June 20, 2013
We Told You So
Posted on May 18, 2012
By James K. Galbraith, The Baffler
The following piece first appeared in Issue 19 of The Baffler and is reprinted with permission.
Like many Americans, I was doing everything I could to help elect Barack Obama. It wasn’t all that much—but as an economist in Texas, I had some authority on the thinking of former Senator Phil Gramm, John McCain’s chief economic adviser. I’d made the front page of the Washington Post describing Gramm as a “sorcerer’s apprentice of financial instability and disaster.” (Gramm, with a certain sense of humor, denied it.) For that, and for my experience drafting policy papers, I was in contact every few days with Obama’s economists.
To economists in my own circle, it had long been clear that the financial crisis then unfolding was an epic event. We had watched the subprime mortgage disaster build up. In August 2007 we knew the meltdown had begun. Bear Stearns had failed. But for reasons that have to do with the pace and rhythm of politics, these issues remained on the back burner, the campaign being dominated by health care and the Iraq war. For those of us on the outside, it was hard to know whether the insiders understood what was coming.
And so it seemed a good idea to raise an alarm. But here you confront the Cassandra paradox: if you predict disaster, no one believes you. Economics is rife with alarmists; if the wolf really is at the door, it’s better to have a whole chorus saying so.
For this I had the help of the Charles Leopold Mayer Foundation for Human Progress, which convened a meeting in Paris. When you invite twenty friends to spend a few days in Paris in June, it’s rarely hard to persuade them to come. Among the Americans in the group were the editors of two important journals, a former United Nations financial expert, and the former federal regulator who had blown the whistle on the savings and loan fraud. There were also senior specialists from France, Britain, India, China, and Brazil.
Yet the memo disproves the notion that nobody knew. To the group in Paris, three months before Lehman, what I wrote was obvious. It was our consensus view. What follows is an excerpt.
The most important common ground was over the depth and severity of the financial crisis. We placed it in a different league from all other financial events since the early thirties, including the debt crises of the eighties and the Asian and Russian crises of the late nineties. One of us called it “epochal” and “history-making.” And so it has turned out. What distinguishes this crisis from the others are three facts taken together: (a) it emerges from the United States, that is, from the center, and not the periphery, of the global system; (b) it reflects the collapse of a bubble in an economy driven by repetitive bubbles; and (c) the bubble has been vectored into the financial structure in a uniquely complex and intractable way, via securitization.
Bubbles are endemic to capitalism, but in most of history they are not the major story. In the nineteenth century, agricultural price deflation was a larger problem. In the twentieth, industrialization and technology set the direction. It was only in the information technology bubble of the late nineties that financial considerations including the rise of venture capital and the influx of capital to the United States following the Asian and Russian crises—came to dominate the direction of the economy as a whole. The result was capricious and unstable—vast investments in (for instance) dark broadband, followed by a financial collapse—but it was not without redeeming social merits. The economy prospered, achieving full employment without inflation. And much of the broadband survived for later use.
The same will not be said for the sequential bubbles of the Bush years, in housing and now commodities. The housing bubble—deliberately fostered by the authorities that should have been regulating it, including Alan Greenspan and Ben Bernanke—pushed the long-standing American model of support for homeownership beyond its breaking point. It involved a vast victimization of a vulnerable population. The unraveling will have social effects extending far beyond that population, to the large class of Americans with good credit and standard mortgages, whose home values are nevertheless being wiped out. Meanwhile, abandoned houses quickly become uninhabitable, so that, unlike broadband, the capital created in the bubble is actually destroyed, to a considerable degree, in the slump.
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