Epic Recession

I do a weekly drive time radio show in Los Angeles and began concentrating on the economy right after the effective nationalization of Long Term Capital Management (LTCM) in 1998—the year that the so called Asian flu took down economies from Asia to Russia and beyond. Economically, we seemed to be in new territory—profound and unresolved problems in the real economy were papered over by debt, speculation drove profit, and it soon became apparent that the U.S. economy was addicted to bubbles as a growth strategy. I began to interview Keynesian, Minskyan, and Marxist economists for answers, and my featured guests commented with growing alarm as bubbles inflated, deflated, and then burst. As with LTCM in 1998, but on a much larger scale, the 2008 financial meltdown couldn't be contained to the U.S. and leapt national boundaries with electronic speed.

Not surprisingly, I turned to Jack Rasmus to go "beneath the surface" and help the listeners understand the unfolding economic drama. Armed with facts, Rasmus could expose the rosy recovery myths the mainstream business press celebrated, talk about the real numbers of unemployed, and otherwise analyze, make predictions, and theorize the nature of the financial implosion we are living through. Rasmus's articles chronicling the crash and critiquing the measures proposed to deal with it appeared in Z Magazine regularly. Now Rasmus has published his thinking on the biggest economic crisis in the last 80 years.

When the financial institutions began to go bust creating a domino-like run on the banks, economists, journalists, and pundits debated whether this was a recession, depression, or something else. The mainstream press has settled on the name "Great Recession." Many on the left classify this as another Great Depression, the second in 75 years and an indictment of the capitalist system. Jack Rasmus calls it an "Epic Recession" and that is the title of his new book, Epic Recession: Prelude to Global Depression.

Does it make a difference what this global meltdown is called? Yes, and there is substantial disagreement among analysts. But what is crucial is that we get more than either a recitation of events or a grand theoretical overview that pays scant attention to the story as it unraveled, bringing the global economy to the brink of collapse. We live in an age that has little sense of history: the causes and consequences of the crash of 1929 and the decade which followed were easily forgotten in the hubris and euphoria of what some called bubble-economics. Rasmus's book takes us through an historical comparison with epic recessions from the past and shows how government policy can either avert the worst or lead the economy into a Great Depression, step by step. Politics matter in how this economic crisis is handled, as the economy is more and more dependent on government decision making.

Epic Recession is not a simple blow-by-blow catalog of events from the dot.com boom and bust to the stock market and real estate bubbles and busts, followed by weaker attempts to create a commodities and then an oil bubble. Rasmus examines what set off the cascade and then asks questions and analyzes the structural changes in motion.

Rather than just blame the smart set in the banks who devised complex financial instruments that few could understand, Rasmus goes back three decades to look at deliberate actions taken during the Reagan administration that deepened the dependence on debt to maintain consumption. Examining the subsequent structural changes in the economy, and fiscal and governmental policy, Rasmus attempts to theorize what has happened, to explain why the Bush and Obama bailouts are insufficient to prevent the continued downward slide and hemorrhaging of jobs, and to propose an alternative recovery program that can be used as an organizing tool.

Three articles by Rasmus that were published in Z Magazine (February, March, April 2010) outline the major arguments of his book. Most of what has come to pass was predicted accurately in these earlier articles. He wasn't alone. Notwithstanding the Wall Street boosters on much of the cable television business channels, noted economists and financial journalists of the right and left saw this coming—some had a ringside seat—and warned and wrote about what was happening. They weren't in a position to do anything about it.

Analysts on the left tend to see this crisis as another indictment of a failed capitalist system, no longer able to hide its decline with debt driven bubbles. Some see the crisis in criminal terms: fraud, theft, opacity, and corrupt regulators combined to make this meltdown an inevitability, especially once protective walls like Glass-Steagall were removed. Danny Schechter, in the documentary Plunder, sees the crisis as a crime scene, asking for "jail-outs not bail-outs." Max Wolff undercuts conventional wisdom on "Too Big to Fail," saying the real problem is "Too Big to Bail." The steps that States take are crucial to fostering a recovery or, alternatively, leading us into depression. Nomi Prins calls this a banking-led depression. Michael Hudson, watching current European proposals to inflict painful and draconian cuts to the public sector to tame deficits (which he says are coming here next) thinks the world is heading back to a system of debt peonage. Others argue that government and business are taking advantage of the crisis to return to a pre-WWI, or even pre-Civil War economy, before the gains of the progressive, labor, and civil rights movements. Most observers agree that the period ahead looks bleak.

