Monday, May 16, 2011

*Capitalizing on Crisis*

. Monday, May 16, 2011

I'm going to try to stay with OrgTheory's book forum on Greta Krippner's book. This appears to be an article version. Krippner has been doing research on this since at least 2005. Here's the author's book summary:

In the context of the current economic crisis, the extent to which the U.S. economy has become dependent on financial activities has been made abundantly clear. The conventional explanation for this development – a process I refer to as “financialization” – is that the U.S. economy has been in the grip of a speculative mania that has swept firms and households alike into its vortex. In my book, I take a somewhat different perspective, suggesting that recent developments in U.S. financial markets rest on a broader transformation of the U.S. economy, with deeper historical roots, than a focus on speculative bubbles allows. This is not to deny that a financial bubble developed in the U.S. economy in the 1990s and 2000s, and that it has shaped (or more aptly, distorted) patterns of accumulation in the U.S. economy. But I argue that an examination of processes internal to financial markets is incomplete as an account of the turn to finance, and that these processes must be understood in the context of wider shifts in the political, economic, and social environment. In this regard, my central thesis is that our own era of free-flowing credit, financial manias and panics is the result of a state-organized response to the economic crisis of the late 1960s and 1970s. More specifically, I argue that state policies that promoted the turn to finance allowed the state to (at least temporarily) avoid the economic, social, and political difficulties that observers at the time believed would soon overwhelm policymakers. Thus, the creation of a policy environment conducive to financialization was not a deliberate outcome sought by policymakers but rather an inadvertent result of the state’s attempts to solve other problems.

Bold added. The book is sociology, but the interesting thing to me is how much the central argument dovetails with research in other disciplines. For instance, Cowen's "Great Stagnation" hypothesis, Rajan's political economy of credit access as inequality palliative, the divergence between income and consumption inequality (pre-crisis at least) that was partially due to increased credit access. Herman Schwartz has a book chapter in Konings' Beyond the Subprime Headlines. Here's one selection:

Put simply, America’s ability to securitize large quantities of mortgage debt and sell it into global markets enabled the US economy to temporarily escape the normal economic constraints, to grow faster than its peer competitors, and to expand its firms’ control over global production chains. These three conditions restored US global economic power after the troubling 1970s and 1980s.

His book expounds on the argument. All of these narratives complement the Blyth/Taleb argument that moderating risk by shifting it into the tail compounds crisis in the end. It also is reconcilable with various accounts of how the "Greenspan put" interacted with loose monetary policy in bad ways.

The story that appears to be emerging is one in which policy makers try to mitigate the effects of a stagnating economy, in which real income growth is low and unequally distributed, by encouraging improved standards of living through financialization. In essence, the government encourages the levering up of the economy, and financiers are happy to go along because it means big profits for them. The Greenspan put gives them some security, too. Citizens may have preferred broad real wage growth, but access to cheap credit provides opportunities for increased standards of living in the absence of that growth.

As I said, I haven't read the book yet, but I'm looking forward to seeing how well it pulls strands like the above together.


commoncents said...
This comment has been removed by a blog administrator.
Dan Nexon said...

Looks like you got some spam.

Anyway, as I've alluded to before I'm reasonably convinced that easy credit compensated for stagnating wages. What I'm dubious about are some of the implied causal mechanisms. Looks like Krippner might resolve some of those issues.

Dan Nexon said...

Or maybe not. Sounds not only like some of the assumptions of the book are unlikely to move me, but that we'll wind up with another variant of functionalist arguments for this process.

Kindred Winecoff said...

Yeah, I'm interested in mechanisms too, which is what has bothered me about most explanations of the crisis. Particularly the "bankers/Republicans are bad" arguments. Perhaps... when has that *not* been true. And deregulatory stories don't map all that well either.

Thomas is building research on the macro mechanisms. Our joint paper is on structural factors. But there's an interest group competition story still to be told, that includes firms, individuals, and politicians. I think the functionalist explanations lay some of the groundwork for that, but obviously they don't get us all the way to where we want to go.

Still waiting for my copy of the book, so who knows whether it'll fill some of those gaps.

*Capitalizing on Crisis*




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