This
is mainly based on my paper (in Japanese), Modern
Thought (May 2009).
Lecture
5
Lehman
Shock and the US Economy
-
May 2009
Toshiaki Hirai
1. Introduction
The meltdown of the
U.S. financial system is driving almost all the nations of the world into
critical conditions. Many financial institutions as well as manufacturing firms
have gone bankrupt, which has sent the numbers of unemployed soaring throughout
the world. Various governments have made strenuous efforts to surmount the
crisis, injecting huge amounts of public money to stabilize their monetary
systems, and implementing drastic fiscal policies to cope with massive
unemployment.
At
the same time, this is a
state of affairs that marks a great turning point in the era. For
“Neo-Liberalism” (=Market Fundamentalism) and the “New Classical School”,
which have been predominant over these three decades in social philosophy and
economics/economic policy, have collapsed, and governments all over the world
are making great efforts to surmount the crisis based on new social philosophy
and economics/economic policy.
In
the present paper we will see where market society is moving, critically examining
the social philosophy, economic theory/policy in this tempestuous period. The
underlying keyword should be the “turning point manifesto”, meaning by this the appearance of the
modern version of the Keynes-Beveridge System (to the effect that if left to
itself, the capitalistic system would bring about much unemployment and
insufficient social security: hence the onus on the government to secure full
employment and sufficient social security).
2. Turning Point of the
Present World
― Current Situation and
Economic Policy
Current Situation － At present the meltdown of the bubbled economy
ignited by the collapse of sub-prime
loans is driving American mega banks and investment banks to the brink
of bankruptcy. And since sub-prime loans were aimed at millions of low-income
earners, the meltdown of the finance bubble has cut the ground away from under
their feet through foreclosure and the breakdown of home equity loans and
credit card loans, resulting in the great slump in consumption (the symbolic
scene is the plight of the Big Three). Many firms declining into
underperformance have carried out large-scale restructuring, resulting in
millions of unemployed. Thus a phenomenon very similar to the Lost Decade of
Japan – the collapse of the real estate bubble, the disruption of the financial
system, and injections of huge amounts of public funds by the central bank –
has appeared (though the recent one differs from the Lost Decade of Japan in
billions of multi-layered
securitized papers and the global-scale economic crises ignited by the
collapse of them).
Because
the economic meltdown occurred in the US and thus practically at the center of
the world economy, the impact has spread out throughout the world at a stretch:
A vast quantity of US
securitized papers were held by big financial institutions throughout the world,
and a sharp drop in US
consumption has hit the countries which relied on exports to America.
In the case of China, heavily dependent on export to the US, the huge
drop in consumption has caused a sharp fall in exports, leading to unemployment
for 20 million expat workers (Non-Ming-Kou). So China is proving a real
tinderbox in that dire social and political turmoil could ensue if it failed to
implement an appropriate economic policy.
In the case of EU while in the ex countries serious interwar
In the case of Japan, many leading industries, including automobiles and
electric goods, have met with massive loss at every door due to a sharp drop in exports.
For the sake of survival they have implemented drastic restructuring
Economic Policy － The fragility of the US financial situation was
already apparent in summer 2007. In October the Citi Group, Merrill Lynch and so forth announced
huge losses related to sub-prime loans. March 2008 saw the Bear Sterns crisis, followed by
the Fannie Mae and Freddie Mac crises in July. Then, in September, a large-scale meltdown took place.
The Bush Administration
had implemented “band aid” (patchwork) measures in order to deal with these
crises. But the scale of the crises became so large and serious that the
administration eventually enacted the “Emergency Economic Stabilization Act of 2008” on
October 3. Through this
250 billion dollars were injected into nine mega banks.