Rasmus recognizes the theoretical debt he owes to three economic thinkers: John Maynard Keynes, whose work is more about how to recover than what produced the crisis; Irving Fischer, who identified debt and deflation as the main mechanisms that drive a downturn into a depression; and Hyman Minsky, the theorist who wrote about the role of speculative investment, showing how the accumulation of debt can destabilize the entire financial system and provoke the kind of financial meltdown we have just experienced. Although Minsky died in 1996, his thinking is so pertinent to the crises of 2007-10 that financial journalists and academics have called it a "Minsky moment."

Rasmus tries to take the work of these theorists further in order to understand the nature of the current crisis and he pledges to do this more fully in subsequent volumes as this crisis unfolds. His analysis is also aided by a thorough grounding in Marxist economic theory. Missing in Keynes, Fischer, and Minsky, he writes, is "...the consideration of the price for labor and its relationship to product and asset pieces: how wage deflation is related to product and asset deflation."

Chronicle Of The Implosion

There were warnings all along about the dangers of highly leveraged subprime mortgages that rapidly spread to credit markets worldwide, creating financial havoc that led to recession in 2007. In March 2008 Bear Stearns collapsed, beginning the global meltdown. The Fed sought to contain the damage through infusions of capital and forced restructuring of failing institutions. Bear Stearns—an investment bank that was one of the shadow institutions heavily involved in the subprime mortgage market—was essentially given to JP Morgan Chase at a fire sale price backed with money from the Fed. The Fed then backed Fannie Mae and Freddie Mac. When Lehman Brothers started to go belly-up the Fed reversed its policy and allowed it to go under (Fed Chief Paulson spoke of "moral hazard"). AIG was partially nationalized and the whole house of cards came down in late summer 2008. More than just the puncture of a bubble, this was a catastrophic breakdown and a full-fledged banking panic ensued. The amount owed on leveraged instruments was now many times the world's GDP, though this isn't a particularly useful measurement. More importantly, was this a crisis of liquidity that infusions of cash could remedy, or was it a crisis of insolvency? There followed an unprecedented financial freeze—credit simply crashed, taking down businesses, contracting the economy, and leading to massive layoffs. It started to look a lot like the early years of the Great Depression of the 1930s.

Reviewing these events, Rasmus concluded that this was not a typical recession, but something entirely new. Finance capital imploded. The connections between Wall Street and Main Street became all too apparent. With banks unwilling to lend, businesses laid off workers and/or went under. But what were the fundamental forces at work that drove and underlay this economic storm?

Going beneath the surface, Rasmus sees the debt, deflation, and default cycles as enabling but not fundamental causes, leading to "consumption fragility" and the collapse of finance that produced the epic recession. It is epic, according to Rasmus, because the contraction of the economy is a hybrid with characteristics of both a recession and a depression. What are the forces driving this contraction? Rasmus's interrogation involves a thorough historical and theoretical investigation to arrive at an understanding. He is not interested in what he calls "labeling in lieu of analysis" or the kind of conceptual models or even superficial historical parallels that may dazzle but fail to explain and fall short of proposing solutions. Rasmus reviews the analyses of economists (academic and non-academic) as well as those of financial journalists, raising essential questions they fail to address. He notes that sophisticated terminology is no substitute for theoretical analysis, but theoretical models abstracted from the facts are equally unhelpful.

The epic recession did not begin with the housing bubble. To get at the underlying cause of the present crisis Rasmus goes back to the Reagan-era deregulation and tax cuts. The shift to finance capital that began in the 1970s came on the heels of the radicalizing social movements of the 1960s and the rising expectations of the working population for a higher standard of living. The response was an employer offensive to roll back the historic rise in American workers' real wages through attacking unions and shipping production to low wage economies. It marked the switch to finance from industry, the transfer of wealth upwards, and the expansion of debt-driven finance for household and state budgets alike.

More than deregulation and tax cuts, Reagan began the frontal assault on unions. When the air traffic controllers went on strike in 1981, Reagan ordered them back to work. They continued the strike and he fired them, destroying their union (PATCO). This was by implication an attack on the organized working class and Reagan's success signaled the beginning of the assault on living standards (stagnant wage growth) and the redistribution of wealth upwards from workers to investors and corporations. Not surprisingly, it was also in 1980 that working and middle class households began to resort to debt to maintain living standards. It is this income redistribution that allowed the creation of what Rasmus calls the "money parade," a global glut of capital sloshing around looking for profitable investment.

