“What the decision-makers at the Fed and Treasury appear not to have learned is the most important lesson of all: that the financial sector has grown too large, too dangerous, and too parasitic.”—William K. Tabb
In the concluding chapter to The Restructuring of Capitalism in Our Time, William K. Tabb examines some of the lessons learned in the wake of the Great Recession and those not learned, at least among those making decisions. Here is an excerpt from the chapter:
What the decision-makers at the Fed and Treasury appear not to have learned is the most important lesson of all: that the financial sector has grown too large, too dangerous, and too parasitic. To prevent new and even more costly financial crises, it needs to be shrunk and restructured to fulfill its central purpose of mediating between savers and those who can use capital to increase the productive capacity of the economy. They did not learn that the unregulated reliance by major financial institutions on the short-term repo markets is too dangerous to be tolerated. Their failures stem from the difficulty of relinquishing the core of mainstream financial economic theories that have reigned for the previous three or four decades.
Some lessons have been learned. For one thing, we are less naïve concerning systemic safety and the benefits of presumed portfolio diversification. It has become clear that if asset holdings are diversified similarly, the system as a whole lacks diversification, and that financial institutions following similar strategies take on similar risk and render the entire system vulnerable. Second, as Minsky leads us to expect, the system is subject to tipping points where there is a sudden discontinuity and reversal in Keynes’s animal spirits. Third, focusing on the importance of financialization to the global neoliberal SSA makes clear the role of credit overextension in causing such crises. Fourth, the complex networks of counterparty exposure are better understood, as is the recognition that reregulation requires a global perspective.
The global financial crisis should force a reassessment of misguided certainties central to neoliberalism: that self-regulation provided by the discipline of the market guarantees efficient allocation of financial resources; that modest capital requirements provide protection against random shocks from outside the financial system; that bankers have every incentive to preserve their institutions and so will not act in ways to endanger them; that government intervention in financial markets, however well intentioned, impedes the innovation and risk taking that promote economic growth; and that mathematical models can accurately predict risk in the face of uncertainty. All these assumptions came to be widely questioned with the Great Recession.
Financial markets turned out to be neither efficient in allocating capital nor self-correcting. As the discussion of the Minsky-Keynes financial approaches in chapter 3 argues, a period of low default rates, strong bank profitability, and seeming stability (or “great moderation”) should not be taken as evidence that all is well. Increased leverage rationalized by the rising value of collateral-backed loans can instead indicate growing financial fragility. Unless regulators understand these things and are willing to take the punch bowl away even though everyone is happily enjoying the party—and to face the dissatisfaction earned by their preemptive actions —we are looking at a future of continuing asset bubbles and financial collapses. Moreover, the impacts of the global financial crisis, despite official optimism, are hardly behind us, as is made clear by continuing painful austerity measures imposed by governments.