple strategy – make money of real estate, there was also plain dumbness at the centre of the collapse and the crisis. Dumbness created by a dangerous Groupthink where patterned behaviour was inculcated into the financial system and, ultimately, came back to bite most of us.

While the representations of cocky, sharp, bright financial market traders with PhDs in physics or mathematics in a sequence of movies about the GFC and its aftermath lead to the conclusion that these conspirators knew what they were doing and were happy to profit for themselves at the expense of those they considered to be dumber, a recent academic research study has revealed that the traders themselves were oblivious to what they were doing and became entranced themselves by their own image. 

That is what Groupthink does – it builds an impervious layer for those trapped inside the group – they are insulated from reality, consistent logic, criticism and behave in self-reinforcing ways that may involve enlarged deviations from anything reasonable, smart or evidence based. Groupthink makes people dumb and compliant. The GFC was in no small measure the product of that sort of dumb compliance, which is not to reduce the enormity of the corruption involved. It, however, does reinforce my view that we should ban all these speculative products that provide no beneficial input to the real economy, if only because the sociopaths that are attracted to creating and selling them are too dumb to know what they are doing.… [paragraphing introduced for readability] 

Kind of sums it up.

However, I think that perhaps Bill overemphasizes the role of groupthink in the financial crisis overall. The FBI warned in December 2004 of massive fraud taking place in the mortgage market, and Bill Black and others have documented the prevalence of control fraud.

Sorting out stupid and complicit is not a simple matter, and the probably go hand in hand.

Bill Mitchell – billy blog
It is fuelled by stupidity … That’s not stupidity that’s fraud
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Raúl Ilargi Meijer — 2016 Is An Easy Year To Predict

Deflation. The second leg down in the global financial crisis.

The Automatic Earth
2016 Is An Easy Year To Predict

Raúl Ilargi Meijer

Diane Coyle — The devil take the debt

Mini-review of Adair Turner's Between Debt and the Devil: Money, Credit and Fixing Global Finance .

Given the difficulty of tackling the three drivers of the crisis – a limited supply of land and real estate, income inequality and global imbalances – what does Turner, a former head of the FSA, recommend? His answers are interventionist, suggesting a total rejection of the idea that finance can be left to ‘the market’. “To achieve a less credit-intensive and more stable economy, we must … deliberately manage and constrain lending against real estate assets,” he writes. He also advocates central bank monitoring of credit growth, constraining it when necessary; taxation of land values; taxation of debt to bring its treatment in line with taxation of equity; and raising bank equity ratios and minimum liquidity requirements (a step advocated by every, but every, economist who has given a moment’s thought to the crisis – shocking that the banks have lobbied their way out of this minimal step towards systemic stability).…

The Enlightened Economist
The devil take the debt
Diane Coyle | and a former adviso freelance economistr to the UK Treasury. She is a member of the UK Competition Commission and is acting Chairman of the BBC Trust, the governing body of the British Broadcasting Corporation

Raúl Ilargi Meijer — Everything’s Deflating And Nobody Seems To Notice

Debt deflation taking hold globally. Get ready for the second leg down in the GFC.

With Paul Ryan as Speaker of the House, the US is not going to be able to get out of the way using fiscal.

The Automatic Earth
Everything’s Deflating And Nobody Seems To Notice

Raúl Ilargi Meijer

Zero Hedge — Deutsche Bank's chief credit strateigst Jim Reid on the endgame

Deutsche Bank's chief credit strateigst Jim Reid.

I'd call it the second leg down.

Zero Hedge
This Is The Endgame, According To Deutsche Bank

Michalis Nikiforos — Not All Macro Models Failed to Predict the Crisis

Noah Smith has a post on the failure of macro theory to predict the crisis. He concedes that DSGE models did very badly on this score, but, he continues, “There are no other models out there that did forecast the crisis” and there is no better alternative.

The word “better” is important here because some “angry heterodox” people have pointed Smith to at least one alternative—Wynne Godley’s Seven Unsustainable Processes—that had in fact predicted the crisis.….

