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Mapping the Great Recession: AReader's Guide to the First Crisis of21st Century CapitalismDavid Norman Smith a , Brock Ternes b , James P. Ordner c , RussellSchloemer d , Gabriela Moran e , Chris Goode f , Joshua Homan g ,Anna Kern h , Lucas Keefer i , Nathan Moser j , Kevin McCannon k ,Kaela Byers l , Daniel Sullivan m & Rachel Craft na University of Kansas, USAb University of Kansas, USAc University of Kansas, USAd University of Kansas, USAe University of Kansas, USAf University of Kansas, USAg University of Kansas, USAh University of Kansas, USAi University of Kansas, USAj University of Kansas, USAk University of Kansas, USAl University of Kansas, USAm University of Kansas, USAn University of Kansas, USA

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To cite this article: David Norman Smith, Brock Ternes, James P. Ordner, Russell Schloemer,Gabriela Moran, Chris Goode, Joshua Homan, Anna Kern, Lucas Keefer, Nathan Moser, KevinMcCannon, Kaela Byers, Daniel Sullivan & Rachel Craft (2011): Mapping the Great Recession: AReader's Guide to the First Crisis of 21st Century Capitalism, New Political Science, 33:4, 577-601

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REVIEW ESSAY

Mapping the Great Recession: A Reader’s Guideto the First Crisis of 21st Century Capitalism1

Abstract Commentators agree that the crisis that boiled to a bubble in the fall of 2008(“the Great Recession”) is the gravest downturn since the depression of the 1930s. Thatmakes it one of the two greatest crises in the history of capitalism. And plainly, the crisiscontinues, yielding severe joblessness and a growing danger of government defaults,bank failures, and stock market crashes. Hundreds of commentators have sought toexplain the crisis. Yet much remains murky, even paradoxical. This essay attempts toput the crisis in perspective by mapping the universe of crisis literature. It begins byframing some of the key questions posed in this literature. Next it offers sharply etchedreviews of thirteen key books. The result is a multi-faceted portrait of a crisis that is stillunfolding.

Many aspects of the Great Recession are widely understood—the vast scale of thecrisis, the stubborn persistence of mass joblessness, the devastating cuts thatgovernments have now embraced. The antecedents of the crisis are also familiar:predatory lending to low-income borrowers, the explosion of exotic debt-basedsecurities, unhinged speculation by investment banks. But much else remainsobscure.

Analysts often stress that the global economy came to the very brink of failurein September 2008. But why was world capitalism so vulnerable? How could afew years of recklessness put global finance at risk of outright collapse?

Other puzzles present themselves as well. Why did a massivestimulus program yield only a limping, nominal recovery? Why have politiciansturned to austerity policies that can only worsen joblessness and strangle demand?The aim of this paper is to review the crisis literature with these questions in mind.I open with a survey of the field of discourse, followed by a suite of book reviews.

The Queen’s Query

Just six years ago, it seemed that the sun might never set on world capitalism.China was the new vanguard of industrial production and Western finance had

1 This essay, and the thirteen reviews that follow, originated in a graduate seminartaught by David Smith at the University of Kansas in spring 2011. Smith wrote the openingessay. The book reviews, written by the authors whose names appear in the text, wereedited and condensed by Smith. Queries can be sent to David Norman Smith, 716 FraserHall, Department of Sociology, University of Kansas; email: emerald@ku.edu

New Political Science,Volume 33, Number 4, December 2011

ISSN 0739-3148 print/ISSN 1469-9931 on-line/11/040577-25 q 2011 Caucus for a New Political Sciencehttp://dx.doi.org/10.1080/07393148.2011.619829

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soared to improbable heights. But now, after recent shocks, it seems increasinglylikely that decline will prove lasting, perhaps even irreversible—that crisis mightbecome “the new normal” and that we might, indeed, have entered a new era ofplummeting demand, lending, production, employment, and government taxrevenues. A long night of crisis is feared by investors and the public alike.2

A famous question about this disturbing shift came from the Queen ofEngland when, in late 2008, she met with a conclave of experts at the LondonSchool of Economics (LSE): “Why,” she asked rather plaintively, “did no one seethis coming?” The reply, solemnly given by the Queen’s interlocutors in July2009, was that most economists and investors had been blinded by hubris. Theyhad fallen victim to bubble psychology, accepting the core tenets of AlanGreenspan’s version of market fundamentalism, namely, that capitalism is self-regulating and markets are efficient. These tenets had proven false, as evenGreenspan, fleetingly contrite, was forced to admit. But questions lingered: Whyhad speculative hubris run rampant? Why had bubble fever dominated thediscourse?

A week later, an economist who had not attended the LSE conclave stressedthat many people had, indeed, foreseen the crisis. He too was right.3 Hubris hadbeen rife but not everyone had been fooled. Post-crisis, a few early skepticsbecame icons of foresight: above all Brooksley Born, who had resisted unregulatedderivatives trading in the late 1990s; and Raghuram Rajan, who, as chiefInternational Monetary Fund (IMF) economist in 2005, had publicly warnedGreenspan that deregulation had gone too far. Others had seen deeper. Clinicallyexact warnings had come from practitioners like Stephen Roach, Richard Duncan,Michael Hudson and the Prudent Bear bloggers.4 Still others who sounded thealarm ranged from critics of capitalism (including Marxists and followers of crisistheorist Hyman Minsky) to speculators who sought to wring profit from thebubble (including hedge fund managers and traders at investment banks likeGoldman Sachs and Deutsche Bank).5

What did these critics see? A global bubble in which China, the United Statesand the European Union found themselves awash in money thanks to anunsustainable nexus of artificially stimulated consumption (in the US and EU)and export production (in China and elsewhere). This bubble was buoyed by an

2 As I write these lines, in early August 2011, the economy is racked with worseningproblems: government default fears; persistent steep unemployment; and plunging stockmarkets. At this moment the crisis appears to be far from over.

3 Thomas Palley, “Letter to the Queen,” July 29, 2009, ,http://www.thomaspalley.com/?p ¼ 148..

4 Many of Roach’s warnings are available online. For a convenient collection, withoutstanding material on China as well, see Stephen S. Roach, The Next Asia (Hoboken, NJ:Wiley, 2009). See also Richard Duncan, The Dollar Crisis (Hoboken, NJ: Wiley, 2003); andStandard Schaeffer, “An Interview with Economist Michael Hudson: The Coming FinancialReality,” Counterpunch, July 11, 2003. Prudent Bear is mainly Doug Noland’s brainchild.

5 For a rich review of Marxist accounts, see Chris Harman, Zombie Capitalism: Global Crisisand the Relevance of Marx (London: Bookmarks, 2009). Minskyan analysis is provided bymany economists associated with the Levy Economics Institute of Bard College (,http://www.levyinstitute.org/.). For copious detail on Deutsche Bank and Goldman Sachs inparticular, see the US Senate Permanent Subcommittee on Investigation, Wall Street and theFinancial Crisis—Anatomy of a Financial Collapse, April 13, 2011,,http://hsgac.senate.gov/public/_files/Financial_Crisis/FinancialCrisisReport.pdf..

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opportunity to practice “global labor arbitrage” on an historically extreme scale,6

producing goods in low-wage zones for sale in high-wage zones. The surplusesaccumulated in this way had revived capitalism after the recession of 2000–2001.China had extracted vast profits from low-wage exports sold abroad. Much of thisprofit was parked in foreign bonds. This enabled central banks, in the US andparts of the EU, to superheat demand, especially for housing, by keeping interestrates low. Lenders funneled risky loans to millions of subprime (low-income)homebuyers, many of whom unwisely accepted variable rate loans. Debt ratherthan income fueled household consumption, as wages remained static in thejobless recovery after 2001. Wal-Mart rose to global retail preeminence byimporting a cascade of Chinese goods, including many items such as washingmachines which they sold, not least, to new homeowners. Western investors,doubting the profitability of domestic manufacturing industry, poured moneyinto speculative purchases of debt, which they “securitized” and resold with evergreater ingenuity—and recklessness.

This bubble, fueled by borrowing and speculation, could last only until thechain of bad loans came due. When homebuyers began to default on their loans,the speculative spiral became a vortex of decline. Soon, the unheeded skeptics ofthe boom years were joined by a chorus of post-festum critics.

After the Deluge—Analysis

By January 2011, over 200 books on the crisis had appeared in English; many morehave appeared since. What are we to make of this outpouring? An early reviewcame from Andrew Gamble, who had participated in the dialog with the Queenand later wrote a full-length analysis. Gamble posits five trends, ranging fromunabashed market fundamentalism to protectionism and anti-capitalism.7 This iscoherent, but I would argue that the literature is less easily pigeonholed, sincealmost everyone now favors some kind of regulation. This is true even of the mostwounded and bellicose defenders of the gospel of efficient markets, who seldomremain entirely anti-regulatory. Most conflicts of opinion now center on the detailsof projected regulations, not on their legitimacy per se.

