Monday, 22 October 2012

5 steps to Understanding The Crisis

I've recently been starting to look at the financial crises of the past years in terms of a slightly different narrative to the traditional. 

1. Deregulation of the market in 80s leads to rising inequality
2. This causes a lack of demand (the poor's spending doesn't increase), but also an increase in the amount of spare capital seeking a return on investment. (80-00s)
3. Demand is boosted by Consumer Debt. (80s-00s) financial deregulation allows the lack of money of the majority to be met with the excess, loaned resources of the majority.
4. Peak (consumer debt) is reached, households realise they cannot make interest payments at current level of spending. They both impose austerity to pay things back and default on loans. A great de-leveraging of both personal, corporate and national balance sheets occur.
5. This reduces aggregate demand, causing recession.

If we frame the problem in these terms how do we sort it out? We need to increase demand, both at home and abroad.

At home: Reduce inequality, increase government spending on progressive policies, increase labour rights, minimum wage and benefit payments.  (Is this possible if the government itself is trying to pay off debt?)

Abroad: Pray for a quick recovery in key export markets. 

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