Are We All Keynesians now?

The fact that the Keynesian Revival has its own Wikipedia page demonstrates that, whether it is actually true or not, those with an interest in the boring world of economics do believe that it is taking place.

A glance at the contemporary discourse tends to support this awakening: Paul Krugman is the man of the moment; Naomi Wolf is a regular guest on late night talk shows; and, most importantly of all, Timothy Geithner is lording over the Federal Reserve.

The glaring failure of right-wing economics has not appeared out of the blue. It has been obvious from the very beginning. Rising inequality led to enormous pressure on the middle-class who, facing stagnant incomes, had no choice but to mire themselves in debt. It doesn’t take a genius to figure out that an economy where inordinate sums money are being spent on Mortage-backed securities and consumers are maxing out their credit cards on the high-street, is not going to last.

The economic ‘elite’, however, appeared to be oblivious of this startling fact. The ‘experts’ in this country laughed David McWilliams off the stage when he had the gall to suggest that the housing bubble would defy logic and, somehow, not burst. We were told to relax. Charlie McCreevy had worked it all out years ago and we had nothing to worry about. Well, you know what happened next …

This financial crisis did not just hurt the bankers’ wallets; it hurt their pride too. The superfluous jargon that permeated the financial discourse (referring to sections or wedges of securities as ‘tranches’, for example) made those who took the time to scan a dictionary feel intellectually superior to the general public who turned glary-eyed when the financial news followed the sports. The right-wing economic mantra lulled those in power into a false sense of security.

They have now finally, it appears, woken up – a bit. Probably the most significant development is that Martin Wolf, the chief economics commentator of the Financial Times – that paper that all students like to be seen browsing in the shops – has come out in favour of a Keynesian solution. The worm may have turned.

This, of course, begs the question: have the bankers really abandoned Friedman’s soft, alluring words? Have they really decided to forgoe honour, leave the nicely decorated drawing room and enter the crowded lifeboats with the poor plebeians from the lower decks abandoning ship? I remain skeptical.

Surpassing all the talk of Keynes is that of FDR. The bankers appear to pine after that Golden Age preceded by the New Deal. If Friedman cannot fund their indoor swimming, maybe FDR can? Reading William E. Leuchtenburg’s book on the subject, one is struck that the New Deal was not based on any coherent economic ideal or set of principles. The Government decided to take responsibility for the mess of the great depression, make things mildly inconvenient for the financial elite and spend a very substantial sum of money. Most importantly, FDR made it all better again.

Will Obama (or Cowen) introduce a truly progressive tax system, create a proper welfare state and properly regulate big business? I think not, and I think that the financial elites certainly do not want such an eventuality to arise. Like the modern evangelical Christian movement, the bankers want to be saved, but they do not want to take the medicine.

Real economic reform will not be achieved by piece-meal effort. We will not attain a semblance of economic normalcy until there is systemic change. Monetary reform, an end to a money supply created as bank debt, has got to the first step. We should not hold our breath.

If you were to ask me why, in a nutshell, we are in this mess. I would say that it is because a group of Math geniuses, with little understanding of real economics, were in one room of a ‘too big to fail’ company creating sophisticated algorithms to leverage even more sophisticated financial instruments. In another bigger office were their bosses, the economists, who had no understanding how these instruments even worked. No-one, it appears, even bothered to attempt a bit of cross-dialogue as they were all making bucket-loads of money. Ignorance is bliss.