Liberals tend to blame Wall Street and conservatives tend to blameWashington; but otherwise, jolted by the crisis, traditional divisions have beenblurred. This is especially clear on the right, where market ideologues have beenshaken by high-profile defections: most notably, in the case of Richard Posner, tofull-bore Keynesianism. Others have posed sharp challenges to banks deemed“Too Big to Fail” (for example, Simon Johnson, who was Rajan’s successor as IMFchief economist). Rajan, who is now highly influential, has staked out a middleground in which modestly pro-regulatory views are voiced in free market idioms.Many liberal economists take substantively similar positions.

Investors, however, remain stubbornly engrossed in “the hunt for yield.” Theywant profits by the fastest route possible, with the fewest hindrances. Thisdiscourages the economists, whose books have a largely pessimistic, elegiac tone.They know that speculation thrives, even in subprime markets, and that money is

6 Roach, The Next Asia, is a particularly good source on this subject.7 Andrew Gamble, The Spectre at the Feast: Capitalist Crisis and the Politics of Recession

(New York: Palgrave Macmillan, 2009).

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still being diverted from industry to finance on an epic scale. Many authors arealso keenly and disconsolately aware that politicians seem to take positivepleasure in ignoring disinterested counsel. When, not long after taking office,Barack Obama was asked whom he would consult about the economy, he saidthat, although he knew his base wanted him to appoint reform-minded figureslike Joseph Stiglitz and Paul Krugman as his advisors, he would instead rely on“ruthless pragmatists.”8 These ruthless pragmatists proved to be the very samefigures, associated with Citibank and Goldman Sachs, who had unleashed andenabled the speculative boom in the first place.9

This distinction, between ruthless enablers and disinterested critics, is perhapsthe brightest dividing line in the discourse. But the enablers seldom write; theysimply forge ahead, and leave it to the critics to object. Hence the literature is richin cogent critiques of the “pragmatism” that brought us bank bailouts, a toothlessstimulus program, soaring profits without jobs, spiraling home foreclosures, andsky-high government deficits. The criticisms of these policies are often judiciousand compelling, but they seldom rise far enough above the details of events andpersonalities to convey a sense of the larger dynamics at work.

What, in the deepest sense, is wrong with the 21st-century economy? What canwe offer, positively, to replace the flawed theories that fed investor hubris? Ifcapitalism is now entering uncharted territory, what compass points can weestablish to reorient our thinking?

Few current books probe questions like these very closely. Many are excellentin other ways. The best books, by academics and journalists, critique the flawed“financial architecture” of the global economy and document the crisis and itsbackground. Many fine-grained stories have also been told about traders,regulators, bankers, and others. But the deepest questions seldom appear in suchaccounts. Howard Davies, who then directed the London School of Economics,published a book in late 2010 in which he divides the crisis literature into nearly 40topic areas. Of these, one stands out—what he calls “Big Picture” accounts. Daviescould place just a few titles under this rubric.10 But these books raise critical issues,which deserve a few words.

The Big Picture

As a framing hypothesis, I would suggest that the “Great Recession” may be thesecond acute phase of a sustained crisis that first became visible in the turbulenceof the years 1997–2001. Rates of industrial investment in the advanced economieshad fallen so steeply that many people felt a decisively new phase of capitalismhad begun—an age of “financialization,” in which money flowed from industry tofinance. Investors were increasingly reluctant to function as capitalists in theclassical sense. Instead of buying labor power and capital goods, they turned toequities and derivatives. (And when they did hire workers, they tended to do thisabroad, in places without unions.) This shifted the balance of class power,

8 David Leonhardt, “After the Great Recession,” New York Times, May 3, 2009.9 Michael Hirsh explains this history well in Capital Offense: How Washington’s Wise Men

Turned America’s Future Over to Wall Street (Hoboken, NJ: Wiley, 2010).10 Howard Davies, The Financial Crisis: Who is to Blame? (Cambridge: Polity, 2010).

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weakening labor and eroding wages and job security. This, in turn, softenedconsumer demand and eroded the tax base.

The result was a vicious circle. Falling demand for industrial labor led tofalling wages, reducing the demand for industrial goods, which further reduceddemand for labor, yielding still lower wages.

The puzzlingly “jobless” nature of the recovery after the 2000–2001 crisisshould have made it clear that something was gravely wrong. But doubts weredispelled when the recession receded. The manic speculation of the ensuinghalf decade was construed as a return to normalcy; in actuality, it wasalmost entirely bubble-driven. China and the US found themselves suspendedin a historically unique situation, in which China capitalized on the stun-ning wage differential between US and Chinese workers to accumulate thesurplus needed to fuel a debt bubble (in the US) and an export bubble(in China).

US wages, momentarily propped up by cheap credit and low interest, had notyet plunged decisively below the historic heights they had attained in the earlypostwar decades, and Chinese wages, suppressed by a radically anti-labor regime,remained historically low. This enabled the Chinese government to profit mightilyfrom production while US investors chased paper wealth in the form ofsecuritized debt. Commodities produced by workers whose wages had not yetascended from historic depths were sold to workers whose wages had not yetfallen from historic heights.

The result was a unique combination of real and apparent accumulation.It is accurate, I believe, to describe the global surge in the half-decade after2001 as bubble-driven, since Chinese exports would not have flourishedwithout debt-enabled spending by US consumers. Now, with the deflation ofthe US debt bubble, China’s export bubble is deflating as well. But the feltdynamism of the bubble years was not simply an illusion. On thecontrary, the accumulation of capital by the Chinese regime was real,however short-lived it may ultimately appear in retrospect. It sprang from theclassical source of profit in capitalist society—the sale of goods produced byworkers whose input to the value of their products outpaced the value of theirwages.11

Chinese accumulation, and the bubble of pseudo-accumulation in the debtornations, lifted the world out of the initial phase of the 21st-century crisis. Chineseworkers and North Atlantic consumers gave capitalism renewed hope. But thatphase has ended. The “Great Recession,” which supposedly concluded in late2009, now appears to have been a return to underlying pre-bubble trends. Worriesagitate markets, governments and citizens: Can demand revive? Can accumu-lation be sustained? Can states remain fiscally viable?

The outlook is bleak. With the historic decline of employer and consumerdemand in the (decreasingly) high-wage economies, global demand is clearly inperil. China has long pledged, and long failed, to boost domestic demand. With ahorizon of dwindling export profits, that window of opportunity may not stayopen long. And if China fails to spur domestic demand and buoy the economy foranother interval, where will demand come from? Consumers? That seems likely

11 Seldom, indeed, has this classical criterion been more amply realized than in theChinese case!

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only if wages revive, which would require revived manufacturing. That, in turn,depends on investors, who would have to gamble that industry can be sustainablyprofitable again. Such a gamble seems unlikely given that, even in the pre-crisisdecades, investors diverted $20 trillion from industry into other channels—junkbonds, currencies, tech stocks, hedge funds, derivatives and, ultimately,securitized debt.12 Increasingly, it has come to seem natural that investors chaseprofit in every realm except production.

Can governments take up the slack? That too seems highly unlikely. Currently,governments are suffering from a deep demand crisis of their own. Since theydepend for revenue on taxes and bonds, their solvency depends on the financialcapacities of taxpayers and bond markets—capacities which have been changingdramatically. Once, taxes were the main foundation of revenues. But tax baseshave eroded sharply, as wage- and job-challenged workers have increasingtrouble paying taxes and globalized businesses pay reduced taxes. This putsgovernments at the mercy of bond markets—a fact with stunning consequences.

Many people have fretted over the folly of the recent rush to austerity, but, follyaside, austerity now has deep structural roots. Bondholders demand payment,and governments must pay if they hope to secure future bond funding. This putsthem in a critical bind. To pay their creditors, they have two perennial options:either to squeeze more revenue from workers and businesses or to cut spending.Neither solution is viable in the long run unless taxable income from productionrevives; since spending can be cut only once, new revenue sources are the besthope for future expansion. But, in the short term, acute pressures converge to forcebudget cuts.

Since tax hikes are effectively opposed by the wealthy, spending cuts aimed atworkers and the poor seem to be the only option. Bondholders press for such cuts,and politicians (who increasingly act as on behalf of bondholders rather thantaxpayers) comply. And the apparent failure of stimulus programs also played a role,once it became clear, for example, that corporate bailouts and tax cuts had fueledspeculation, hoarding, and foreign spending rather than domestic job creation.