The Obama
Administration, which took office in February 2009, put forward two environments clean moving
A large-scale fiscal
policy (together with a social security system) was, in fact, implemented
earlier in China than in the USA. Through the Policy of Reform and Openness
promoted with Deng Xiaoping’s “Senpu Ron”, China has continued to attain
miraculous economic growth over long years, while social troubles such as the
widening gap between rich and poor (entrepreneurs cum cadre men of the
Communist Party vs. farmers th National
Assembly in yuen th century
In the UK Prime Minister Gordon Brown has urged the need
to implement active fiscal policy, which signals a transformation from the
Neo-Liberalism espoused by the Thatcher Government to Keynesian Social
Philosophy.
Contrastingly, the EU
is faced with a big dilemma. With the birth of the Euro the steering of
monetary policy has been delegated to the European Central Bank (ECB). In
fiscal policy, the member states are required to maintain balanced budgets, which means that they are no
longer free to implement discretionary fiscal policies. There are some
differences in power within the EU, and the weaker members are showing some
irritation.
The financial summit G20 held in London on April 2, 2009, however, achieved some
success, for a fiscal policy was agreed upon to cope with this crisis (spending
a total sum of 500 trillion dollars [around 50,000 trillion yen] by the end of
2010), to strengthen the regulatory system for the stability of the financial
system (in particular controlling
hedge funds and tax havens), and to increase the IMF loan to the
developing nations.
In social philosophy
fundamental problems of the market society (=capitalism) are being addressed:
how it should be evaluated; based on what theory or ground it
3.1 The Collapse of Neo-Liberalism (Market
Fundamentalism)
It
was the activities of the Monetarists, with Milton Friedman as their guru, that
contributed to the spread of Neo-Liberalism, which can be seen as a
counterrevolution against both Keynesian economics and the Keynes-Beveridge
system. Monetarism delivered a great blow to them by putting forward, on the
one hand, a new version of
the quantity theory of money and the Natural Rate of Unemployment
Hypothesis, and, on the other hand, by advocating Neo-Liberalism such as
expounded in, for example, Free to Choose.
The movement gathered momentum thanks to political support from the Thatcher
Government (UK) and the Reagan Administration (US) in the1980s (On this
occasion, Mises and Hayek
– the Austrian School - were resurrected from long oblivion).
There sprang from the
stream of Monetarism a group of young economists who shared Neo-Liberalism and
an economic policy stance (but differed in economic theory), namely the New Classical School
represented by Lucas, Kydland and Prescott. It is a group engaged in theoretical
and empirical study, believing in the price equilibrating mechanism of the
market, Pareto optimality, and assuming the “(ultra-)
What Happened － It has been argued fervently that the market
society must be a system of self-discipline:
one should confront the future with self-discipline in mind; success or failure
should be attributable to one’s own responsibility; the government should not
interfere with the market economy – such are Neo-Liberals
What has happened in reality? Almost all the American
mega-banks and investment banks have pleaded with the government for bailout securitized
One of the causes of this messy state of
affairs is ascribable to the fact that the realization of a “pure market
society” has been advocated to an excessive degree without taking other things
into consideration. Excessive liberalization has made too short-term
speculative activities unruly, bringing about an atmosphere of neglect for
social ethics by many managerial staff and, on the part of the public, dreams
of get-rich-quick schemes. The consequence of these behaviors was abandonment
of the “Principle of Self-Discipline” and the pleading with the government for
bailout
The financial crises
that have quite often hit securitized hosannaed
It is worth noting that Neo-Liberalism has involved
serious self-contradictory failures – the phenomenon of market non-existence
and the phenomenon of market opaqueness.
The Phenomenon of Market Non-Existence securitized se securitized securitized Securitized
While
the economy was going well (and finance theory was consequently believed to be
trustworthy), nobody doubted the value of securitized securitized securitized securitized
The Phenomenon of Market Opaqueness ― Unlike the market for
manufacturing and service industries, the financial market has gone through a
dramatic transformation over these two decades due to deregulation and
application of financial engineering. Heretofore the financing of firms had
been procured through bank borrowing, equity and bonds (and this type of financing
had been under surveillance by the regulatory agency). Because of the invention
and development of securitized surprisingly rapid extension
And yet this
in itself became a major cause of the present crisis of the world economy. A huge
amount of money has flowed into the buying and selling of multi-layered
securitized
That
is not the end of the story. Even the mega deposit banks under FRB supervision
earnestly have been promoting and selling securitized
3.2 The Nature of the Market Society
What are the characteristic features of the
market society? Let us mention several noteworthy points missing from
Neo-Liberalism.
