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