Governments, in short, demand less rather than more. Deprived of tax revenueby the contraction of corporate demand for workers, governments turn tobondholders, who pressure them to slash budgets and regulations—even in times,like the present, when established Rooseveltian tenets would dictate the opposite.Rather than reversing the downward spiral of aggregate demand, governmentsaccentuate this spiral.

Given these obdurate realities, the best hope for renewed demand probablylies in the “emerging markets,” of which China remains the prime instance. Butfor demand to grow in such markets, many non-wage earners would have to bedrawn into wage labor and wage rates would have to rise—and that would haveseveral problematic effects: inflation, which would limit exports; pressure ondemand-challenged domestic markets; and an investment shift from bondmarkets (where China, for example, now has $1.2 trillion parked in US bonds) todomestic industry.

12 Charles Roxburgh et al., Debt and Deleveraging: The Global Credit Bubble and Its EconomicConsequences (Beijing, Brussels, Delhi, London, San Francisco, and Washington, DC:McKinsey Global Institute, 2010), ,http://www.mckinsey.com/mgi/publications/debt_and_deleveraging/index.asp..

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All that is entirely possible. But would this yield the same kind of growth thatChina achieved recently? That seems doubtful, since the key to that growth wasthe disparity between Chinese and US wages. Unless a similar discrepancy couldbe exploited (perhaps between low-wage labor in the Chinese interior and high-wage labor on the coast, or between low-wage Indian or Indonesian labor and theupscale Chinese market) the chance that China’s new domestic demand would liftthe global economy for very long is slim. Accumulation would proceed, but moreslowly and, quite possibly, with diminishing returns.

Thirteen Books

Several key aspects and implications of the crisis remain obscure, and others arebecoming plain only now. Still others will surface only in the future, as the crisisunfolds further. But the first wave of analysts (partly represented by the booksreviewed below) offers many insights into Big Picture questions. These books arereviewed in roughly the order in which they appeared, beginning with two booksthat probed the crisis in its early days (by Morris and Foster & Magdoff) andclosing with two books that appeared two years after the zenith of late 2008 (byDumenil-Levy and McNally). Many perspectives, clashing and converging,appear in these books. The result is a fractured mosaic of analysis, with manystrengths and many persisting obscurities. Here are reviews of thirteen of thesebooks.

DAVID NORMAN SMITHUniversity of Kansas, USA

Charles R. Morris, The Trillion Dollar Meltdown: Easy Money, High Rollers,and the Great Credit Crash, New York: PublicAffairs, 2008, 224 pp.

Morris was among the first to explain how the meltdown began. Unregulated risk-taking is a central theme: “ . . . at the very epicenter of American finance, a tinygroup of people were able to borrow hundreds of billions of dollars from banks,and . . .neither the banks or their regulators had any idea of how much they hadborrowed or what they were doing with it” (p. 53). He shows the causes andconsequences of this risk-taking, especially in the housing market.

By early 2005, the US was experiencing the greatest housing boom in history.Half of all gross domestic product (GDP) growth was driven by frenziedconstruction or home refinancing. With soaring prices, people could buy homes,sell them at a profit, and repeat the process. They also used their homes ascollateral for borrowing. Housing appeared to be an inexhaustible source ofconsumer income.

Capitalizing on the boom were investment bankers, who borrowed prodigallyto buy mortgages. They divided these mortgages into “tranches” (low-risk,medium-risk and high-risk) which they packaged for resale. This created a newkind of security, the CDO, or “collateralized debt obligation” (obligations, that is,with real assets as collateral). By themselves, the low-risk tranches were fairly safeinvestments. But they were bundled with high-yield tranches which were at highrisk of default.

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To enhance profits, financial mathematicians ultimately diced CDOs into 125tranches. This yielded complexity too great to be readily understood. Butinvestors trusted the math, and banks tried to protect securitized mortgages withcredit default swaps, which emerged as “one of the faster-growing new financialinstruments ever . . . They are a form of insurance contract. If I own a company orCDO bond, I can protect myself . . .by entering into a credit default swap with acounterparty who promises to make good my losses in the event of a default” (p.130). “The notional value of credit default swaps—that is, the size of portfolioscovered by credit default swaps—grew from $1 trillion in 2001 to $45 trillion inmid 2007” (p. 75).

Riskier tranches were popular with hedge funds, whose “persistent demandfor higher-yield products is pushing the industry up the risk ladder . . . ” (p. 117).This was especially dangerous because the risky securities were largely purchasedwith borrowed money. Yet the demand for new mortgages to securitize was soonintense. Since qualified buyers were now scarce, lenders began lending to“subprime” borrowers who had little prospect of repaying their loans. Over athird of all subprime loans went to “Ninjas”—people with no incomes, no jobs,and no assets. Subprime lending quadrupled in four years, reaching $625 billion,about a quarter of the total, in 2005. With insurance covering the risks and theFederal Reserve Board keeping interest rates low, investors rushed in: “Whenmoney is free, and lending is costless and riskless, the rational lender will keep onlending until there is no one else to lend to” (p. 61). But what appeared rational forinvestors was hardly safe for the economy.

Worsening the problem was the fact that the credit rating system becamedistorted: “ . . .vintage CDOs were priced as if they were almost as safe as USTreasuries. They’re not” (pp. 121–123). When the defaults began, the system froze,and banks, lenders, and investors all teetered at the brink, as Morris describes inhis chapter “The Great Unwinding.” The crisis was like a roller coaster racingdownward; no one could get off. The dot-com bust of the previous decade hadbeen mitigated by the peak productivity achieved in the 1990s by the baby boomgeneration. That wasn’t the case now. “All bubbles pop, and the longer theyexpand, the worse the implosion. By late fall 2007, the hiss of escaping gas hadturned into a roar” (p. 61).

For this Morris blames the market fundamentalism that triumphed in theReagan era—the myth that markets can govern themselves, a myth internalizedby irresponsible regulators. “The irresponsibility of the financial sector wasmatched by that of its regulators . . . ensuring that taxpayers would eventuallyreap the whirlwind” (pp. xviii–xix).

BROCK TERNESUniversity of Kansas, USA

John Bellamy Foster and Fred Magdoff, The Great Financial Crisis: Causesand Consequences, New York: Monthly Review Press, 2009, 144 pp.

The authors, whose opening chapters first appeared in Monthly Review in early2006, see long-term stagnation as the ultimate cause of the crisis. The underlying

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problem is that real wages have stagnated since the 1970s though consumption,based on massive debt, has grown steadily.

How did debt become so crucial? The root problem is that productiveinvestment cratered: “With declining expectations of profit on new investment,corporations have been sitting on vast undistributed corporate profits . . . [and]without a step-up in business investment the US economy will stagnate—a realitythat speculative bubbles can hold off and disguise in various ways, though notentirely overcome” (p. 37).

The decline of productive investment does not stop growth, but slows itsignificantly. The consequence is “over-accumulation,” that is, the accumulationof more money than can be profitably invested, given limitations in consumerdemand. Formerly, outlets for excess capital were found in projects like railwaysand highways, but today’s investors and politicians show little interest in growth-stimulating infrastructure projects.

When investment lags, growth depends on debt spending. By 2005, debt madeup almost 350% of total US GDP. The authors contrast consumer debt and corporatedebt, which (sooner or later) spur production, with speculative borrowing, whichtends to decouple capital from production altogether. Financial institutions borrow tolift profit margins despite sluggish growth. This bifurcation of investment fromproduction was a major cause of the 2008 crisis.

The authors note that by 2005, productive profits had fallen from 50% to just15% of domestic profit while financial profits had risen from 15% to 40%.Corporations, dissatisfied with industrial profit rates, poured money into finance.This was abetted by banks, which pursued low-rate lending in order to sell vastpools of consumer and corporate debt, re-packaged, to institutional investors,including hedge funds.

The consequences include serial debt bubbles; artificially elevated consumerdemand (despite falling wages); widening class divisions; the ideologicalhegemony of neoliberalism; the dependency of emerging economies on theInternational Monetary Fund (IMF) and World Bank; and increasing globalinstability. The authors see the 2008 crisis as dramatic evidence of the latter, inparticular. Hence, in the second half of the book, they turn to the speculativebubble that sparked the housing crisis.

The authors explain how securitized mortgage loans were bundled into packagesof securitized loans which pooled “tranches” of low-risk, medium-risk, and high-risk mortgages. Credit agencies gave these bundles AAA ratings, despite thepresence of many BBB sub-prime mortgages in the mix. The housing bubbleinflated rapidly after the Federal Reserve Board (the Fed) lowered interest rates tojust 1% in 2003. With cheap financing millions of people who could not reallyafford homes took out home loans, egged on by predatory lenders. Once mortgagelending began to soar in this way, real estate “hyperspeculators” began buyinghouses in order to flip them at higher prices. By December 2005, the outstandingUS mortgage debt had reached 8.66 trillion dollars, equivalent to 69.4% of totalGDP.

