The surprising insights of John Maynard Keynes
Title: Keynes: The Return of the Master
Author: Robert Skidelsky
Publisher: Public Affairs, 2009
ISBN: 978-1586488277, 240 pages
By Rolf Dobelli, Chairman, getAbstract
The modern recession casts doubt on many long-held economic beliefs, in particular, the validity of free markets. Unable to agree on causes or remedies, economists look on as politicians try various kinds of stimulus spending and corporate bailouts.
Pundits call forth the ghost of John Maynard Keynes, often incorrectly labeled as a has-been socialist and tax-and-spend liberal. But Robert Skidelsky, Keynes' biographer and a noted expert on the economist and his work, reveals how Keynes' pre-World War II experiences shaped an economic worldview that still holds lessons for the 21st century.
This scholarly book assumes that the reader has more than a nodding acquaintance with modern economic theory and philosophy, yet Skidelsky also injects literary references and sparks of wit that enliven the sometimes-challenging text. getAbstract suggests this abbreviated, but solid, look at Keynes to students of economic and political history, and to anyone who is trying to make sense of how the 2008 crisis happened and how to move forward.
How do we get out of here?
Most economists have explanations for how the 2008 world economic crisis happened, but opinions differ on the cause and the remedy. Many are looking to the past and to the ideas of economist John Maynard Keynes (1883-1946), who is known widely but superficially as a proponent of stimulus funding and government involvement in business. However, that explanation glosses over the complexities of his philosophy.
Indeed, his experiences during the seminal economic events of his lifetime -- World War I, the Great Depression and World War II -- inspired him to create a new way of economic thinking. The harmonious functioning of capitalism became his goal, which included calling upon the state's tempering hand to tame the system's excesses. Some arguments as to how free markets around the world broke down beginning in 2007 and continuing into 2008 include:
• "The collapse of the housing bubble" - By 2005 the rise in U.S. home prices accounted for 50% of U.S. gross domestic product (GDP) growth. Government entities expanded lending, and commercial lenders gave mortgages to subprime debtors. As housing prices grew, people borrowed against equity. Rising interest deflated the balloon, and defaulted subprime loans became "a bullet that fatally wounded the banks."
• "Financial innovation" - The securitization boom resulted from deregulation. Rolling back the Glass-Steagall Act let commercial banks function like investment banks. The government chose not to legislate to control the vagaries of credit-default swaps, and the Securities and Exchange Commission (SEC) tripled bank leverage ratios. In 2002 Warren Buffett forecast that derivatives would become "financial weapons of mass destruction."
• "The banking crisis" - With bank assets under siege and liquidity scarce, a global banking panic ensued. In 2007, Northern Rock bank suffered the first run on a British bank in more than 100 years. Bear Stearns' and Lehman Brothers' collapse, along with AIG's trauma, called for a fast response. The $700 billion Troubled Asset Relief Program bailout was only one of many huge spending programs in Europe and the U.S.
• The "collapse of commodity prices" - Speculation and growing demand in developing nations raised commodity prices to new highs. But the economic crisis suddenly washed away demand, dropping prices dramatically and endangering export-led countries.
• The "collapse of the stock markets" - The banking and commodities crashes combined to sink the stock markets worldwide. Most severely affected were Russia's RTS Index, which dropped by 80%, and Japan's Nikkei, which fell by 42%.
• The "collapse of the real economy" - Before the subprime crisis, people held wealth largely on paper, in their property deeds and stock certificates. When perceived wealth dropped, consumption slowed, businesses laid off staffers and recession became a reality.
The underlying cause of these breakdowns is the failure of free market thinking, stemming from the 1980s era of President Ronald Reagan and Prime Minister Margaret Thatcher, which fueled a return to the belief in the "invisible hand" that theoretically guides free markets...
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Posted by: canadianobserver1 | July 31, 2010 3:21 PM
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