The Path of the Market
Society
― It is very important to bear in mind the path along which the market society
has proceeded, where all sorts of things are transacted as goods th century growth thus
The widening
and deepening of the market released the energies pouring out of a “devil’s millstone”.
However, it would be an exaggeration to say that the people did nothing to
change the course of events, letting things go their way. In the UK, for
example, society was gradually to become “milder”, removing the baleful effects
of the Industrial Revolution through a natural process with the spread of
various kinds of safety net. In
fact, it was only in the third quarter of the 19th century welfarism
In
order to succeed in widening and deepening the market while mitigating social
unrest, it is indispensable to keep its volcanic energies under control. A successful
market society did not necessarily emerge simply by faithfully following the
laissez-faire principle. So
far we have often seen how enforcement of the laissez-faire principle without
any element of alleviation caused social/economic disorder and confusion.
The present meltdown is a typical example.
The
Nature of the Market Society
― What characterizes the market society is, above all, is its dynamism. It is
dynamic in two senses. On the one hand, through the development of the division
of labor and competition, and the technical innovation induced by them, the
market society brings about economic growth. On the other hand, the widening
and deepening of the market eat away and destroy the traditional system and
institutions with formidable power (unchained Prometheus).
As the market society has
these two features, it has an inherent potential instability. There still
remains the formidable task for any nation setting out to be a successful market
society of how to keep this “Prometheus” under control. The task seems to have
been accomplished, for example, in present-day China (Neo-Liberalism neglects
this point of view).
The Two-Tier
System ―
Entrepreneurs are required to sail out into new undertakings, which are finally
tested and evaluated by the market. The fact is likely to be overlooked,
however, that the actual market society is a two-tier system composed of big firms (listed companies)
and small and medium-sized firms (non-listed companies).
In small and medium-sized firms the position
of the top management is quite different. They have the right to make decisions,
and must take on the responsibility. When they want to embark on new business
ventures, they need to get loans from a bank, and as guarantee offer mortgages,
usually their own fortune. If
they fail in the enterprise, the mortgages are to be foreclosed, and the
managers find themselves on the street.
We have quite often heard that “the
capitalistic society is a system based on the principle of self-discipline”,
meaning that the consequences, whether good or bad, of their own decision-making
must be borne by the top management themselves. However, observing business
organization as comprising the fundamentals of the market society, it is not so much the top
managers of big firms as those of small and medium-sized firms who respect (or
are forced to respect) this motto.
The Emergence of Non-regular Labor ― It is well known that
the position of laborers has strikingly deteriorated over the past decade.
According to the data of the Ministry of Internal Affairs and Communications,
the number of non-regular laborers increased
from 12.25 million in 1999 to 17.60 million in 2008, as a result of which the ratio of regular workers /non-regular
workers decreased from 75 to 66 percent.
Emblematic of the worsened situation of
laborers is the Worker
Dispatching Undertakings Act (revised in 1999), which enabled to
dispatch workers to almost all businesses (1.4 million belonging to this
category in 2008). This act, with the high-sounding name of “deregulation of
the labor market”, has driven many laborers to conditions similar to those of
the one-time proletariat who were not eligible for social security. Exploiting the
euphuism of efficiency, the Japanese economy ― a highly developed market society
― has reintroduced inhuman working conditions with many people (top management
included) endorsing and even applauding this act. We should be ashamed of this
when we recall how our predecessors made such great efforts to create the welfare
system.
