Abstract
Jack Rasmus’s book is not just another chronological account of the current economic crisis or a simplistic denunciation of financial ‘animal spirits’. Nor does it replicate superficial discourses of business analysts and the financial press, which put all the blame for the crisis on abusive bank practices and the violation of market mechanisms. Instead, in a counterpoint to neoliberal discourse and financial jargon, Rasmus’s book offers readers an illuminating and developed theoretical framework that adds to our understanding of specific contours of the current crisis, and its difference from earlier crisis experiences.
Dissatisfied with atheoretical explanations of the crisis attached to quantitative parameters and alphabetical (L, U, V, W) metaphors, Rasmus introduces a new concept of ‘epic recession’. This describes an unstable economic conjuncture in which financial and real economic cycles overlap and feed back upon each other, producing strong deflationary and default tendencies. In contrast to normal recessions produced by certain external shocks, epic recessions are precipitated by prolonged processes of the building-up of systemic financial and consumption fragility through rising income inequality, speculation, consumption debt and financial leveraging. Unlike normal recessions that quickly reverse into a new upward economic cycle, the trajectory of the economy in an epic recession is undetermined: it may lead either to depression, or to stagnation. In developing his concept, Rasmus constantly links the current crisis back to the crisis experience of the Great Depression, the 1920-1921 ‘false’ depression, and the recessions of 1966, 1973-1975, 1981-1982 and 1987-1990 in the USA, tracing similarities and differences between them. In an interesting theoretical move in the introductory chapter, Rasmus compares the 2007-2010 ‘epic recession’ to the 1929-1931 ‘epic’ stage of the Great Depression, leaving readers curious as to whether the current crisis will transform into depression or stagnation. The indeterminacy of the present historical moment adds a kind of cinematographic suspense to the gradual exposition of Rasmus’s concept.
The theoretical development of the ‘epic recession’ concept in the first chapter of the book builds on a clear distinction between its quantitative, qualitative and dynamic characteristics and their comparison with normal recessions. The chosen theoretical framework seems appropriate, for it allows for a gradual movement from static values to complex economic and social relationships. In quantitative terms, epic recessions, as Rasmus clearly demonstrates and supports with statistics, are marked by deeper economic decline, longer duration, larger degrees of debt, deflation and defaults.
Qualitative analysis of epic recessions already incorporates complex phenomena and processes that explain quantitative parameters. The cornerstone of Rasmus’s analysis in this section builds on the idea that epic recessions are provoked by a gradual buildup of various forms of economic fragility that ultimately burst at a certain bifurcation point. Here, Rasmus creatively extends Minskian analysis of financial fragility to incorporate the often neglected concept of consumer fragility, to which Rasmus attributes a greater role in producing financial instability. Rasmus argues that consumer fragility lies at the intersection of such economic trends as falling real incomes of workers, slowdown of fixed investment, shareholder value revolution and the growing role of financial practices in wealth generation. Aside from this, Rasmus fills the void in the analysis of the role of financial innovation, off-balance activities, hedge, pension and mutual funds in leading to ‘epic’ economic events. In his study of speculative investment, he demonstrates exceptional analytical skills in deducing the conclusion that fixed investment shrinks due to the cash flow shift to speculation. He also brilliantly proves that securitisation and layering of financial assets in order to create synthetic instruments are always conducive to the acceleration of leveraging and, hence, debt.
In his research on the dynamics of epic recessions, Rasmus introduces still deeper underlying causes of the present crisis, and persuasively correlates mutual influences of various qualitative phenomena. Financial fragility, according to Rasmus, is produced by a global liquidity explosion, the latter being caused by Federal global injections of dollars, open market operations, the global growth of
Rasmus’s presentation of dynamic forces at work in epic recessions is equally precise and insightful. Readers may appreciate the stage-by-stage exposition of how financial speculation, at first based on real investment, gradually ‘crowds it out’ to become unlinked from fundamental economic variables. Following Minsky in his analysis of financial instability, Rasmus sees this process as endogenous to the system, rather than being caused by miscalculations and wrong policies. The same may be said about Rasmus’s analysis of the debt-deflation-default nexus built on feedback mechanisms of rising deflation in asset, wage and product prices, which fuels even more debts through the ‘Fisher effect’, which generates massive defaults.