When the crisis hit, taxpayers paid the price—and commentators blamedeither the poor or the predators. But the authors trace the crisis, ultimately, to thefinancialization of the economy. Hence, they close by discussing the prospect ofdefinancialization. Conventionally, the Fed is supposed to act like a train engineer,regulating liquidity through cash infusions or rate hikes. But these are monetary

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solutions to monetary problems and do not address the underlying problem ofstagnation.

Many previous undertakings—rebuilding destroyed economies after WWII,pursuing the space race and arms race, building interstate highways—comprisedmassive investments that staved off stagnation. But these proved to be stop-gapmeasures, and ultimately a turn towards the speculative economy began in the1970s. Current calls for investment in energy, technology, and transportation havewon only a tepid response as legislators cut budgets and banks hoard rather thanlend. But the need remains. Without real productive investment, crisis willbecome normal, and perhaps terminal.

JAMES P. ORDNERUniversity of Kansas, USA

Paul Krugman, The Return of Depression Economics and the Crisis of 2008,New York: W.W. Norton, 2008, 224 pp.

Paul Krugman won the Nobel economics prize in the crisis year—2008. This book,he says, is “an analytical tract. It is not so much about what happened as why ithappened . . . ” (p. 6). With China and the rest of the world now firmly in the profit-making camp, capitalism stands unopposed: “ . . .who can now use the wordsocialism with a straight face?” (p. 14). Yet capitalism still faces regular crises. Toexplain this apparent paradox, Krugman offers a homely analogy—the collapse ofa babysitting co-op in Washington, DC.

Families, he says, cared for each other’s children in return for coupons, whichthey could redeem for babysitting help from other families. This sparked demandfor the relatively scarce coupons, leading many people to want babysitting work,while only a few wanted babysitters. This created a sort of credit crisis in whichfamilies with coupons hoarded them even though others wanted to earn them.The co-op broke down.

For Krugman the problem was that no group oversaw the coupons ormanaged the system. Had such a body existed, the crisis could have been averted.Ultimately, it was only when a Krugman-like economist convinced the co-op toprint more coupons that the problem was solved. This is akin to the role he assignsgovernment.

Government failure was also a key factor in precipitating the crisis. Krugmannotes that the Federal Reserve Board under Greenspan openly preferred to letbubbles burst and clean up after, rather than anticipating and deflating themresponsibly. He also stresses that lax oversight of risky trading permitted the riseof “shadow banking.” From the 1930s until the 1990s, the Glass-Steagall Act hadseparated commercial banks, which held deposits and were barred from riskyinvestment, from investment banks, which were barred from holding deposits butwere permitted higher risk. But nebulous quasi-banks arose in the 1980s as theregulation of the financial system weakened. These shadow banks, many of whichwere giant institutions, routed vast sums of money to institutional borrowers whopursued risky high-yield investments, often in housing. When the marketimploded, the shadow banks found themselves “illiquid.” They sold short for

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quick cash to avoid defaults. This sparked depreciations and sell-offs. The panicwas on.

Other mistakes worsened the situation. The Bush administration declined toconfirm that they would back loans made by Fannie Mae and Freddie Mac,undermining their value. Other, similar failures helped matters spiral out ofcontrol. And ultimately the government bailed out the very banks, includingquasi-banks, which had triggered the crisis.

During the boom years, many people had thought capitalism was now bullet-proof. Recessions now only amounted to hiccups. But the scale of the crisis, and ofthe bailout, proves that is not true. And even the unprecedented scope of theintervention barely scratched the surface. Krugman argues that, to forestallfurther crises, the government will have to act much more decisively, eithernationalizing or leashing the financial sector—and injecting far more money intothe economy, a figure Krugman pegs at around $4 trillion dollars.

As a New York Times columnist, Krugman often laments the hesitancy ofObama’s interventionism. He argues here that the US cannot solve its problems ifit goes only halfway. “I won’t try to lay out the details of a new regulatory regime,but the basic principle should be clear; anything that has to be rescued during afinancial crisis, because it plays an essential role in the financial mechanism,should be regulated when there isn’t a crisis so that it doesn’t take excessive risks”(p. 190).

RUSSELL SCHLOEMERUniversity of Kansas, USA

Richard A. Posner, A Failure of Capitalism: The Crisis of ’08 and the Descentinto Depression, Cambridge, MA and London: Harvard University, 2009,368 pp.

This book was completed early in 2009. At that time, Congress had not yet passedthe Troubled Assets Recovery and Reinvestment Act of 2009 and the worstunemployment figures were still ahead. It was also before the term “GreatRecession” had been popularized. In fact, Posner calls the banking collapse andsubsequent slump a “depression”—the most significant downturn since the 1930s,with consumer demand projected to fall as much as 12% in 2009.

Posner stresses that banking deregulation was a basic cause of the housingbubble. Financial intermediaries had been allowed to provide bank-like servicesbut without the same restrictions. As they thrived, banks borrowed to keep up,pursuing increasingly risky loans with high interest. The systemic dangers thisposed were not factored into risk assessments by the banks. If the odds of acatastrophe are low, it is unlikely to be taken very seriously by any one institution.So, though risks of this kind may be very relevant for the system as a whole, theyare not very significant for one specific actor. This is the main justification Posneroffers for government regulation.

Posner’s analysis of the stimulus was largely predictive, since it wasformulated before the stimulus plan had become operational. Significantly, heargued that a stimulus focused on tax cuts would stumble because people oftenchoose to save rather than spend extra income: “A federal tax cut will do nothing

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to alleviate the acute financial problems of the states” (p. 169). Infusing money into

banking would stumble for similar reasons, since insolvent banks could easilyrefrain from lending, hoarding rather than spending.

What would work better? Posner’s answer includes transfer payments, such as

increases in unemployment insurance, which give money to people who are morelikely to spend than to save. Posner also makes a case for deficit spending in public

works, which he says stimulates demand more effectively than tax cuts because itcreates jobs (and because people are more likely to spend from a steady stream of

revenue than from a one-time cash gift). An “optimal depression fightingprogram,” he says, would target “industries or areas of the country where there is

high unemployment or other unemployed resources. It should be executable onshort notice . . . It should be terminable when the depression ends” (p. 188).

Posner blames deregulation for the descent from crisis into full-blowndepression. Deregulation spurred risky lending, the repeal of Glass-Steagall, and

unchecked derivatives trading. The Federal Reserve Board (the Fed) failed inmany ways, and the Bush administration ran up huge deficits.

In many recessions, the Fed has stimulated consumer spending with reduced

interest rates, which prompt banks to lend to consumers. However, this time thegrave capital shortage made banks very hesitant to lend, even after the Fed refreshed

their capitalization. But Posner says the Fed could still have handled the crisis. Hecensures the Fed chairs for failing to do this. Greenspan allowed the housing bubble

to expand rather than popping it. Bernanke could have popped the bubble after thefall of Bear Stearns. But the Fed chairs were too preoccupied with inflation to worry

about the credit binge and deregulation. They were overconfident about the “self-correcting” powers of markets—an overconfidence that Posner attributes in part to

the influence of libertarian academics, among whom he was himself (before the crisisand his conversion to quasi-Keynesianism) an eminent figure.

Interestingly, Posner does not blame the group that most critics name first:

“ . . . although the financiers bear the primary responsibility for the depression, I donot think that they can be blamed for it—implying moral censure—any more than

one can blame a lion for eating a zebra” (p. 284). This conforms to one of Posner’smain claims: that structural and institutional problems, rather than simple greed,

were the source of the depression. This is why he speaks of a failure of capitalism,which he explains in this way: “depression is the result of normal business activity

in a laissez-faire economic regime . . . ” (p. 235). Capitalism in unregulated formnormally results in deep depressions. That is because individual rationality

and rational collective choice seldom coincide, and that’s why self-regulationin insufficient: “Rational indifference to the indirect consequences of one’s . . .

behavior is the reason the government has a duty, in regulating financial behavior,to do more than prevent fraud” (p. 107).

GABRIELA MORANUniversity of Kansas, USA

Harold James, The Creation and Destruction of Value: The Globalization Cycle,Cambridge, MA and London: Harvard University, 2009, 336 pp.

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James, an historian who has written about Deutsche Bank’s association withNazism, views the recent crisis through the lens of a concern with (and commitmentto) globalization. Agreeing that the crisis arose from globalization, he worries thatthe public will call for trade protection to create jobs—thus undermining globalinterconnectedness. But he notes, too, that elites often resist these calls. He observesthat Obama’s “Buy American” clauses in the stimulus package incurred suchlegislative wrath that they were scaled back. So the debate continues.

