We need to come out of this crash the right way to avoid depression and war

The COVID-19 pandemic is the most serious threat to public health we have faced in recent history. The utmost priority is slowing of the spread of the virus and putting in place measures to treat the maximum number of people as safely as possible, without regard to the cost or the economic impact. My take here is not meant to subsume those health impacts to economics, but to say that the crisis will trigger a cascade of changes, and it’s our duty to try and make this a cascade for the better, or else they could cascade for the worse.

Pump up the jam

COVID-19 has sparked a stock market crash waiting to happen. Anyone who thinks markets will ride it out within a few months solely on the back of an interest rate cut could be in for a rude awakening.

In the wake global financial crisis of 2007-2008 central banks pumped trillions of dollars to bail out the financial sector. In one way it worked, preventing the financial crisis from spiralling into a depression like the 1930's, when unemployment in the US reached 25%.

But this money came with few strings attached. Governments were unwilling to control or regulate banks to direct lending to productive and useful ends. Worse still, the cause of the financial crisis — a build up of unsustainable levels of private debt for speculative and unproductive activities — was deliberately obscured, and the crisis used to justify austerity. In reality, this decision was based on nothing more than political ideology.

The result is rising poverty, massive health inequality, rising infant mortality rates, falling life expectancy for some, food banks, rising homelessness, overloaded schools, and many people working in insecure, undervalued, and unfulfilling jobs.

The 2007 financial crisis should have delivered a fatal blow to neoliberal economists who claim that markets are always best left to themselves. Yet not only did they manage to step aside, they used the momentum of the attack to throw the population to the ground.

Now in 2020 the writing is clearly on the wall, and even the Tories have tacitly admitted that austerity has failed. Yet despite their seemingly Damascene conversion from Hayek to Keynes, there is little evidence that they fully grasp or are equipped to deal with the scale of the crises we face, either with regards to coronavirus or climate change.

No limit

In parallel with bringing misery to the poor and wealth to the ultra rich, a decade of austerity combined with unregulated cheap credit has created the conditions for another financial crisis much more serious than that of a decade ago:

One of the most significant developments in the financial system has been the accumulation of corporate debt, much of it of low quality. Corporations have taken advantage of ultra-cheap money to finance ever riskier operations as well as mergers and takeovers and share buy backs.

The result is that around 70 percent of corporate bonds, estimated to be as much as $10 trillion in the US, are either below investment grade, so-called junk status, or have a BBB rating, one notch above junk, and are susceptible to a write down to junk status in the event of a recession or a financial crisis.”

We’ve built an economic system which can do everything but stop. Accurately characterised back in 1960:

“Growth becomes the normal condition. Compound interest becomes built into its habits and institutional structure”

Not only is this system of infinite growth driving the planet into climate breakdown and ecological collapse, it’s not even sustainable on its own terms. Back in 1975 economist Herman Daly wrote:

The conceptual basis of the growth philosophy is equivalent to that of the chain- letter swindle: there will always be five new resources for every depleted resource. The beneficiaries of the swindle, those relatively few at the beginning of the chain, try hard to keep up the illusion among those myriad doubters out at the ends who are beginning to wonder if it is really possible for the game to expand to the point where they too will receive more in dividends than they pay out in labor.

Or as Professor Michael Hudson notes:

A common denominator runs throughout recorded history: a rising proportion of debts cannot be paid … One way or another, there will be defaults — unless debts are paid in an illusory fashion, simply by adding the interest charges onto the debt balance until the sums finally grow to so fictitious a magnitude that the illusion of viability has to be dropped.

But freeing an economy from illusion may be a traumatic event.

Crash Test Dummies

COVID-19 could well be that traumatic event which frees our economy from the current illusion. Back in 2007 most economists were caught with their pants down when the crisis hit, because the dynamics of debt didn’t feature in their economic growth models. In 2020, many will yet again be caught with their pants down, as the same oversight means they fail to predict the scale and dynamics of the crash.

In fact, most people don’t realise that almost all money is essentially a debt, created by private banks making a loan. The Bank of England helpfully explains:

Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money. The act of lending creates deposits — the reverse of the sequence typically described in (economics) textbooks.

Understanding money as debt introduces an inherit positive feedback. When the economy is growing, more people are employed and spending money, confidence grows and banks expand credit further. Leaving aside the enormous ecological implications of growth for a moment, this can be good thing. You can access credit to build a house, start a business and employ people.

But when growth saturates either because we reach the stage where we simply don’t need to buy any more shit, or when the credit is used for unproductive things like buying your own shares, then there’s trouble. When confidence eventually evaporates, like when a viral epidemic imposes a shock, then the feedback works in the opposite direction. Credit starts tightening, people are laid off, stop spending, and, without massive and sustained government spending, the whole house of cards collapses.

Johnny be good

Post Keynesian economists, who understand the nature of money and debt saw the 2007 crisis coming and this one as well. It’s their predictions and recommendations that should be given precedence (see e.g. here, here, and here).

In the short term, people and small businesses need governments to fund sick pay, rent, mortgage and tax holidays so that workers can afford to weather the storm in decency without going bankrupt.

In the medium term, a lot of private debt needs to be written off. This will happen whether we like if or not, the question is whether this happens in an orderly or disorderly way. But this is an opportunity: big corporations which need bailed out should expect to be heavily regulated in return. There was never a better time to dictate that the oil companies need a plan to rapidly reduce fossil fuel extraction to zero.

The financial industry needs massively reduced in size and be far more heavily regulated. In short, the issuing of credit can’t be left to unregulated banks, to be given out wherever there might be money to be made. Credit should only be issued for activities which are socially useful and don’t damage the planet. The Bank of England has already made some positive noises on that front.

Green Day

It wasn’t only neoliberal economists who were caught with their pants down by the 2007 financial crisis. Progressive society as a whole was largely taken off guard. Taken in by the mantras of “balancing the books” and “living within our means”, there was no coherent opposition to austerity.

But now a coherent framework has emerged based around a Green New Deal, Modern Monetary Theory, and Post Keynesian Economics. Not just a green boom with increasing resource consumption baked into the cake, but one based on reduced consumption, a circular economy, regenerative agriculture, cooperation, kindness and compassion.

A massive shift in labour needs to occur from consumption based industry, into more sustainable jobs. There is no better time to do that than when old industries are going bankrupt. We need to insulate and upgrade housing. We need to massively expand public transport. We need to properly care for the elderly. We need to reduce inequality. We need to produce food in harmony with nature. Responding to this crisis is not just about propping up the old industries, but enabling that shift to the new.

It also requires deeper thinking about what are we really here to do? To work to pay bills, or to further understanding and art?

Appetite For Destruction

If the crisis is not handled correctly, all the ingredients are there for a perfect storm: economic rivalry between nation states, imperial wars of aggression, right wing leaders with resonant emotional appeals, set against and a backdrop of climate collapse and ecological breakdown.

I don’t think we’re going to be given a chance to simply vote for this. So changing the economic debate, putting a nail firmly into the coffin of neoliberalism, may be best and only chance we have.

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else.

John Maynard Keynes, The General Theory of Employment, Interest and Money