The historic testimony by former Federal Reserve Board chairman Alan Greenspan before the House Committee of Government Oversight and Reform on October 23, 2008, represented such a startling turnaround for an individual previously given such nicknames as “Maestro” and “Oracle,” that it might well have been entitled “The Education of Alan Greenspan.” Taken to task for the enormous and still growing economic disaster, Greenspan acknowledged that he was “shocked and dismayed” by the emergence of what he called a “once-in-a-century credit tsunami.” In his effort to account for the complete failure of foresight at the Fed, Greenspan explained that the supposedly sophisticated asset pricing models that he and others in the financial community had relied on had been based almost exclusively on the experience of the last two decades during a period of rapid financial expansion, and had failed to incorporate the negative shocks visible from a longer-term historical perspective. As Greenspan himself put it, “The whole intellectual edifice…collapsed in the summer of last year because the data inputted into the risk management models generally covered only the past two decades, a period of euphoria. Had instead the models been fitted more appropriately to historic periods of stress, capital requirements would have been much higher and the financial world would be in far better shape today” (“Greenspan Testimony on Sources of Financial Crisis,” Wall Street Journal, October 23, 2008; see also “Greenspan Says He Was Wrong on Regulation,” Washington Post, October 24, 2008).
The extreme short-sightedness of building models on “a period of euphoria” and ignoring “historic periods of stress” meant that the historical reality of capital accumulation was simply written out of the analysis. As Marx explained, overproduction of capital inevitably leads to periods of massive devaluation, by which the system prepares the ground for a further expansion. “Business is always thoroughly sound, and the campaign in fullest swing, until the sudden intervention of the collapse” (Capital, vol. 3, chapter 30).
“It is too bad,” Floyd Norris, economic columnist for the New York Times, noted, “that Mr. Greenspan never appreciated the work of Hyman Minsky, who understood that stability is destabilizing, and there will come times when the very calmness of markets, and lack of apparent risk, causes investors to take ever greater and greater risks.” In fact, Minsky, building on the work of Marx, Keynes, and Kalecki (see the Review of the Month in this issue), developed an analysis of financial instability as an “inherent flaw” of a capitalist economy, leading to the danger of deep depression and prolonged stagnation—if the lender of last resort function of the government should fail. It was this financial instability hypothesis—together with the interaction between stagnation and financialization, as emphasized for many years in these pages—that was most conspicuously absent from the arcane models constructed by Greenspan and other orthodox economists. As a result “the whole intellectual edifice” of neoliberal economics has proven bankrupt and has now visibly “collapsed” (Floyd Norris, “Greenspan’s Lament,” norris.blogs.nytimes.com, October 23, 2008). Those wanting a fuller, more systematic treatment of these issues will be interested in The Great Financial Crisis: Causes and Consequences by John Bellamy Foster and Fred Magdoff, forthcoming from Monthly Review Press in January 2009. It can be ordered online at www.monthlyreview.org or by calling 1-800-670-9499.
As István Mészáros powerfully demonstrates in his new work, The Challenge and Burden of Historical Time (Monthly Review Press, 2008), the deep-seated problems of capital accumulation that we are now encountering are due to the “structural imperatives” of capitalism. This means that “it is impossible to significantly alter them without envisaging a qualitative different structural framework” (384). Mészáros’s aim in his book, Venezuelan president Hugo Chávez points out, is to provide the intellectual means with which “to take to the offensive—throughout the world—in moving toward socialism.” We strongly urge MR readers to obtain a copy of The Challenge and Burden of Historical Time and to study it, passing on to others the ideas that it conveys of “a qualitatively different structural framework” of society. (On ordering see the previous paragraph.)
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