US Congress report confirms that mainstream economists have absolutely no clue about how and when the next big meltdown will occur
Wikileaks
has released nearly a billion dollars worth of quasi-secret reports
commissioned by the United States Congress. The 6,780 reports,
current as of this month, comprise over 127,000 pages of material on
some of the most contentious issues in the nation, from the U.S.
relationship with Israel to the financial collapse. Nearly 2,300 of
the reports were updated in the last 12 months, while the oldest
report goes back to 1990. The release represents the total output of
the Congressional Research Service (CRS) electronically available to
Congressional offices. The CRS is Congress's analytical agency and
has a budget in excess of $100M per year. CRS reports are highly
regarded as non-partisan, in-depth, and timely. The reports top the
list of the "10 Most-Wanted Government Documents" compiled
by the Washington based Center for Democracy and Technology. The
Federation of American Scientists, in pushing for the reports to be
made public, stated that the "CRS is Congress' Brain and it's
useful for the public to be plugged into it,". While Wired
magazine called their concealment "The biggest Congressional
scandal of the digital age".
A report
dated back in August 25, 2003, and released by WikiLeaks in February
2, 2009, that is, after the financial crisis of 2007–2008, actually
proves that the mainstream economists were not have been able to
predict the next big financial crisis, occurred only four years after
the report.
Furthermore,
the report proves the blind devotion of the mainstream economists to
the dominant neoliberal doctrine, implying that the banking system
should never be left to collapse so that further severe damage to the
economy would be prevented.
For example,
we read that “The distinguishing characteristic of the 1929-1933
episode was that an economic
contraction probably set in motion by the Federal Reserve was
compounded by a financial panic as the banking system was allowed to
collapse.” and
“Economic theory is
much more advanced today on 'what not to let happen' and government
has taken responsibility for the economic health of the nation. This
includes a commitment to keep the money supply and the banking system
intact ...”.
Although
after the 2007-08 financial crisis the US banking industry was
rescued with taxpayers' money, the devastated effects in the lives of
millions of Americans and the terrible consequences with the rise of
poverty, inequality, unemployment can still be identified clearly
today.
Furthermore, the tsunami of crisis was global and hit eurozone, one of the most economically advanced areas. Up to date, many eurozone members struggle with huge problems and deteriorated indexes similar to the ones of the 1929 financial crisis in the US. While neoliberal orthodoxy failed miserably, the neoliberal policies were dictated in Greece - the most heavily affected member - as medicine to deal with the huge economic problems. The result: even more destruction and zero prospect in the horizon for the vast majority of the Greeks.
Furthermore, the tsunami of crisis was global and hit eurozone, one of the most economically advanced areas. Up to date, many eurozone members struggle with huge problems and deteriorated indexes similar to the ones of the 1929 financial crisis in the US. While neoliberal orthodoxy failed miserably, the neoliberal policies were dictated in Greece - the most heavily affected member - as medicine to deal with the huge economic problems. The result: even more destruction and zero prospect in the horizon for the vast majority of the Greeks.
A
characteristic part of the report:
Between 1929
and 1933, real GDP fell by nearly 27%, the unemployment rate rose to
25%, and the price level as measured by the implicit price deflator
for GDP fell by nearly 26%. The distinguishing characteristic of the
1929-1933 episode was that an economic contraction probably set in
motion by the Federal Reserve was compounded by a financial panic as
the banking system was allowed to collapse. On March 4, 1933, the
day Franklin Roosevelt was inaugurated as President, not a single
bank in the United States was open for business.
From 1929 to
1933, 9755 commercial banks in the United States suspended operation.
This was approximately 1/3 of all commercial banks. An important
reason for the collapse of the banking system was the absence of
deposit insurance and a failure on the part of the Federal Reserve to
prevent it. In addition, the United States was linked to other
countries through fixed exchange rates embodied in the gold standard,
which severely limited the Fed's ability to respond. There is now a
growing body of research that links the severity and world-wide
character of the Great Depression to the gold standard.
Finally,
generally accepted economic theory at the time was used to
rationalize and accept as inevitable what happened. Economic
theory is much more advanced today on "what not to let happen"
and government has taken responsibility for the economic health of
the nation. This includes a commitment to keep the money supply and
the banking system intact, and the United States has not had a
financial panic since 1929-33. Given such changes as the
institution of deposit insurance, the legislative commitment of the
government to maintain high employment, and the use of flexible
exchange rates, it was hard to make a case that the downturn now
faced by the United States would develop into anything remotely
similar to the economic contraction of 1929-1933.
The cause of
the Great Depression has often been attributed to the stock market
crash in October 1929. This explanation has not stood the test of
time. First, it occurred two months after the Great Depression
officially began. Second, in October 1987 a stock market crash of
similar percentage magnitude occurred without causing an economic
downturn. In fact, the economic expansion then in progress
continued for nearly three more years. While the 1929 crash may have
worsened the beginning of the downturn, there is no credible evidence
that it could have set off the next 10 years of calamity and
hardship.
Most
importantly, the report reveals that the mainstream economists, based
on, as described today's 'advanced economic theory', couldn't even
imagine how another big meltdown similar to that of 1929 may have
been occurred. As being blindly devoted to the neoliberal economics,
they couldn't possibly guess a cause, like a big housing bubble, for
example, despite previous experience from the bubble in SE Asia in
the late 90s. This can be depicted on phrases like “Given
such changes as the institution of deposit insurance, the legislative
commitment of the government to maintain high employment, and the use
of flexible exchange rates, it was hard to make a case that the
downturn now faced by the United States would develop into anything
remotely similar to the economic contraction of 1929-1933.”,
and “in October 1987 a
stock market crash of similar percentage magnitude occurred without
causing an economic downturn.”
Indeed,
as Costas Lapavitsas decribed a few years ago on the Real
News:
This
is a deeply unequal system. It isn't just unequal; it's also a deeply
unstable system. Financialized capitalism is also deeply unstable. I
don't need to go in depth into this. All I need to do is refer you to
the crisis of 2007-2009, which is a crisis of financialization if
there ever was one. And this basically shows you what
financialization is very, very clearly. That crisis was global,
systemic. The entire system came very close to collapse. And it was
structural. It was deep. It wasn't because of some accident. This was
a crisis, then, of financialization. And where did it come from?
Strikingly enough, it came out of the financial system and out of
lending to the poorest sections of the United States working class.
It's an extraordinary thing. And historically we've never seen
anything like it, that lending to workers, and particularly to poor
workers, could destroy the capitalist system. I mean, if you told
people in the 19th century that something like that could happen,
they would be astounded. They would tell you, there's no way. And yet
that's what nearly happened a few years back. And that's an
indication of how unstable the financialized capitalism is. It's a
deeply unstable system.
This is
another evidence that, no matter what the mainstream neoliberal
economists say about the 'efficiency' of current economic theory,
they have absolutely no clue about how and when the next big meltdown
will occur. Therefore, they couldn't have suggest any possible
measure to prevent it, inside this absolutely unstable and
destructive financial capitalism.
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