INEQUALITY IS KILLING CAPITALISM
di Robert Skidelski
da project syndacate
LONDON – It is generally
agreed that the crisis of 2008-2009 was caused by excessive bank
lending, and that the failure to recover adequately from it stems from
banks’ refusal to lend, owing to their “broken” balance sheets.
A
typical story, much favored by followers of Friedrich von Hayek and the
Austrian School of economics, goes like this: In the run up to the
crisis, banks lent more money to borrowers than savers would have been
prepared to lend otherwise, thanks to excessively cheap money provided
by central banks, particularly the United States Federal Reserve.
Commercial banks, flush with central banks’ money, advanced credit for
many unsound investment projects, with the explosion of financial
innovation (particularly of derivative instruments) fueling the lending
frenzy.
This
inverted pyramid of debt collapsed when the Fed finally put a halt to
the spending spree by hiking up interest rates. (The Fed raised its
benchmark federal funds rate from 1% in 2004 to 5.25% in 2006 and held it there until August 2007). As a result, house prices collapsed, leaving a trail of zombie banks (whose liabilities far exceeded their assets) and ruined borrowers.
The
problem now appears to be one of re-starting bank lending. Impaired
banks that do not want to lend must somehow be “made whole.” This has
been the purpose of the vast bank bailouts in the US and Europe,
followed by several rounds of “quantitative easing,” by which central
banks print money and pump it into the banking system through a variety
of unorthodox channels. (Hayekians object to this, arguing that, because
the crisis was caused by excessive credit, it cannot be overcome with
more.)
At
the same time, regulatory regimes have been toughened everywhere to
prevent banks from jeopardizing the financial system again. For example,
in addition to its price-stability mandate, the Bank of England has
been given the new task of maintaining “the stability of the financial system.”
This
analysis, while seemingly plausible, depends on the belief that it is
the supply of credit that is essential to economic health: too much
money ruins it, while too little destroys it.
But one can take another view, which is that demand
for credit, rather than supply, is the crucial economic driver. After
all, banks are bound to lend on adequate collateral; and, in the run-up
to the crisis, rising house prices provided it. The supply of credit, in
other words, resulted from the demand for credit.
This
puts the question of the origins of the crisis in a somewhat different
light. It was not so much predatory lenders as it was imprudent, or
deluded, borrowers, who bear the blame. So the question arises: Why did
people want to borrow so much? Why did the ratio of household debt to income soar to unprecedented heights in the pre-recession days?
Let
us agree that people are greedy, and that they always want more than
they can afford. Why, then, did this “greed” manifest itself so
manically?
To
answer that, we must look at what was happening to the distribution of
income. The world was getting steadily richer, but the income
distribution within countries was becoming steadily more unequal. Median
incomes have been stagnant or even falling for the last 30 years, even
as per capita GDP has grown. This means that the rich have been creaming off a giant share of productivity growth.
And
what did the relatively poor do to “keep up with the Joneses” in this
world of rising standards? They did what the poor have always done: got
into debt. In an earlier era, they became indebted to the pawnbroker;
now they are indebted to banks or credit-card companies. And, because
their poverty was only relative and house prices were racing ahead,
creditors were happy to let them sink deeper and deeper into debt.
Of
course, some worried about the collapse of the household savings rate,
but few were overly concerned. In one of his last articles, Milton
Friedman wrote that savings nowadays took the form of houses.
To
me, this view of things explains much better than the orthodox account
why, for all the money-pumping by central banks, commercial banks have
not started lending again, and the economic recovery has petered out.
Just as lenders did not force money on the public before the crisis, so
now they cannot force heavily indebted households to borrow, or
businesses to seek loans to expand production when markets are flat or
shrinking.
In
short, recovery cannot be left to the Fed, the European Central Bank,
or the Bank of England. It requires the active involvement of fiscal
policymakers. Our current situation requires not a lender of last
resort, but a spender of last resort, and that can only be governments.
If
governments, with their already-high level of indebtedness, believe
that they cannot borrow any more from the public, they should borrow
from their central banks and spend the extra money themselves on public
works and infrastructure projects. This is the only way to get the big
economies of the West moving again.
But,
beyond this, we cannot carry on with a system that allows so much of
the national income and wealth to pile up in so few hands. Concerted
redistribution of wealth and income has frequently been essential to the
long-term survival of capitalism. We are about to learn that lesson
again.
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