Financial crisis, the repeating cycles in capitalism.

Is capitalism falling?

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Studying the history of fiscal and monetary policies and the role of economists who created and enforced these policies since the first world war have been an interesting area of my studies during the last 12 years.

There have been numerous researches about the 2007 financial crisis among which many discuss about the similar state of the economy in the years prior to 1929 and 2007 crises. The speedy growth, excess liquidity, low inflation, high speculation, Lack of regulations, and less transparency were all visibly present in the years before these two huge crises.

Are we going to experience another financial crisis in near future? Are the financial crises the essential cycles for capitalism to Survive?

Nowadays, the state of the US economy and the monetary policies are again like the pre-crisis era of the yrs. 1929, and 2007. Besides, the danger of a global trade war, protectionism in Europe and slowing economy in China are also threatening the global economy and adding to the likelihood of another huge financial crisis in the early future.

Studying the history of these crisis and the role of the government policies, one could easily conclude that the root causes to these financial crises cycle have always been the government fiscal and monetary policies that drive the economy in the road of capitalism.

prior to any crisis there is a period when the market and economy go mad and behave recklessly with less transparency and supervision. In other words, long before a crisis happens, there are similar feeding factors that show up vividly and tell us that a new crisis is coming, but the human greed does not let us remember the past and we go through the same road again and again.

There has been a nonstop battle between the two different economy schools of thought in the western world since the great depression in 1929. One inflates the economy and repeal and decrease the rules and regulations, and the other deflates the economy with more regulations and supervisions.

The classic school or the free market economists generally believe that the market is smart and could regulate itself and decides when, how, what to produce. They believe that the markets do not need much of rules and regulations imposed by the governments. On the contrary, the other school or” Neo- Keynesians” believe the government mild intervention is necessary to protect the public, maintain the fairness, employment and prevent the market failure.

Mr. Greenspan as a Neo-classical capitalist served for 18.5 years (1987-2006). He and his colleagues such as Dr. Milton Friedman kept the interest rate low for 16 years and deregulated the financial and credit markets to be able to absorb all the liquidities flowing into US economy from wealthy oil countries and emerging Asian markets. They did not raise the wages and salaries due to existing excess labor coming from the eastern Europe.

In 2004, while supporting the President Bush tax cuts, Mr. Greenspan also started raising the interest rates slowly but continuously in every policy announcement from June 2004 to January 2006 meaning that the FED and monetarists economist were concerned and aware of excess liquidity and inflated credit markets. He raised the interest rate 14 times in his last 18 months of service from 1% to 4.5% until his term was finished in Jan 2006.

In February 2006 Dr. Bernanke became the US FED chair and continued the raising rate policy to cool down the housing market. But after three raise and when the interest rate stood at 5.25%, the market could not stand it anymore and the FED stopped raising the rate to avoid a total economy melt down. Too little too late. The new sophisticated financial products and services in a deregulated market had already spread out and polluted the Financial Industry during the last 19 years of free market economy.

Monetarists such as Dr. Greenspan kept the interest rate low, deregulated the financial market for 19 years and revoked many effective rules such as the Glass Steagall Act which was designed to prevent the bad banking practiced. Is the current state of economy like the years prior to 2007 crisis? Yes, precisely.

In February 2006, Ben Bernanke, a Neo- Keynesian economist became the new FED chair. His views were totally different from Dr. Greenspan. He Believed that the government must be supervising the economy and have an active role in guiding the economy toward a moderate growth, full employment and controlled inflation.

Dr. Bernanke had been studying and writing about all aspects of the 1929 depression for many years and was probably the best man to become the chair of FED and save the US and global financial systems skillfully. His findings about the great depression helped him to stop the crisis from spreading out to the whole economy.

He and his Keynesian colleagues such as Dr. Janet Yellen, Volker, Dodd Frank and other members of the FOMC committee proactively responded and reduced the market stress and did not let the crisis effect the other sectors of economy. Their transparent policies and plans worked well; they initiated a transparent interest rate policy announcement to avoid any market surprises and applied some Innovative rules and regulations while helping the financial institutions to survive and regain their power through initiatives such as the quantitative easing programs. They also introduced some new regulations such as Dodd Frank act and Volker rules to keep the financial institutions under systematic control in terms of their sustainability and compliance.

The neo Keynesians run the economy for twelve years and delivered it to the monetarist economists that are working for president trump at the present time. Although Dr. Yellen stayed until January February 2018, but the neo classics have been running the economy since 2017 with the same agenda to unleash the financial institutions to lend, borrow, and invest speculatively for themselves and others which reminds us of the same scenario that was played in the years prior to the 1929 and 2007 financial crisis. Isn’t it an avoidable repeating scenario? Maybe not. Is Capitalism dying? Maybe.

Speech. Feb. 2018 in North Vancouver.

To be continued.

Mahmoud Gonabadi

Dec 21, 2018