Capitalism, as James sees it, thrives by “creative destruction.” In this spirit heoffers a kind of apology for job loss during the Great Depression: “In the short run itlooked devastating, and governments contemplated as many measures as theycould for increasing manufacturing employment . . .But [this] eventually pushedworkers into new occupations, and underlined the importance of the skillsand education that proved vital for the development of the service economy . . . ”(p. 159). Unlike analysts who say that joblessness and falling wages cut demand andput the global economy in peril, James projects a vision of an IT-enabled economy inwhich job loss comports well with prosperity. “Raising productivity . . . through theuse of new techniques and new equipment meant that these activities could becomemuch more productive, while employing fewer people and generating lessmacroeconomic vulnerability” (p. 169). How the unemployed will find new jobs,and how the system will rebalance and even benefit in the meantime, is aconundrum he does not fully clarify.

James says that most crises originate in the global periphery, giving the corenations time to buffer themselves. But the current crisis, like the Great Depression,originated in the financial center of the global economy. Ground zero was thehousing debacle, in which subprime loans were sweetened with ultra-low downpayments and repayment schedules: “ . . . the overwhelming majority of subprimemortgages (80 to 90%) were re-packaged into pools [and] split up according totheir likelihood of default” (p. 153). These pools changed hands repeatedly, andwere often repackaged: from 2005–2007, “some $540 billion of collateralized debtobligations and asset-backed securities were created” (p. 153). The error of thispractice soon became clear.

In April 2007, a top subprime lender filed for bankruptcy. Soon two smallEuropean banks needed help because they were exposed to US debt. Severalnations tried to stem the tide of likely bank failures with liquidity infusions. Butthis proved unsuccessful. In February 2008 the Swiss bank UBS announced an $11billion loss due to US mortgage investments. The next month, the giantinvestment bank Bear Stearns came to the brink of failure. To many insiders, thiswas the signal that Wall Street had failed and Financial Times writer Martin Wolfstated this was “the day that the dream of global free-market capitalism died”(p. 106). Major banks, both in the US and abroad, were shaken and ultimatelybecame essentially or literally nationalized.

James is clear about “what” happened, but less compelling about “why” ithappened. Why did subprime lending boom at that precise moment? Why wasexotic finance embraced so ardently? Who was chiefly responsible for this trend?Who gained and who lost? Others dwell on these topics; James touches upon themlightly. He gives some weight to White House initiatives, under Clinton and Bush,to expand homeownership. He cites weak risk management at investment banks;the fast pace of financial innovation; the dispersal of debt among nations; therelaxation of bankruptcy laws for financial institutions in 2005; and, above all, “the

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most obvious culprit of the credit boom, . . . the Federal Reserve System’s policy ofrapid interest-rate cuts in order to deal with the recession of 2001” (pp. 156–157).But the underlying reasons for the crisis, the threads which bind the detailstogether, remain beyond his purview.

CHRIS GOODEUniversity of Kansas, USA

Graham Turner, No Way to Run an Economy: Why the System Failed and Howto Put it Right, London and New York: Pluto Press, 2009, 240 pp.

For Turner, an economic consultant in the UK, the crisis is primarily structuraland macroeconomic in origin. He indicts many of the usual suspects (deregulation,low taxes with high spending, irresponsible investment banks, and the fact thatcentral bankers allowed credit to grow cancerously). But he also posits anoverarching trend revolving around cyclical profit failures, compounded by highunemployment, rising prices, and falling demand.

During the bubble years, profit-hungry capitalists scoured the world not onlyfor cheaper labor power, means of production, and markets but also for credit, thatis, foreign capital. This globalization dynamic drove material growth, includingconstruction, but at the same time it spurred excessive credit growth as well. Theresulting recession gave business an incentive to reverse growth still further byslashing labor costs, especially by firing workers at home and seekingreplacements overseas. The latter trend (“outsourcing”) was already visible asthe housing crisis grew, showing that negative real growth was one of the centralunderlying features of the speculative expansion. Hours were also forcibly cutback—yielding “involuntary part-time workers,” the “marginally attached.”Turner concludes that, with falling wages and income in thrall to credit, “debt wasthe new slavery” (p. 17).

In Chapter 5, Turner provides an in-depth Marxist analysis of the crisis.He defines capitalism as a system of accumulation in which investorspush “profits to their limits.” Over time, production tends to become progressivelyless profitable, leading investors to seek profits in the realm of “fictitious capital”(that is, financial speculation). It was the concentration of excess funds in the formof speculative or fictitious capital that provided the “trigger for a collapse of thecredit cycle, taking the economy into recession” (p. 115).

According to Marx, counter-trends (including war, credit extensions, fasterproduction, better inventory, cheaper labor, globalization) can slow ortemporarily reverse the fall of profits, but these trends are often fragile. In thebubble years, the trends went in the reverse direction. Laissez-faire policy (mostnotably deregulation) allowed banks to take on excessively risky debt. Cuttingtaxes, a la Bush and Obama, is the opposite of what we need. HereTurner emerges as a Keynesian loyalist. He contends that crisis, now as in theGreat Depression, requires swift and decisive intervention through fiscalpolicy to avoid collapse. Keynes had understood that. But, ignoring Keynes, thecentral bankers have relied mainly upon the monetarist manipulation of interestrates to engineer a hoped-for recovery—an approach Turner says cannotsucceed.

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For Turner, Obama’s policies are an “intensification of the very worst featuresof the Bush administration” (p. 148). What is offered as “recovery” is actually areturn to the bubble—tax cuts, revived speculation, unsustainable debt,unaccountable banks, passive central banks, and minimal regulation. With banksweighted down with delinquent accounts, Turner argues that far-reachingreforms are needed—including the nationalization of the banks (to mitigate debtinflation) and economic democratization to “attack the vested interests of bigbusiness” (p. 170) that led to the crisis, moving “away from shareholder valuetowards community goals” (p. 173).

Are such changes likely? Turner isn’t optimistic. But they may be necessary.

JOSHUA HOMANUniversity of Kansas, USA

Ross Garnaut, with David Llewellyn-Smith, The Great Crash of 2008,Melbourne: Melbourne University, 2009, 256 pp.

Garnaut blames the crisis on greed, “clever money,” and global imbalances insaving investment, supply and demand: “ . . . a great flood of surplus savingsfound its way from East Asia and resource exporting countries to the UnitedStates and the rest of the Anglosphere . . . ” This fueled greed and Machiavellianfinance, allowing consumers and investors in “the deficit countries . . . to increaseexpenditure on housing, consumption and government, as well as to reducetaxation, beyond what would once have been regarded as prudent limits.” Whenthe bubble burst, investors retreated. Unable to rely on suddenly shaky banks,they transferred less capital across borders. The consequence was that the shift ofsavings from “surplus” to “deficit” nations collapsed, transforming the “GreatCrash into the Great Recession” (pp. 25, 37).

“Clever money” (for example, derivatives) gave banks and others “access tocredit they could never repay” (p. 39). Shadow banks—lightly regulatedinvestment banks, money market funds, hedge funds and others—playedstarring roles in the rise of clever money and the fall of the economy. A keyshadow banking practice is securitization, in which “an illiquid but income-producing asset . . . is converted into a security that is more easily traded byinvestors” (p. 41). Securitization originated in the early 1980s and became knownas “asset-backed finance.”

Shifts in global and US regulatory policies opened the door to asset-backedfinance. The Basel I accord in 1988 specified that investment banks must holdcapital reserves at levels higher than many of them liked. Securitization was oneway they got around this requirement, by removing loans from their institutionalbalance sheets. The repeal of the Glass-Steagall Act allowed depository banks toenter the securities game, raising the percentage of revenues that could beunderwritten by securities to 25%, thus expanding the securities marketenormously. Many of the investors were otherwise risk-averse groups likepension funds which, when the bubble collapsed, lost vast sums.

For Garnaut, derivatives and shadow banks were the “Heart of Darkness” inthe crash. Yet he affirms their peculiar beauty as well: “The global shadowbanking system is as intricate, swift and beautiful as the chemical transmissions

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within a living organism. It is the circulatory system of global capitalism. It existsbeyond the understanding and control of any regulator or nation. The system caninundate chosen assets, markets, even countries with capital, or starve them on awhim. It can transmit shocks around the globe in an instant. It is the lifeblood ofthe Great Crash elephant” (pp. 64, 71).

Garnaut decries the links between Wall Street and the Federal Reserve Boardand Treasury Department, which led, he says, to the “regulatory capture” ofgovernment bodies by financial interests. He names Greenspan, Rubin, andPaulson in particular. These were the men, he says, who deregulated andrewarded speculators with bailouts while giving them virtual impunity for theirmisdeeds.

