The blog provides a left-wing non-partisan perspective on socio-economic issues in Russia and throughout the world. The focus is on qualitative development of national economic systems and ensuring flexibility in economic policies to meet the challenges of the 21st century. Email: leftistobserver@gmail.com

FINANCIAL BAND-AID TREATMENT

The crisis is being handled as a failure of the existing financial system. Some are blaming greedy bankers or lack of regulation. Governments throughout the world have been injecting liquidity in hopes to boost lending and are attempting to apply some controls to the banking industry to prevent further financial collapses. The modern economic theory often defines an economic crisis as a downturn brought on by a financial crisis, which is viewed as the cause of all this trouble. As a supporter of political economy (I like calling it Marxian economics, although it is a rather awkward term), I utterly disagree with this approach. In my view, the world is facing an over-production crisis (sometimes referred to as over-accumulation crisis), which is mainly associated with the widening gap between an economy’s ability to produce and its ability to consume.

First and foremost, it has to do with falling solvent demand, e.g. the US household disposable income has been falling in the long term thus cutting consumers’ ability to increase consumption, which is the genuine driver of the economic growth. Instead, it is now believed that lending can be the driver, the reason for this belief being the fact that lending is able to boost consumption thus pulling the economy out of an over-production crisis and prevent massive bankruptcies. But this is only possible as long as consumers are able (and willing) to borrow. This explains the corporate encouragement of commercialization, consumerism, and the notorious buy-now-pay-later attitude – they simply wanted consumers to continue spending at any cost to the consumers themselves. So ultimately it is still the consumer who foots the bill for the shopping spree. The more US jobs are taken out to Asia, the more US markets – the largest consumer in the world economy – become dependent on local low-wage jobs for increased consumption. Other developed countries see similar trends, which have been confirmed in recent reports by International Labor Organization. When consumers’ income becomes no longer sufficient to spend more without borrowing, pay off their loans or refinance them, they have no other choice but cut spending.

This triggers both massive defaults on loans in the financial sector and a sharp reduction of revenues in the real economy. This is the crisis we have seen – it is purely ECONOMIC. The lending initially applied to counter falling consumption only postponed the day of reckoning. The downward long-term consumption trend has been shrinking profits in the real economy against the backdrop of easy profits from financial speculations thus channeling capital from production to speculation. Financial speculations were now believed to be an essential part of economic activity. Companies previously specializing in manufacturing alone would start receiving a major portion of their profits from speculative transactions. This financial overindulgence has been inflating various bubbles and exacerbating the ultimate performance of the entire economy. The FINANCIAL aspect of this crisis is thereby an effect, not the cause.

I came across numerous comments from various American and Russian economists, who are increasingly becoming convinced that assisting the banking sector in order to boost lending (while consumers remain highly indebted and unable to spend more) will have no effect. It is like treating cancer with a band-aid. The effectiveness of financial measures (if those are still engaged in) will be shrinking as time goes by simply because the main cause of the crisis will still remain unaddressed and continue to grow in its influence over the situation. The ability of stimulus programs to treat the cause rather than the symptoms of the current crisis has been called into question by many including TARP overseer Neil Barofsky who, in his report, warned Congress of increased risks for more financial complications to come our way.

Boris Anisimov

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