Deeper Causes

One of the side-effects of the current financial crisis is that people have stopped to reflect on some of the less obvious, underlying and long-run reasons for our predicament. Or perhaps they've been doing it all along and it's only now that we're paying close attention.

First, Robert Feinman (via Mark Thoma) on Democracy:

Even the wisest of governments can vote itself into a future disaster if it wishes to. The real culprits in this collapse are us, the US public....

For several decades the public has been pushed into investing in the stock market. The secure retirement funds have been eliminated and they had no choice. Even those with traditional plans have been encouraged to do further investment using IRA's and other vehicles. The nightly business news hypes new stocks every day and people tend to believe that 10-30% returns are to be expected.

In this atmosphere any firm which doesn't engage in risky behavior soon sees it stock in disfavor and it CEO bounced out by Wall Street types who want to "unlock the potential" of the firm.

As Pogo said: "We have met the enemy and he is us".

If we had a stable society where people were assured that their old age would be funded and that illnesses would not bankrupt them and their families then appeals to such speculation would not be so inviting. German's put a quarter as much of their earnings into stocks as do Americans. They prefer banks. The fact that they have much better social services means they can go for low risk investments.

So, no, there is no way to prevent another bubble-crash cycle in the US as long as the social structure and financial incentives remain as they are

Do you think this assessment is correct? On a side note, Germany's relative financial prudence has not insulated them from the negative economic effects of the crisis.

Second, Professional Economists: we can forgive Gavin Kennedy's run-on-sentences for bringing us this piece. Citing David Warsh, Kennedy suggests that

...the economics profession, as trained in the past thirty years, is not treated to any passing familiarity with the nature and causes of ‘the cycles of manias, panics and crashe[s] that have been a familiar feature of global capitalism since its emergence in the seventeenth century’. Indeed... leading introductory textbooks scarcely mention them.

Now that I think about it, I wasn't introduced to the idea of a business/credit cycle in my undergrad economics courses - a concept that was understandably central to the work of Keynes, Hayek, and other Depression-era economic theorists. According to Warsh's essay, this trend may be changing very soon.