Multiplier Effect
Not All Macro Models Failed to Predict the Crisis
Michalis Nikiforos

Bill Black — Capitalism’s Defender Unknowingly Indicts the Banksters

Great history lesson about the crisis as Bill Black eviscerates Cato 's Johan Norberg.

New Economic Perspectives
Capitalism’s Defender Unknowingly Indicts the BankstersWilliam K. Black | Associate Professor of Economics and Law, UMKC

Joseph Joyce — The U.S.: Inept Diplomacy, Indispensable Currency

All this demonstrates the discrepancy between the diplomatic and financial power of the U.S. On the one hand, the U.S. must deal with countries that are eager to claim their places in global governance. The dominance of the U.S. and other G7 nations in international institutions is a relic of a world that came to an end with the global financial crisis. On the other hand, the dollar is still the predominant international currency, and will hold that place for many years to come. The use of the renminbi is slowly growing but it will be a long time before it can serve as an alternative to the dollar. Consequently, the actions of the Federal Reserve may have more international repercussions than those of U.S. policymakers unable to cope with the shifting landscape of financial diplomacy.

Angry Bear
The U.S.: Inept Diplomacy, Indispensable Currency
Joseph Joyce

Asad Zaman — Why does Aggregate Demand Collapse?

Summary of Atif Mian and Amir Sufi's House of Debt. It attributes the decline in aggregate demand to the collapse of assets held by the middle class, which led to their greatly increasing saving desire and consequent demand leakage. The summary omits stagnant wages along with increase in household debt, however, which also contributed to demand leakage as a result of the crisis and subsequent economic contraction. 

This was a crisis in the making over several decades as productivity gains were distributed chiefly to capital and top earners and workers — the 99% — borrowed more to maintain lifestyle. This was supported by increasing middle class asset values. When asset value crashed, a "balance sheet recession" ensued from which the middle class is still trying to recover.

Real-World Economics Review Blog
Why does Aggregate Demand Collapse?
Asad Zaman

Marshall Auerback — The Financial Crisis Of 2008 Can Be Laid At The Door Of The Clinton Administration

The usual hagiography, particularly amongst Democrats, is that the US got seriously off track during the Bush (II) presidency after the golden years of prosperity under the Presidency of Bill Clinton. That myth has afflicted much policy making amongst the party today, notably within the Obama Administration, which hired a lot of the ex-Rubinites responsible for creating the mess.

And there’s a lot more evidence that has come out to support the view that Clinton’s crew truly was “the wrecking crew” when it came to dismantling many of the protections that had afforded much financial stability to the US for much of the post World War II era....

Macrobits by Marshall Auerback
The Financial Crisis Of 2008 Can Be Laid At The Door Of The Clinton Administration
Marshall Auerback

Bill Black — Ten Lessons We Must Learn from Charles Keating

The Savings and Loan debacle was the test bed for the epidemics of accounting control fraud that drove our subsequent financial crises. The debacle was the only one that was “successfully” contained before it could cause a financial crisis. The debacle was widely described at the time as the “worst financial scandal is U.S. history,” so the phrase “successfully contained” is obviously one that could spark disbelief. The critical modifier is “before it could cause a financial crisis.” The S&L debacle did not lead to even a mild national recession. It did hyper-inflate regional real estate bubbles that pushed parts of the Southwest region into a serious economic decline. The Enron-era frauds substantially contributed (in conjunction with the related collapse of the dot com bubble) to a $7 trillion fall in market capitalization and the fraud epidemics hyper-inflated the largest bubble in history and drove a Great Recession that is projected to cost over $20 trillion in lost production. The S&L debacle, therefore, allows us to understand not only went wrong, but also how to prevent things from going wrong.

This one is a classic.

New Economic Perspectives

Ten Lessons We Must Learn from Charles Keating

William K. Black | Associate Professor of Economics and Law, UMKC

Zero Hedge— Alan Greenspan's Modest Proposal: Fix Broken Economic Models By... Modeling Irrational "Animal Spirits"

Pretty amazing admission by the Maestro.

Zero Hedge

Alan Greenspan's Modest Proposal: Fix Broken Economic Models By... Modeling Irrational "Animal Spirits"

Submitted by Tyler Durden

Jed S. Rakoff — The Financial Crisis: Why Have No High-Level Executives Been Prosecuted?