Ultimately, though, Garnaut blames the game more than the players: “ . . . theUS securitization process . . . stretched the rules governing transactions past thebreaking point. The borrower was separated from the lender, the lender fromownership, AAA guarantees from capital provisions, profit centers from balancesheets, risk from reward, and . . . credit creation from oversight.” This was asystem based on the illusion that notional derivative values were as good asmoney in the bank, that clever financial instruments would always attract buyers:“When the test came, [the system] collapsed upon itself like a dying star” (p. 54).

Garnaut contrasts the ways in which Asia and the Anglosphere responded tothe Asian crisis of the late 1990s. When the Asian debtor nations soughtInternational Monetary Fund help, “they were forced to accept humiliatingconditions and counterproductive economic policies.” Determined not to repeatthis, they privileged production over consumption (pp. 26–27). In China, excesssaving over spending led to surpluses that rose from to 1.3% of GDP in 2001 to11% by 2007. This fueled destabilizing global imbalances and now looms as amajor threat to global demand, but it also prevented China from experiencing theworst of the financial crisis.

This lesson was plainly lost on the West.In closing, Garnaut waxes lyrical about capitalism and its tendency to reward

merit with wealth. The crash came, he says, when financiers were compensatedbeyond “the limits upon which the modern market economy had been built”(p. 219). The implication is that the system can be saved by returning to capitalistfirst principles, with regulation to ensure balance.

ANNA KERNUniversity of Kansas, USA

Joseph E. Stiglitz, Freefall: America, Free Markets, and the Sinking of the WorldEconomy, New York: W.W. Norton, 2010, 361 pp.

For Nobel-winner Stiglitz, the Great Recession is marked by acute resource under-utilization, in which “the cumulative gap between the economy’s actual outputand potential output is in the trillions” (pp. 17–18). In twenty-one months theeconomy lost eight million jobs, and some groups were very hard hit. Stiglitzreports 15.7% joblessness among African-Americans and a whopping 27.6%among teens (p. 65).

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What explains this crisis? Stiglitz condemns the incentive structure inparticular: “Bankers acted greedily because they had incentives and opportunitiesto do so, and that is what has to be changed” (p. 6). Arguing for regulation torevise the incentives, he devotes much of the book to explaining how deregulationcreated the crisis.

Banks traditionally wanted borrowers to repay their loans, with interest. Butfinancial innovations allowed banks to profit, above all, by earning fees. Thisinverted their priorities and practices. Consider, for example, the innovation of100-plus percentage mortgages. Homeowners were invited to refinance theirhomes for more than they were worth, on the assumption that housing priceswould continue to rise. Since fatter loans meant fatter fees, bankers were glad toignore the fact that, down the road, prices might plummet. To worsen matters,mortgages were often securitized and traded.

The problem lies in the incentive structure. Commercial banks, designed tolend to small businesses and homeowners, began taking risks like investmentbanks to maximize profits. Unlike investment banks, commercial banks arebacked by the FDIC; they know that even if they lose out in their gambling withsecurities, they still will not go under. This is what led “Too Big to Fail” banks tocommit the “Great American Robbery” of taxpayer money to pay their debts(p. 109).

Stiglitz wants to see banks rewarded for serving the public interest andpunished when they do the contrary. This requires changing pay structures so thatbankers are paid for long-term performance and penalized, like shareholders,when losses accrue. Commercial banks should be barred from taking risks likeinvestment banks. Banks that are deemed “too big to fail” should be broken intomore manageable units, and predatory lending should be stopped immediatelyby the creation of a financial consumer protection bureau. Stiglitz also says thatderivatives should be fully transparent—although he says they are too useful toban outright.

Ultimately, for Stiglitz, the core problem is regulatory, not systemic (in theMarxist sense). In essence, the state has failed to regulate finance properly. Thetriumph of market deregulationism in the 1980s was thus a turning point, and afurther key step on the path was the Gramm–Leach–Bliley bill in 1999. The Glass-Steagall Act of 1933 had distinguished FDIC-backed commercial banks frominvestment banks. But the Gramm bill allowed commercial banks to circumventthese restrictions. Consequently the five largest banks grew from 8% market sharein 1995 to 30% today. This is why they are now, indeed, “too big to fail.”

Others contributed as well. Stiglitz explains Ronald Reagan’s culpability indetail. With regard to Reagan’s appointee Alan Greenspan, Stiglitz writes:“Greenspan and the Fed were just wrong. The Fed was created, in part, to preventaccidents of this sort. It was not created just to help clean up” (p. 271). He says theFed failed to discourage predatory and irresponsible lending by allowing 100-pluspercent loans, variable-rate mortgages, and low-documentation loans. Had theFed behaved more responsibly, the recession could have been prevented.

Stiglitz also criticizes the Troubled Asset Relief Program (TARP). He agreesthat TARP allowed the government to buy the toxic mortgages, effectively savingthe banks. But without increasing bank regulation, or otherwise changingincentives, TARP ultimately did little more than reward the banks for riskymortgages and risk-taking.

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“Many countries may conclude not simply that unfettered capitalism,American-style, has failed, but that the very concept of a market economy itselfhas failed . . . ” Stiglitz disagrees, saying that “no successful economy . . .has notrelied heavily on markets . . .Old-style communism won’t be back, but,” he warns,“a variety of forms of excessive market intervention will return. And these willfail” (p. 225). He is equally implacable about market fundamentalism: “September15, 2008, the date that Lehman Brothers collapsed, may be to marketfundamentalism what the fall of the Berlin Wall was to communism” (p. 219).

The re-regulated capitalism that Stiglitz favors should seek to ensure fullemployment, promote innovation, provide social protection from risk, and ensurethat market participants are not victimized (for example, by a lack oftransparency).

LUCAS KEEFERUniversity of Kansas, USA

Raghuram G. Rajan, Fault Lines: How Hidden Fractures Still Threaten theWorld Economy, Princeton, NJ and Oxford: Princeton University, 2010,260 pp.

Rajan, who teaches at the University of Chicago, was the International MonetaryFund (IMF)’s chief economist from 2003–2006. Chicago and the IMF are bothbastions of free market ideology, but Rajan departs from that tradition. Heattributes the economic quake to a concurrence of tectonic fault lines. Myopicfinanciers created risky products; firms managed risk poorly; rating agenciesevaluated risk badly; Washington sabotaged market discipline; US workersbecame dependent on credit; and global trade imbalances led exporting nations(especially China) to depend on credit-driven US demand. When the crash came,the US could not function as the consumer of last resort and guarantor of foreigninvestments. Rajan concludes that regulation is needed to stabilize markets whichcannot self-stabilize.

The asset bubble is Rajan’s starting point. He says that, pre-crisis, the USgovernment had usurped the market’s role in credit provision, offering easy creditand low interest in lieu of wage-based demand. The Federal Reserve Board (theFed) had abdicated its regulatory role, allowing financiers to take ill-advised riskin the chase after profit. The consequence was that, against a backdrop of fallingconsumer demand, diluted by the jobless recovery from the last recession, thegovernment inflated an asset bubble instead of reviving income-based demand.

Jobs had rebounded fairly quickly after most earlier downturns. But it tooknearly two years for jobs to recover after the 1990–1991 recession, even thoughproduction revived in just three quarters. After the 2001 downturn, productionreached prerecession levels in a single quarter, but jobs were not replaced for overthree years; and the next crisis came just a few years later.

Why have recessions been so hard on jobs? One reason is that they giveemployers an excuse to shed unneeded or inefficient workers; when prosperityreturns, the firm is leaner and meaner. Web-based procedures also enablecompanies to hire “just in time.” This gives them leverage over workers, as doesthe rise in temp work. Given these trends, Rajan suggests that future recoveries

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(including the present one) are likely to follow this pattern, and it is likely thatbenefits will expire before workers find new jobs.

The outlook will remain bleak as long as the dominant “arm’s-lengtheconomics” (p. 89) prizes efficiency over personal ties and short-term gain overlong-term loyalty. As an example he cites interventions in the auto industry in theUS and France. The US forced GM to close lagging plants, while France, incontrast, aided Peugeot in return for a pledge to close no plants. Arm’s-lengtheconomics also widens the fault line of income inequality, which Rajan blames onunbridled financial profit-taking compounded by a declining educational system.

Rajan also indicts the arm’s-length economists of the Fed for saying that theywould not thwart price bubbles in advance, but, rather, that they would (inGreenspan’s words) “mitigate the fallout when it occurs and, hopefully ease thetransition to the next expansion” (p. 113). For Rajan, this told speculators that“ . . . if they gambled, the Fed would not limit their gains, but if their bets turnedsour, the Fed would limit the consequences.” Rajan also blames the Fed forkeeping interest rates low, arguing that rock bottom rates hurt savers and invitebanks to “plunge the system into trouble and get a great deal on interest rates”(p. 115).

