The events that brought about the Great Recession, and the circumstances that have combined to transform that recession into an ongoing jobless Lesser Depression, are the result of widespread but erroneous beliefs about economic theories which have taken hold of laymen and policymakers alike.
The fundamental problem in current and recent political activity is caused by a persistent set of “ideas that fail to describe how economies actually function,” writes Jared Bernstein, senior fellow at the Center on Budget and Policy Priorities, in a recent report for The Atlantic. [For analysis of both recession and financial crisis in California, see the July 2011 first tuesday article, The rocky roads: recession and financial crisis.]
At the core of these mistaken economic ideas, sometimes referred to as zombie economics, is an irrational belief in the power of markets to beneficially regulate themselves, without harm to society, in the absence of outside (government) interference. This argument is based, loosely, on the economic theories of Adam Smith, who determined that unhindered competition and rational self interest leads to the greatest profit. Smith, however, never theorized (as some modern economists have) that bubbles were impossible, or that free markets were not likely to lead to disastrous income inequality, poverty and pollution.
Instead, those beliefs are part and parcel of the unjustified tenet at the core of current zombie economics: that markets cannot fail and always self-correct, and that government actions only serve to distort society’s proper functioning. The dominance of these beliefs during the Reagan, Clinton and Bush administrations led to deregulation and tax benefits for the financial and housing markets, which allowed rampant debt for homebuyers and unsustainable pricing for investments.
first tuesday take: Now, as the recession’s effects continue to be felt in all tiers of the economy (except the very highest, which go on as ever), zombie economics wrongly demands that the government deliberately avoid taking action to ameliorate the pain of those in our society worst hurt by the crisis. Under the justification of “the free market,” politicians call for tax cuts and even further deregulation, and oppose any attempts to regulate markets to prevent future bubbles, invest in public goods and industries (such as infrastructure or clean energy), or prepare for the future.
These policy recommendations are divorced from current and historical realities, and are instead motivated by blind faith in an incorrectly characterized economic theory. Until the mantra of “deregulation and free markets” is no longer the go-to rationale for all political behavior, disastrous policies will continue to be the norm. Private sector losses and damages, on the other hand, will continue to be socialized – covered by the government – the last and only recourse of citizens when disaster financial disaster strikes.
RE: “The tyranny of zombie economics in America”, from Housingwire.com
Government must get bigger and be more intrusive in our lives, our businesses, and our psyche! Every little thing that we do must be regulated by bureaucrats who know better than we do what’s best for us and our families! All hail the government!
What drivel. What propaganda.
America didn’t rise to be the greatest economic engine in the world through the meddling of big government in every aspect of business.
Just look at the “demands” of those who protest Wall Street: forgiveness of all debt and a living wage of $20/hour whether one works or not. Greece, here we come…
Someone needs a reality check – The ridiculous claim (“Until the mantra of “deregulation and free markets” is no longer the go-to rationale for all political behavior, disastrous policies will continue to be the norm.”) is pure irony and would be funny if it wasn’t preached and believed by so many people WHO GET TO VOTE!
The Obama administration’s Keynesian policies and spending have been the largest EVER demonstration of how wrong they are. How many times does this theory have to be proven disastrous? And how many times does the free market and reasonable deregulation have to be proven right?
I guess as long as the Keynesian propogandists continue to corrupt our education system and the media continues to collaborate.
The debate over whether it was government intervention or a lack thereof that caused the housing collapse is getting old, and more importantly, misses the point. The right answer to anything as complex as the situation in which we find ourselves is always going to be ‘all of the above’. Yes, Fannie and Freddie played a role, but they were late entrants to a market that had started and flourished without their involvement. The Community Reinvestment Act did encourage bank investment in sub-prime markets, but institutional exposure to these loans extended far beyond the banks.
Mr. Markano raises a point that gets lost in the finger-pointing that characterizes so much of this debate: what do we do now? Policy driven by ideology, from either side of the aisle, is not going to work. I think that policy should focus on ways to facilitate home purchase by exploring possibilities such as these: (1) lending based on split credit scoring that enables households with fundamentally sound credit, but who have lost a home to foreclosure, to re-enter the market more quickly; (2) looser underwriting for lending on condos; (3) loan modifications that combine principal reduction with a shared appreciation second.
There is a lot we can do. The point is to start, not to argue about who did what and when.
Mr. Markano paints a broad brush of blame against capitalism while embracing the notion that the government should come to the rescue with more regulation. Wow, that’s worked pretty good so far! To borrow his words, I think he is “…divorced from current and historical realities…” I did not know that “free market” meant opposing “all” regulations. I did not know that embracing a reduction of duplicitous and onerous regulations that serve to send many companies overseas which causes a transfer of jobs which reduces income to families in the United States which means they have less money to buy houses makes me a tyranical zombie. But then, I could be wrong. Maybe Mr. Markano could explain Mr. Keynes’ theory to me. That might help alot.
Considering the housing bubble was, for the most part, started by governments notion that everyone should be a home owner, forcing banks and mortgage companies into sup-prime lending practices, I find it ironic that the very architects of that fiasco (Dodd-Frank) have now cramed legislation through to fix the monster they created. We’ve not yet felt the full impact of that bit of micro managment, but it’s started.
Please, give me back a free market and stay out of my face!
Quite right Thomas I too would take supply and demand economics over any Govt. intervention at all myself. Stop forcing me to buy things I do not want to buy or subsidies things that do not pencil out. Let the real estate bubble collapse and then it will rebuild not artificially hold it up only prolongs the decline.
Considering that this mess started with the Federal Reserve’s decision in 2000 to reflate family wealth after the collapse of the Internet Bubble by driving down interest rates to boost real estate, I’d say the blame is that there is too much belief in governments doing the right thing. I’ll take the markets over the gov any day when you look at the carnage that has resulted. As a real estate broker and a hedge fund manager, I know the trade quite well.