The shift from manufacturing to speculative investment brought with it new forms of banking to get around regulators (the shadow banking industry), as well as new financial instruments that serve as conduits for the money parade, creating debt-financed consumption in place of the old fashioned generation of income and jobs through physical production of assets. In common parlance the shift was from making goods (manufacturing went to countries with cheap labor) to making bets on capital: the term casino capitalism is a fair description.

Epic Recessions

Defining the 2007-10 crisis as an epic recession and not a depression leads Rasmus to trace its origins and discern its dynamic, suggesting policy approaches to deal with it and warning about the consequences of policy failure that could well transform this epic recession into a bona fide depression. He looks at two previous epic recessions, which, because of their similarities to the present, become important to understand—1907-1914 was an epic recession that stagnated, while the 1929-31 crisis evolved from an epic recession into a bona fide depression.

The banks were bailed out in the epic recession of 1907-14, but not the real economy. Sound familiar? The financial sector was stabilized, but credit contracted, production declined, businesses shuttered, unemployment soared, asset prices fell (deflation), and an extended period of stagnation ensued. There were brief and shallow recoveries along the way, but the end only came with the onset of World War I in 1914.

The "epic recession" following the financial crash of 1929 until 1931 was worse and there was no bailout of the banks or of the real economy. The result was an economic collapse that descended into global depression. The effects of government fiscal and monetary policy determined in each case the economic result. The chapters on the 1929-31 epic recession and that of 2007-10 are gripping, as we see step by step that the cyclical downturns can be made much worse by bad fiscal public policy, something we are about to see globally now. When Rasmus catalogs the 1980s Savings & Loan crisis and Reagan's push for deregulation, it's a stomach wrenching read, but that crisis did not go global nor beyond the S&L industry.

Policy Muddle?

The world economy is ever more dependent on government decision making, so policy is all important. Rasmus correctly concentrates on the insufficiencies of both the Bush and Obama injections of capital to deal with the crisis. While Bush is a firm believer in market, not government solutions, his economic team pressed him to bail out the financial institutions with an initial $700 billion injection of funds and to set up TARP (Troubled Assets Relief Program). More than four trillion has been thrown at the problem with another eight trillion dollars (or so) committed for future bailouts. As Rasmus notes, this was the monetarist solution—"a liquidity solution to an insolvency crisis." The Obama/Geithner team steadfastly refused to nationalize the banks, while it could be said that the Bush/Paulson bailouts amount to a nationalization of banking bankruptcy.

Obama's program, as Rasmus notes, is a short term holding operation for normal recessions, not epic ones. It relies on market solutions, doesn't address the collapse of consumption, and favors global markets over domestic ones. The amount of stimulus injected was inadequate to fight deflationary pressures and hemorrhaging jobs, but at the same time talk emerged about rising deficits and fighting inflation down the road. The discourse changed when China balked at buying more U.S. securities to finance U.S. deficits. The irony of relying on semi-Stalinist China to save capitalism is a rather rich one to contemplate.

Now that the financial sector has been bailed out, it is back to business as usual. Companies are sitting on mountains of cash, yet they continue to slash payrolls and cut expenditures. Main Street just gets worse and worse with chronic high unemployment and underemployment, dire cuts to education and health (in California one in four is without health insurance), and more foreclosures and bankruptcies to come. State and local governments are in desperate need of bailouts and their balanced budget requirements undercut or cancel out Obama's economic stimulus. Everywhere individuals, states, and nations are drowning in unsustainable debt. The crisis is global and the picture is grim from Iceland to Ireland, the Baltics to the Balkans, Chile to California.

Wall Street has poured hundreds of millions on lobbying Congress to try to prevent any real regulation that would curb their profitable practices. Regulation is being restored, but with plenty of loopholes. Congress can't legislate what needs to be done—it is constrained by party polarization, ideological intransigence, and buckets of money from financial lobbyists. The somewhat veiled relationship between capital and power has lost its cover. Congress is openly seen as a wholly-owned subsidiary of the titans of finance, industry, real estate (FIRE), and pharma. Capitalism may be losing its luster (confirmed by a recent Rasmussen poll), but the deficit hawks are gaining ground, blaming workers and crying for pain.

Western Europe has taken the decision to cut living standards drastically (Britain's Cameron has warned of pain for decades to come) and the UK and Germany are in the lead in attacking living standards. Indeed, European policymakers make President Obama's stimulus policy look reasonable by comparison. Since the deficit hawks in the U.S. are not in control, the U.S. stands out as the only developed country with any sense, even if the Obama program is insufficient for recovery. Nonetheless, the calls for deficit reduction are gaining in the U.S. and the states are already forced into draconian measures.