An interesting tension in Rajan’s own thinking—a fault line?—is hissimultaneous endorsement and criticism of capitalism. “Although systemicfailure does imply the need for serious reform, it does not mean that a radicallydifferent system would be better. I believe we have to work to fix the system, butthere is a lot worth keeping” (p. 155). One wonders: Can we exonerate capitalismin cases of “systemic” failure? Rajan walks a fine line. His premise is that fault linesin the economy do not necessarily derive from the imperatives of capital; thatcrises spring from conjunctural rather than defining structural features of thesystem. He frequently and firmly rejects anti-capitalism. Yet he agrees thatcapitalism cannot be wholly unfettered: “The central problem of free-enterprisecapitalism in a modern democracy has always been how to balance the role ofgovernment and that of the market . . . [The] government . . . simply cannot allowordinary people to suffer collateral damage as the harsh logic of the market isallowed to play out” (p. 18).

Given this conviction, and to revive income-based consumption, Rajan favorsimproved support for schools, immigrants, workers, health care and unemploy-ment insurance. If this is still market economics, it is very distinctly 21st centurymarket economics.

NATHAN MOSERUniversity of Kansas, USA

Nouriel Roubini and Stephen Mihm, Crisis Economics: A Crash Course in theFuture of Finance, New York: The Penguin Press, 2010, 368 pp.

Unlike some economists, who consider only equilibrium normal, the authorsargue that crises “have always been” and “will always” be with us: “Though theyarguably predate the rise of capitalism, they have a particular relationship to it.Indeed, in many important ways, crises are hardwired into the capitalist genome”(p. 4). Roubini, a famed analyst whose bearish views led many to call him

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“Dr. Doom” in the bubble years, joins Mihm to propose “crisis economics”—thatis, the study of why markets fail. They pronounce themselves observers who“check ideology at the door” (p. 6).

Roubini and Mihm identify many factors that combined to precipitate thecrisis. They say that toxic policies facilitated the rise of “shadow banks”; thatabstruse financial instruments obscured systemic risk; and that indulgent centralbankers fueled “moral hazard” by encouraging investors to think that evenextreme gambles could be pursued with impunity, since, if they failed, thegovernment would bail them out. They also fault laissez-faire economics for itsinability to recognize the crisis-prone nature of unbridled capitalism. From aKeynesian viewpoint, they suggest reforms which could, in theory, prevent crisesfrom recurring.

The crisis began when financiers found themselves “paralyzed” by a loss ofconfidence, unable to tell which banks were insolvent and which were merelyilliquid. Roubini and Mihm argue that, had the Federal Reserve Board (the Fed)acted swiftly, this paralysis and the panic that ensued could have been averted.But that did not happen. Next came the failure of two hedge funds owned by BearStearns, which, like others, had poured money into financial instruments thatwere so opaque that investors “couldn’t and didn’t know how much exposure”they had to toxic assets (p. 92). Many investors withdrew from the hedge fundmarket entirely.

The problem, as Roubini and Mihm see it, was that risk, which had beenpredictable morphed into uncertainty, which could not be rationally predicted,given information failures. In short, risks which had been rational becameirrational—mandating regulation to keep risk within rational bounds. In thisspirit, the authors propose reforms in the areas of securitization, derivatives, thecredit rating system, compensation, and risk assessment. They urge reforms suchas breaking up “Too-Big-To-Fail” banks, reinstating Glass-Steagall, blocking“capture” of the regulatory agenda by vested interests, and adapting monetarypolicy to limit irrational exuberance and prevent bubbles.

Roubini and Mihm say that crises are not “black swans,” that is, rare andunpredictable, but rather “creatures of habit,” inherent in capitalism (p. 15). Butthe authors do not explain, in depth, why capitalism is unstable. They criticizeunfettered capitalism, but otherwise they have little to say about the system per se.They credit Marx for pioneering insight into capitalism’s crisis-ridden nature, butthey distance themselves from Marx’s “darker vision” of economic crises (p. 45).Nor do they say very much about mundane realities at the level of wages and jobs.That, it seems, would require a more complete “crisis economics.”

KEVIN MCCANNONUniversity of Kansas, USA

Robert Reich, Aftershock: The Next Economy and America’s Future, New York:Knopf, 2010, 192 pp.

This is a brisk, practical book. For Reich, Bill Clinton’s Secretary of Labor, the crisiscan be traced to competition and labor-replacing technologies of the 1980s. Ratherthan enhancing the safety net and creating jobs, politicians promoted deregulation

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and privatization; they cut wages, welfare, and taxes for the rich. This caused theworking middle class to rely on several coping mechanisms: growing femaleemployment (the “two-paycheck household”); longer work hours; the depletionof savings; and heavy borrowing via mortgages and credit cards. As thesemechanisms became less effective, due to job loss and wage reductions, workerslacked the buying power to sustain the economy. This broke the “basic bargain”which had sustained the economy for decades.

Reich warns against demonizing the usual suspects: consumers borrowing toomuch; banks lending carelessly; the Federal Reserve Board (the Fed) for keepinginterest rates too low; China for the influx of credit and debt-funded goods into theUS; and regulatory bodies for failing to contain subprime lending. Of course, thesefactors played major roles. But Reich says that ultimately they are symptoms of alarger issue—that workers’ buying power was siphoned off and concentrated asincreasing wealth among the rich.

Given this perspective, Reich argues that the crisis can only be definitivelyreversed by reforms that rebalance the distribution of social and economicbenefits. Wages, benefits, the safety net, and jobs must revive if the economy is tobe resuscitated.

Interestingly, Reich argues that, while the government’s response to the crisisaverted a free-fall into depression, it was formulated so quickly and unilaterallythat people were not inspired with a sense of “being in this together,” as in theGreat Depression. That solidaristic sensibility had spurred a resolve to restoreprosperity by means of an equitable redistribution of wealth and power. Butrecent emergency measures, by staving off depression without uniting the publicmore generally, address only symptoms of the larger problem without redressingthe core issue of wealth inequality. This allows the boom and bust cycle to persistunchecked.

Historically, Reich connects the boom and bust cycle to pendulum swingsbetween phases of concentrated wealth and periods of greater equality: 1870–1929, the age of Rockefeller and Carnegie, when monopolistic concentration ofwealth became notorious; 1947–1975, the “Great Prosperity” of the early postwaryears, when business and the public shared affluence more broadly; and 1980–2010, a return to the bad old days. In the future, Reich says, “broad-basedprosperity” must again become the norm.

Reich suggests a platform of reforms to restore the “basic bargain” andinaugurate a new era in capitalism. These suggested reforms include thefollowing: a reverse income tax that would provide a wage supplement for lowwage workers (this would diminish as wages increase and, when wages rise highenough, would convert into an income tax); a carbon tax calculated on the basis ofthe quantity of carbon dioxide a particular fossil fuel contains; higher marginal taxrates for the wealthy to realign tax rates to match those in place during periods ofhistorical prosperity; a reemployment system (instead of an unemploymentsystem) that would provide wage insurance and income support for re-educationand training; a severance tax on profitable corporations that lay off workers;school vouchers (for public schools) based on family income; college loans linkedto subsequent earnings; Medicare for all; increased supply and free access topublic goods such as parks and recreation, libraries, and public transportation;and campaign finance reform.

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Reich considers free market ideology to have been a trigger of the GreatRecession—and an obstacle to overcoming its effects. He also holds out little hopefor a market-based recovery that requires rebalanced global production andconsumption. He knows that many people think that rebalancing the US-Chinarelationship is the cure for what ails the global economy, but he expressesskepticism. China’s export addiction and the US preference for finance and debtover production make rebalancing an unlikely prospect. And China, too, suffersfrom acute wealth and income disparities and “a disconnect between productionand consumption” (p. 74). To solve its problems, China must get its own house inorder. That will entail reforms akin to those necessary in the US. Neither country, itseems, will solve the other’s problems.

KAELA BYERSUniversity of Kansas, USA

Gerard Dumenil and Dominique Levy, The Crisis of Neoliberalism,Cambridge, MA and London: Harvard University, 2011, 400 pp.

This book divides into two halves, focusing first on the neoliberal historical trendsthat sparked the crisis and then on the more familiar immediate causes of thecrisis. I focus mainly on the historical argument.

The authors see neoliberalism as an aspect of modern capitalism, which theydate to the early 20th century. This capitalism is simultaneously managerial andfinancial: managerial in the sense that corporate ownership and management areseparated, and in the sense that society pivots around a trio of classes, managerialas well as capitalist and “popular”; financial in the sense that the wealthiest classdepends heavily on financial institutions.