The Similarity
between Big Firms and Bureaucracy – It must be recognised that the difference between the big
firms and the bureaucracy, apart from the difference in the principle of action
[pursuit of private profit and that of the public good], is surprisingly small.
Until
managerial leadership is settled severe competition is fought within a firm.
Once somebody obtains leadership, he or she comes to enjoy the authority to
decide on important strategies. Truly, entrepreneurial activities resemble the those
of an adventurer whose ship sails out for the unknown world. Managers of big firms, however,
are seldom required to take on responsibility even if they make serious
mistakes. It is the employees who are forced to bear the burden of the
mistake, losing their livelihood through restructuring.
The bureaucracy has a similar system to
big firms in terms of hierarchy and career success. Again, before the
bureaucratic leadership is settled there is fierce competition within the
institution. Once somebody goes up to the top position, he or she comes to have
the authority to decide on important policy formation . And again, policy
activities are like the activities of an adventurer in the sense that they
steer society towards the uncertain future. The top bureaucrats, however, are
seldom required to take on responsibility even if they serious mistakes. It is
the public who are forced to take on the burden of the blunder, bearing various
kinds of liabilities.
I have drawn a comparison
between big firms and bureaucracy since it is not so much the big firms in
themselves as a combination of big firms and the bureaucracy which rules the
roost in present market society. Neo-Liberalism, neglecting the real
situation of the market society, has diffused the market society illusion – in
the US and the UK, among other countries – that we can and indeed must reduce
the role of the government to any degree.
Let us look at the
actual world economy. China has, with political unification, attained great economic
growth such as no nation had ever achieved before (now the economic growth rate
which Japan had enjoyed in the 1960s looks modest in comparison). Russia has
recently recovered, mainly through development of the natural resources, from the
disorder of a decade ago, under the leadership of Putin (the so-called “Putin’s
list” is a symbolic example). We also see the behaviors of the sovereign wealth
funds (SWF) such as the Abdabi Developmental Investment Agency (ADIA) and the
Chinese Investment Corporation (CIC) attracting great attention in the global
economy.
Speaking
of the present-day market society in the world perspective, we cannot ignore these
phenomena. The issue of
Capitalism vs. Socialism, which was a pivotal point in economic controversy, is
no longer relevant. Rather, we have another problem – the definition of capitalism, for
capitalism itself has been greatly transformed and diversified, in the process of
the present developments.
3.3 The Resurgence of Keynes
As
the world economic crisis went from bad to worse reference to Keynes showed widespread
increase . Neo-Liberalists and the New Classicals advocated the laissez-faire
principle that if more deregulation was implemented, and more left to the
market, the market society could enjoy unprecedented prosperity. Then the
meltdown hit the world economy. Heaps of securitized papers became nothing,
followed massive foreclosures and unemployment. The world economy has plunged into
an unprecedented crisis which has drawn attention back to Keynes, who advocated
economic policies to surmount the Great Depression in the 1930s.
While
hardly any of the economists were able to do anything for the Great Depression,
Keynes deftly put forward his own economic theory and policy proposals. Now the
same phenomenon is emerging again, for the insignificance of the established macroeconomics has
been exposed in the face of the world economic crisis. (the boast of
“elaboration” has fallen to the ground).
It is not so much to the New Keynesians as to Keynes
that the world has turned. M. Woolf and J. Ackerman declared their abandonment
of the Neo-Liberalism they had embraced. R. Shiller and G. Akerlof urged the
necessity of implementing Keynesian economic policy. J. Galbraith and P.
Krugman also emphasized that Keynesian fiscal policy should be an effective
means to tackle the present economic crisis. In October 2008, the (UK) Chancellor
of the Exchequer, Darling insisted on the necessity of fiscal policy, praising
Keynes. The economic policy staffs of the Obama Administration and many
economists who are supportive of it are New Keynesians. The document announced on January 9, 2009, “The
Job Impact of the American Recovery and the Reinvestment Program”, in which the
Keynesian way of thinking is reflected, was written by C. Romer, Chairperson of
the CEA and became the backbone of President Obama’s economic policy
(“Emergency Economic Stabilization Act”). And so on and so forth.
