The Financial Crisis,The REAL Economy,
and Our Jobs:
What Happened? Why?And What Can We Do About It?
Jim Stanford
Economist, CAW
Kingston, February 2009
A Moment to ChallengeOld Ways of Thinking
• People want to understand what is happening
• People are hungry for an alternative vision
• Need to start at the basics:– Demystify the economy– Demystify this crisis– Demystify our goals, demands
• Economic literacy training should be a priority for unions, community groups
MY GOAL:To Demystify &
Reclaim Economics…www.economicsforeveryo
ne.ca• Excerpts• Lesson plans• Resources• Glossary• Blog• Feedback
Where Did This CrisisCome From, Anyway?
Where Did This CrisisCome From, Anyway?
Where Did This CrisisCome From, Anyway?
Where Did This CrisisCome From, Anyway?
Where Did This CrisisCome From, Anyway?
“Repricing
of risk”
“Betterratingagencies”“More transparency”
“Get the incentives right”“National securities regulator”
Where Did This CrisisCome From, Anyway?
What is the Economy?
W O R K
Demystifying the Crisis• The economy is the sum total of the
work we perform to meet human needs
• We are just as capable of doing that work today as we were last year– In fact, more capable (technology, skills)
• There is no material reason for this crisis!
• Focus attention on real work, production– Cut through other mumbo-jumbo– Demand our right to work & produce
The “Real” Economyand the “Paper”
Economy
The Real Economyand the Paper
Economy• Real Economy: the work we all do to
meet our material needs & wants• Paper Economy: financial sector; plays
a different, unique role– Not directly productive– Trades in paper assets
• Theory: Paper economy facilitates, lubricates real investment & production
• Practice: For every $1 of productive lending & finance, the paper economy spends $100 on speculation (buying/selling existing assets)
Off the Rails• Paper economy is supposed to serve
the real economy• In practice, paper economy ends up
serving itself• Fundamental sources of the
problem:1. Profit motive in private credit2. Speculative impulse3. Deregulation / leveraging / globalization
• Paper economy exhibits a repeating, predictable cycle of crisis
1. Profit Motive in Finance• Credit is essential to our economy
– We’ve “outsourced” the job to banks– They literally have a license to
“print money” (ie. create credit)• They create credit in order to maximize
their own profit– Too much some times– Too little some times (bankers’ cycle)
• Must hold banking system to account to meet society’s need for steady credit– And if need be, step in to do it ourselves– We can “print money,” too!
2. Speculation vs. Production
• Productive Profit:– Invest, hire workers, organize production,
sell product for more than it cost, keep profit
– Results in production and employment
• Speculative Profit:– Buy an asset, sell it for more than you paid
for it (“buy low, sell high”)– Results in no production– Irrelevant to production at best, diverts
attention and disrupts production at worst
Speculative Bubbles• Something gets positive momentum
– Could be anything– Helps that the story is plausible
• Greed for profit pulls in more speculators– And that drives up the price– Self-fulfilling prophecy
• Mass psychology, competition, leveraging push price up far beyond where it deserved to be
• No “real” underpinnings, price inevitably falls– Only question is exactly when and why
• Then speculators sell because they expect the price to fall: self-fulfilling again collapse
3. Making Matters Worse
• Deregulation: Private financiers given more leeway to create, sell debt
• Securitization: Conversion of debt into tradeable assets breaks link between lender and borrower
– Complex derivatives that even the designers didn’t understand
– Massive leveraging (80:1) to expand bets
• Globalization: Capital mobility, global competition exported the crisis quickly around the world
Wha’ Happened?
• Speculative bubble (again):– Centred in U.S. housing
• Aggressive, irresponsible lending– U.S. mortgage practices
• Securitization, globalization of assets• More aggressive leveraging• U.S. housing prices began falling in 2006• Cascading losses, “de-leveraging”• Impact on wealth, confidence, lending,
investment, spending REAL RECESSION
Been There, Done That, Got the T-Shirt
• 1978-1981: Neoliberalism is born• Mid-1980s: U.S. savings and loans crisis• 1994: Peso crisis• 1997-98: Asian financial crisis / Russian
bond crisis• 2000-01: Internet stock market bubble
collapse• 2007-08: U.S. subprime meltdownThere’s nothing fundamentally unique about
this crisis. It’s a pattern that will repeat itself.
A Bigger Failure• Crisis dramatically refutes many
key components of the neoliberal vision
– Monetary / financial policy– Deregulation– Fiscal policy– Globalization– Real capital accumulation
“Canada’s economicfundamentals arein great shape.”
The “Fundamentals”
Capitalism’s Investment Slowdown
(p.149)The Investment Slowdown
0%
2%
4%
6%
8%
10%
12%
14%
16%
1970 1980 1990 2000 2006
Net
Cap
ital
For
mat
ion
(% G
DP)
G-7 Economies, 1970-2006
Unweighted average.
Canada’s Productivity Slowdown
60
70
80
90
100
47 1950 1960 1970 1980 1990 2000 2006
Can
ad
ian
Pro
du
cti
vit
y a
s %
U.S
.
Source: CSLS.
Canada’s StagnantLiving Standards
0
5
10
15
20
25
1950 1960 1970 1980 1990 2000 2006
Ho
url
y W
age
($20
00)
$8.50
$20.75$20.25
Digging Our Way Out:What’s Needed?
• Re-regulate finance• Socialize credit creation• Address the real slowdown
– We want REAL stimulus!
• Protect key industries & firms• Protect pensions• In future, priorize the real economy
– We need a NEW GROWTH MODEL– More emphasis on meeting our actual human
needs
• Workers: Why should we bear the cost? We didn’t create this problem!
How Ordinary PeopleCan ReclaimEconomics…
…and Make it WorkFOR Us
Instead ofAGAINST Us!
www.economicsforeveryone.ca