Dumenil and Levy say that we are now in the midst of the “second financialhegemony,” and that finance entered its first hegemonic phase in the late 19thcentury (p. 17). They say that each such phase leads to crisis: initially the GreatDepression, and now the Great Recession. In the current phase, marked by therecent explosion and implosion of household debt, Dumenil and Levy see twoconvergent trends in neoliberalism: class hegemony, which entails a compromise“to the Right” between capitalists and managers; and US global hegemony,a trajectory that coupled shrinking domestic accumulation with expanding globaltrade. For Dumenil and Levy, these trends yielded unsustainable US householddebt because, on the one hand, rising debt was made possible by the hegemonicpursuit of ever higher income and ever more complex mechanisms of financialderegulation, and because, simultaneously, debt was required to maintaincapacity utilization despite growing trade deficits and indebtedness.

The authors see “the dizzying quest for income” as another key feature ofneoliberalism, paired with free market ideology (p. 22). They say that the capitalistclass—which, descriptively, they equate to the upper five percent of the incomebracket—has been increasingly unchecked in this wealth quest since the 1980s,with the result that, by the 2000s, the purchasing power of the top one percent hadeclipsed the total purchasing power of the lower 99%.

The authors believe that the hegemony of capitalists and top managers issecured through financialization and globalization. Deregulation encourages

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increasingly ethereal financial mechanisms and overvalued profits, and “de-territorialized” production permits exploitation of disparities between the US andperipheral zones.

Thus neoliberalism facilitated the incredible rise of consumption and fall ofsavings among US households after the 1980s. Interestingly, and in contrast tomost other analysts, the authors insist that both spending and indebtedness (in theform of mortgage loans) have been greatest in the upper quintile of income;indebtedness among lower quintiles was not, in their eyes, a key contributor to thecrisis (pp. 151, 178–180).

Internationally, the authors see two primary shifts: a distributional shift,whereby the productivity of capital shifted from the nonfinancial to the financialsector and income shifted upwards; and a trade shift, whereby trade became amajor engine of the global economy. The net result was a major decline in domesticinvestment in fixed capital, accompanied by a trade deficit and generaldependence on foreign investment. For a time, thanks to the momentum ofprior trends, productivity was kept abreast of consumption and debt. But with thecollapse of US mortgage markets, beginning in earnest in 2007, this could nolonger be sustained, and the ensuing downfall of financial institutions initiated acrisis which spread rapidly beyond the United States as a direct result ofglobalization.

Neoliberalism, courtesy of deregulation and globalization, left the state with adiminished capacity to stabilize the economy. Monetary policy was ineffective.What is needed, they say, is re-regulation, redistribution, and a reform of thefinancial sector to serve nonfinancial accumulation and limit risk-taking and debt.Obviously, this would reverse basic neoliberal tenets. Curiously, Dumenil andLevy find hope in the prospect of a “neomanagerial capitalism” in which themanagerial class would lead the way back to nonfinancial accumulation andinnovation (pp. 326–334).

DANIEL SULLIVANUniversity of Kansas, USA

David McNally, Global Slump: The Economics and Politics of Crisis andResistance, Oakland, CA: PM Press, 2010, 176 pp.

The author characterizes the immediate postwar period (1948–1973) as a stage ofunsustainable growth, characterized by over-accumulation and over-investment.Efficient machinery and intensified labor raised productivity, lowering theabsolute demand for labor. As a result of over-investment and over-production—“over,” that is, relative to income-driven demand, not absolute need—profitssteeply declined. Yet capital was still relatively capable of employing and payingworkers. Nonetheless, to consume the over-supply of newly availablecommodities, workers also increased their reliance upon credit.

Over-accumulation crises have been frequent since the Great Depression (forexample, 1970, 1974, 1982, 1997, 2000–2001, 2007–2009). Capitalists profit fromrising productivity while counting on workers to buy the growing mass ofcommodities. But they pay less as machinery becomes more central to production

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and as the proportional demand for labor-power falls per product. So workersbecome relatively wage-poor and capitalists face sales and profit crunches.

From 1971–1982, the US stock market lost half its value, banks went under,state deficits rose, and layoffs and cutbacks became commonplace. As early as1979, Federal Reserve Board chair Paul Volcker was moved to declare that “theAmerican standard of living must decline.” Reagan’s presidency, beginning in1980, was the start of what McNally calls “Volcker shock” (p. 36).

The neoliberal ascendancy from 1982–2007 witnessed static and falling wagesand benefits, job loss, and “flexible” (precarious or part-time) employment, asproduction went ever higher tech. Free trade agreements (for example, withMexico) allowed factory relocation to the South. While US businesses reap thebenefits, they take no responsibility for the consequencs, which include untowardeffects on other countries’ resources, environmental systems, health care, wages,benefits, and pensions.

Emboldened by growing labor reserves (owing to the global expropriation offarmers) and labor’s declining bargaining power, multinational corporations andtheir neoliberal allies attacked unions and labor parties; a key early victory in thiscampaign was the 1981 defeat of the US air traffic controllers union. From 1990 to2005, General Motors lost just 10% of its sales but downsized fully two-thirds of itsworkforce.

At the cultural level, McNally stresses that dependence on “the market” (thatis, capital’s willingness to hire workers) inculcates an ethic—obedience andindustry at work, competitiveness in the labor market—that renders labor fit forexploitation. As workers are increasingly separated from (and replaced by) meansof production, they are compelled to compete with one another even more bitterly.Anyone who cannot compete is cast out.

McNally also stresses the “decommodification” of money that came aboutwith the collapse of the gold standard in 1971. This allowed money to float freelywithout an anchor in production. As a result governments were tempted to spendtheir way out of crises and capital was tempted to pursue financial rather thanindustrial profits. Governments, which had been restrained by gold supplies,could now simply print money when they needed an economic jump-start. Thisescalated the supply of money and, specifically, of US dollars in global circulation.In business, meanwhile, as profits declined per unit of production capitalistsborrowed to manage risks. Increasingly, workers also borrowed—to make endsmeet.

After 1972, derivatives were used to hedge against the risks of speculativecurrency trading—trading that had mushroomed once money had beendecommodified. Large scale securitization, meanwhile, required new debt totrade. So low-interest subprime mortgages were aggressively offered to clienteleswho previously were unable to attain such loans—low wage workers andminority borrowers, who were thus drawn into the logic of asset inflation andencouraged to risk their pensions and homes to finance debt.

After 2000, subprime mortgage bonds registered a tenfold increase. Relativelystable for many decades, housing prices rose 70% faster than the Consumer PriceIndex from 1995 to 2007. The new computer programs developed to assess riskfailed to foresee the growing credit bubble. In essence, the period from 2000–2007was characterized by the ascendancy of fictitious capital: derivatives, and

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derivatives of derivatives, spiraling in a loop of imaginary prosperity. Soon, low-income Americans were no longer able to manage mortgage payments.

Historically, capital has survived bouts of over-accumulation by destroyingexcess capital—allowing bankrupt firms to fail. But now, credit is extended tobankrupt banks and companies to bolster the economy. Massive bailouts onlyserve to preserve excess capital and thereby prolong the recession. And publicdebt has increased since the start of the crisis in many countries such as the US,Britain, Spain, Ireland, Portugal, Italy, and Greece.

As private debt becomes public debt and neoliberalism shifts from marketidolatry to worship of austerity, workers increasingly bear the brunt and blame forthe global slump. Job loss was the leading cause of over 60% of housingforeclosures by 2009. As social programs are cut, workers are forced to depend onthe market (often vainly) for these services. In sum, they are expected to consumewhile lacking the means to consume.

Debt is now a weapon of global dispossession. Between 1980 and 2002,developing countries paid $4.6 trillion in debt services only to end up 400% asindebted as before (owing $2.4 trillion, up from $560 billion). And dispossessionproceeds apace in China, which also pays record low wages—just 4.9% of thewages paid to their American counterparts. No wonder that over 400 of the 500largest corporations have set up shop in China!

What can be done? McNally wants workers to push for universal health care,public pensions, public housing, progressive income and wealth taxes, publicinfrastructure, and bank nationalization. He hopes to see reductions in workinghours so that workers will have time to pursue sustained organizing incommunities and workplaces and develop new political parties. This could seemlike painfully wishful thinking, but McNally gives credible examples of the kindof movement he envisions: the 2000 upsurge against water privatization inBolivia, the 2006 uprising in Oaxaca, and the general strikes in Guadeloupe andMartinique in 2009. I imagine that he would find similar inspiration in the Arabspring.

RACHEL CRAFTUniversity of Kansas, USA

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