Keynesian economists like Paul Krugman warn that economic policy is now set on a disaster course of crippling cuts that will kill any possibility of recovery. But why are governments choosing policies that will, as Rasmus warns, take this epic recession into a full blown global depression? Why don't governments simply reflate to spur growth rather than cutting back?

Put another way, what would it take to force governments to adopt the policies that would benefit the majority of the population? There would have to be a vibrant labor movement that could effectively challenge the cuts to come. It would require the kind of popular mobilization and sustained fight-back that Greek workers began to mount to resist austerity. Unfortunately, that doesn't exist today. Greek workers called for a default and no cuts to their living standards. They have been temporarily bailed out, but draconian cuts are part of the package.

Economic policy has veered from supports that are too little and not given a chance to work, to deficit reduction guaranteed to undermine recovery. There appears to be no satisfactory exit solution from this crisis that preserves present power relationships. To reflate the economy and raise living standards depends on the confidence that the population represents no threat. Technically, it doesn't, but capital is still smarting from the revolts after 1968. The switch to finance after the 1970s appeared to be the solution to the impasse, shifting manufacturing to low wage economies, including those in former Stalinist states where workers would be reliably docile. Now there seems to be no strategy, and Greece notwithstanding, no real left either. Increasingly, the policy appears to be one of rollback, to strip away the gains workers have won over the last 60-70 years that cut into profits. The logic that governments are following is to go back to some form of an imagined pristine capitalism before there was any challenge to the system. Even so, the current offensive proposed in Europe seems suicidal.

Alternative Solution For Recovery

Epic Recession is written in the language of political economy and economic history; it is technical, analytical, political, and practical. The material is well organized with clear explanations and Rasmus provides a very useful glossary at the end that describes his key concepts. After a review and critique of the Bush and Obama recovery efforts through the policies enacted by Greenspan and Bernanke, Paulson and Geithner, Rasmus draws up his own practical solutions to the crisis in a 28-point recovery program that is being taken up by labor councils around the country.

The alternative recovery program is one that involves a radical economic restructuring in the interests of the vast majority: massive job creation programs, nationalization of the mortgage and consumer credit markets, new banking and tax structures tax, and a long-term redistribution of general income with quality and equitable healthcare delivery and retirement systems.

The beauty of the alternative program for recovery that Rasmus proposes is that it provides a concrete basis to fight the offensive on living standards underway. He insists it represents the only way to prevent the onset of a classical depression. The program addresses both the root causes of the crisis, but also contains solutions that are reasonable and realizable. His solutions threaten the position of capital and would be fought tooth and nail. This radical restructuring of the economy challenges capitalism without overthrowing it, yet cannot be undertaken without a militant labor movement that demands and wins jobs, healthcare, homes, education, and decent retirement pensions. Had his program been in place right away, the foreclosures would have been staunched and the credit market stabilized.

Among the proposals in the alternative recovery program are mortgage rates would be reset (all loans, not just those in trouble) to the Fed's 30 year bond rate plus .5 percent, so an effective rate of 3.5 percent. Mortgage principle would also be reset to the levels before the artificially inflated prices of 2003-06. There would be a moratorium on all foreclosures both residential and commercial.

The second set of proposals would provide for real job retention and creation, pumping adequate and targeted stimulus (infrastructure jobs, manufacturing and public sector job retention and creation, plus adequate safety net funding.) The program also includes measures to ensure it is adequately financed through restructuring the tax system. Proposed measures would assure the finance sector as well as begin to redistribute income; restructure retirement tax so that a surplus is restored to the social security system after 2017; and provide funding for a single payer healthcare delivery system. His tax measures would reverse regressive taxes and recover capital from offshore havens, create a financial transactions tax, and other progressive measures. These measures would gradually reverse the income inequalities of the last three decades.

To implement the Rasmus alternate recovery program would require confidence, mobilization, and organization from the very sectors that have been adversely affected for decades. It is precisely that kind of mobilization that government policy seeks to avoid, even to the point of risking a depression to effectively discipline labor (even super-exploited low wage immigrant workers). That is class warfare on steroids, coming from the wrong class.

Nowhere does Rasmus call for an end to capitalism or sound the call to mount the barricades. However, his alternative recovery program does address the real problems in the economy and does so through concrete proposals. It has the added value of being an organizing tool that lifts the population—and, as such, challenges the status quo with its property and wealth arrangements. Chuck Mack, the International Vice-President of the Teamsters, writes (on the back cover) that Epic Recession provides a rallying point for trade unionists and concerned citizens who want to ensure that any recovery is felt further than Wall Street. Rasmus calls for bailouts for workers not bankers.