The fact that Keynes is
explicitly referred to in the context of economic policies in the major
countries of the world is indicative of the resurgence of Keynes, considering
that over the past thirty years Keynes has been attacked and scorned under the
dominance of Reaganomics and Thatcherism.
4. Conclusion
What
I would like to emphasize from the outset in this conclusion is the fact that
The economic policy now enjoying a
great revival is fiscal policy. Although it has been sealed off over a long
period, it is being implemented, pressed by necessity, throughout the world.
In
the case of Japan, consumption and investment have remained low, and exports are
in a dire situation due to the collapse of consumption in the US. This sharp
drop in effective demand can not be dealt with by means of monetary policy only.
If the government cannot sit and wait, the only means left is fiscal policy.
The realities are prompting this shift. Although the fiscal policy implemented
by the Chinese government may not consciously look to Keynes it is, in fact,
faithfully following his prescription.
The
critical situation of the present world economy is very often compared to the
Great Depression. True enough, it resembles the Great Depression in the sense
that it started in the US, and dispersed throughout the world, wreaking havoc
on the world economy.
However,
there is a point of
difference. The dominant social philosophy was not so much Neo-Liberalism
as New Liberalism. The
latter found the shortcomings of the market system in the growing disparity
between rich and poor and a moral code deeply rooted in money making, and aimed
at correcting these defects. The mainstream economics at that time
differed from the current New Classicals, being keenly aware of the importance
of discretionary economic policy implemented by the government in correcting
these defects.
The
current economic crisis is the consequence which the unregulated issue of multi-layered
securitized papers and related moral hazard of many financial institutions have
brought about, with the support of Neo-Liberalism and the New Classicals.
Ironically enough, however, we have witnessed the phenomena of market
non-existence and market opaqueness.
In
what direction will the market society move henceforward? What is clear at the
moment is the collapse of Neo-Liberalism, and the movement of the market
society in a very different direction. In order to prevent the phenomena of
market non-existence and market opaqueness which the excesses of Neo-Liberalism
have brought about from re-occurring, many governments are moving to improve
the system in such a way that they can control and oversee the financial
market. The “Bad Bank Plan” announced by the US Treasury on March 23, 2009 (the
“Geithner Plan”) is a symbolic example. Positive fiscal policy is also planned and implemented by
many governments, including those of the US, the UK and China.
In the US, the “Emergency Economic
Stabilization Act”, with the total sum of 787 billion dollars, was enacted on
February 17, 2009. President Obama is setting priority on increasing employment
through public spending on environmental infrastructure. He also tried to
persuade the G20 countries to implement fiscal policy at the level of 2 percent
of GDP (although here he did not succeed).
Another
important problem concerns the behavior of firms. In these crises many big
firms representing the market society (not only financial institutions but also
manufacturing firms) have shown immorality. They had advocated the following principle: we must make
decisions for the future with the “principle of self discipline” in mind; if firms
failed in this enterprise they should disappear due to the market mechanism, through
which the market society can attain efficiency, freedom, justice and growth.
However, we are now witnessing that many business leaders who had been
advocating the “principle of self discipline” were the first to plead with the
government for financial help, bearing the principle of “too big to fail” in mind. Amazingly
enough, moreover, having got huge bailouts , they are displaying shameless
behavior in awarding themselves big bonuses, as is seen in the case of AIG. The
fact that this kind of injustice, corruption and selfishness has been prevalent
in the US business community is eloquent evidence that we need a new business model for the future of the
market society. If a new type of business model were not created, the
market society would face a bigger problem in the not-too-distant future (In
the Financial Times, March 13, 2009,
self-repentance of the Anglo-Saxon type managerial system by American managers
are taken up).
The world is
facing the turning point.
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