Five years have passed since the onset of what is sometimes called the Great Recession. While the economy has slowly improved, there are still millions of Americans leading lives of quiet desperation: without jobs, without resources, without hope.

Who was to blame? Was it simply a result of negligence, of the kind of inordinate risk-taking commonly called a “bubble,” of an imprudent but innocent failure to maintain adequate reserves for a rainy day? Or was it the result, at least in part, of fraudulent practices, of dubious mortgages portrayed as sound risks and packaged into ever more esoteric financial instruments, the fundamental weaknesses of which were intentionally obscured?

The New York Review of Books (Jan 9, 2014)
The Financial Crisis: Why Have No High-Level Executives Been Prosecuted?
Jed S. Rakoff | U.S. District Judge for the Southern District of New York
(h/t Ryan Harris in the comments)

Judge Rakoff is not going to let this die.

Jonathan Larson — Iceland sends another bankster to jail, USA has many more crooks but...

The fact that Iceland is treating the banksters like more or less common criminals points to a cultural feature of a small Nordic country. For example, the small country of Sweden has an large complex industrial culture that encompasses automobile, truck, bus, and ship manufacture, specialty steel, telecommunication equipment, and a host of smaller enterprises that fill in the gaps. Not surprisingly in a country of only 10 million, everyone knows someone who works for a living doing tasks that are often FAR more difficult than anything they do in the financial world. Iceland has figured out how to survive a very difficult climate by tapping geothermal resources and other amazing feats with a population of only 321,000. This fact leads to the cultural question, Why should we treat the financial services business as special and privileged?
This question is fading in the Nordic countries as they slowly lose industrial activity to Asia and the teachings of neoliberalism becomes more mainstream, but there is still enough animus towards the idea that banking is inherently elite to put banksters in jail.

Real Economics

Iceland sends another bankster to jail, USA has many more crooks but...
Jonathan Larson

David Ruccio — Why 2 big 2 jail?

Cuts to the chase.

Occasional Links & Commentary

Why 2 big 2 jail?

David F. Ruccio | Professor of Economics University of Notre Dame Notre Dame

See also Mark Buchanan, Can you spell FRAUD? at The Physics of Finance.

TheFinanceLab — Transforming Finance [video]

Transforming Finance
TheFinanceLab
(h/t Lars Syll)

Geoff Davies — Sack the Economists

Non-mainstream economists are all-too aware of the failure of mainstream economists to anticipate, let alone avoid, the Global Financial Crisis and the ensuing Great Recession. The mainstream profession is also failing to fix the problem, and is actually making it worse.

It is hard to get alternative views heard, and the mainstream carries on almost totally unperturbed, despite being centrally responsible for a global disaster. This is of course extremely frustrating.

After reading yet another cri de coeur from yet another frustrated economist, I thought perhaps we need to spell out the message in all bluntness: we need to sack the economists (the mainstreamers). We also need to derail their baleful ideology. That means we need to disband the departments of neoclassical economics, so the poison is not passed on to any more hapless generations.

When I say “we”, I really mean “we, the people”. The job can’t be done by a small band of isolated reformers. That means people need to be informed and persuaded. They need to be spoken to in terms they understand; not everyone, but opinion leaders and interested laypeople, of whom there are many.

Thus was I moved to write the short ebook: Sack the Economists and Disband Their Departments.
The title may seem to be a bit confronting at first, but the book is a concisely argued case, not a rant. The bluntness is justified by the fundamental flaws in mainstream economic ideas. There are not just one or two flaws, there are many. Neither are they just obscure theoretical flaws.

Real-World Economics Review Blog

Sack the Economists

Geoff Davies | retired geophysicist at the Australian National University and the author of Economia: New Economic Systems to Empower People and Support the Living World

J. Bradford DeLong — Paul Krugman: What Janet Yellen--And Everyone Else--Got Wrong

No, Professor Krugman, "everyone" did not get it wrong. Only the Very Serious People, whom you apparently regard as "everyone."

Grasping Reality...
Paul Krugman: What Janet Yellen--And Everyone Else--Got Wrong

J. Bradford DeLong | Professor of Economics, UCAL Berkeley