The theoretical validity of the conceptual framework is shown by Rasmus in the empirical analysis of 19th- and 20th-century crises, as well as in in-depth analysis of the 2007-2010 ‘epic recession’. Liquidity explosion, the rise of speculation in railroad bonds and the stock market, and the growth of unregulated shadow institutions were the main drivers of rising financial fragility and subsequent financial fractures in the 1837-1843, 1873-1878 and 1907-1914 depressions. During the 1857-1859 crisis, the path to depression was averted by the increase of spending in the American Civil War. Rich empirical and statistical investigations are made by Rasmus in his analysis of the 1907-1914 stagnation and the 1929-1940 Great Depression.
The 1907 ‘epic recession’ stage led to a prolonged period of stagnation. Although the government response managed to partially slow deflation, debt and default tendencies, the debt stock was not fully erased, and real investment stagnated. Rasmus finds striking similarities between the initial stages of the 1907-1914 crisis and the 2007-2010 ‘epic recession’, both characterised by the fracture of shadow banking institutions and the spread of contagion to commercial banks. The analysis of the Great Depression is equally deep and multifaceted. Rasmus demonstrates that it evolved in five stages, each of which had its specific dynamics. During the 1929-1931 ‘epic’ stage, the deterioration of debt and default was largely stimulated by a false ‘liquidationist’ approach favoured by the President Hoover administration, and premised on the assumption that the economy would recover after deflation bottomed out. Such policies provoked the continuation of financial fractures in 1930, 1931, 1932 and 1933. Rasmus is critical of Roosevelt’s policies, and the New Deal in particular, vividly demonstrating that they were palliative in restoring real investment and preventing defaults. The false conviction that the revival of banks’ stability in 1937 signified the beginning of recovery led the Roosevelt administration to the abandonment of stimulation programmes. This mistake provoked a new relapse in the 1937-1938 period, when the economy nearly returned to the hardest depression times. In general, Rasmus’s analysis of the Great Depression is a strong statement against the limitations of solely monetarist recipes in stimulating economic recovery.
In the chapter that follows, Rasmus addresses the recent 2007-2010 ‘epic recession’. Unlike most business analysts and commentators, who explain the origins of this crisis in terms of wrong government policies and unfair banking practices, Rasmus argues that it was precipitated by a long process of financial deregulation since the 1980s. The growth of shadow banking, speculative investment and the liquidity explosion in 1990s substantially contributed to the growth of financial fragility. According to Rasmus, the speculation in housing markets began ca. 1997, not in 2003, when the Federal Reserve System lowered interest rates to 1 per cent. It was the global money parade and the liquidity explosion uncontrolled by the state that led to the spread of financial fragility. Rasmus asserts that the current ‘epic recession’ has probably led to stagnation, rightly pointing to the fact that the 2009 recovery was unstable and short. Still, the author reserves the possibility that current stagnation can transform into bona fide depression, especially if ruling elites choose to compromise domestic recovery for maintaining dollar stability, foreign investments and, hence, global profits. The evolution of the current crisis will thus depend to a significant extent on the ability of incumbent administrations to devise effective recovery policies. At the present moment, the Federal Reserve System and the US Department of Treasury largely focused on monetarist easing, ignoring the roots of the crisis in consumption fragility produced by rising income inequality and the stagnation of real investment. The response of the Obama administration was largely conducive to a stagnation scenario, because it was primarily centred on bailing out the banking system and preventing financial panics and defaults.
Rasmus ends his book with a combination of Keynesian recipes to stimulate a full-fledged recovery. They address issues as diverse as reducing consumption and financial fragility, re-regulation of financial speculation and the promotion of the long-term equalisation of incomes. To tackle consumption fragility, Rasmus proposes to fix mortgage rates, reset mortgage principals to average housing prices in 2002-2006 to reduce the impact of the speculative housing bubble, introduce a moratorium on mortgage foreclosures, etc. The Keynesian approach to economic stimulus is reflected in Rasmus’s proposals to initiate state-sponsored job creation in infrastructure, public and growth sectors. As far as the financial sector is concerned, Rasmus proposes measures aimed at discouraging speculation. Among others, they include the taxation of financial operations, capital gains and the introduction of a surcharge on excess profits. The most radical, but promising, recipe proposed by Rasmus is the nationalisation of consumer credit to prevent subprime lending and securitisation. Although Rasmus’s recipes may be deemed by radical political economists to be palliative measures that, if implemented, would be soon be nullified again by neoliberal reaction, their depth and consistency within the theoretical edifice developed by Rasmus make them truly revolutionary compared to now dominant responses to the crisis. In sum, theoretical depth, empirical proof and the creativity of practical proposals to stimulate recovery all make Rasmus’s book an invaluable resource for understanding the trajectories of crisis within the modern capitalist system.