A friend of mine emailed a link to a Vox article on The Biggest Surprise of the Financial Crisis.
Let’s take a look.
When you hear “2008 financial crisis,” is your first thought “proof that the global economy works”? Mine neither, but in his new book, provocatively titled The System Worked, Dan Drezner makes a strong case that it should be.
Drezner, an international relations professor at the Fletcher School of Law and Diplomacy at Tufts University and popular world affairs writer, thinks the financial crisis should have been a whole lot worse. At the beginning, it actually looked like it was going to be worse than the Great Depression. But then something miraculous happened: the global economy didn’t collapse. By working together to keep trade free and capital flowing, the world’s major powers and economic institutions prevented us from re-running of 1929.
Drezner Supports Microeconomic Intervention
Drezner states “I’m a huge fan of the microeconomic set of policies that the Washington Consensus, neoliberalism — whatever you want to call it — has advocated. Has the world has benefitted from more globalization? I think undoubtedly so. Could you tweak it at the margins in terms of capital controls in a time of emergency? Absolutely, and in fact the IMF has gone in that direction.”
Drezner Also Sides With Krugman
“This is Paul Krugman’s argument — it was almost morally appealing: “we have committed sins in the past with excessive debt, and we will not do that again.” Without realizing that the way you cure excessive leverage in the private sector is to leverage the public sector, which then allows the private sector to deleverage.
To say the system worked is like saying the Vietnam War worked.
Worked for whom? Yes, the system “worked” to protect the banks, the hedge funds, and the already wealthy at the expense of everyone else.
For the entire Greenspan-Bernanke era, each crisis had a bigger amplitude than the one that preceded it. A global currency crisis of some sort awaits Yellen, it just hasn’t hit yet. It will.
The solution offered by Dan Drezner is more intervention and more of the same policies that caused the mess. Meanwhile, income inequality and economic distortions of all sorts grow.
Only politicians and those living in academic wonderland with no real world experience can possibly assert “the system worked”.
That we needed to take such radical actions in the first place should be proof enough that the system failed.
Mike “Mish” Shedlock