This is the message of Sean Collins’ excellent new essay, The ‘credit crunch’: another Great Depression? where he looks at the difference between the slump in the 1930s and the recession today. As he quite rightly points out, every recession is different and therefore demands a different approach in terms of a resolution. Collins lists the following aspects of this recession which mark it out from the 30s:
1) As the post-war boom ended, the major economies encountered significant problems of stagnant profitability in productive industries. These problems were not fundamentally addressed by the recessions of the 1970s, 1980s or the early 1990s, and remain to this day. Extreme examples of the holdover of unprofitable businesses are the American car manufacturers GM and Chrysler.
2) As the economy grows, so too will the credit and the financial sphere. However, a trend in the major economies is for this sphere to grow at a faster pace than the real economy. Especially noticeable since the 1987 stock market crash was the trend for stagnancy in production leading to surplus capital, which found outlets in an even more extensive expansion of credit and a greater development of (and reliance on) finance as an income-generating area. This development explains the stock market and housing bubbles, as well as the proliferation of financial instruments.
3) A turning point was the end of the Cold War in the late 1980s, which, among other things, lessened international tensions and weakened labour movements. In the global arena, we see greater export of capital and goods from the developed countries, and the expansion of production in emerging markets. A significant development is the opening up of new points of production in China and other parts of Asia.
4) The easing of tensions following the end of the Cold War also gave the market system much more room to manoeuvre, without the need for destructive, cleansing recessions. This allowed capitalism to survive without traditional boom-bust cycles, otherwise known as the ‘Great Moderation’ and ‘SAD’ (stable, anaemic, durable) period. Many have welcomed that recessions became milder and less frequent, but the downside was that growth was muted. Another self-imposed constraint in this period are ‘green’ measures that restrict expansion.
5) The wide expansion of credit, including debt-fuelled consumption, was not sustainable. No one could anticipate when the limit of the credit system would be reached. But now we know: it was precipitated by the US sub-prime crisis, with domino effects across finance and into other sectors.
6) The problems in the productive sphere in the major economies continue today (and arguably more in the US and UK than in Germany and Japan). The ‘deleveraging’ effect from the credit crisis has not fully played out, and is likely to be destructive. In particular, the fallout from this severe asset-based recession will now curb both key drivers of previous 10 to 15 years of economic activity: bank lending/financial activity and consumer spending, leaving a question mark over future sources of growth.
Read this alongside Gavin Poynter’s analysis of the UK economy and you get a very compelling case for the specificities of the problems we face.
At The Battle for the Economy conference in London on May 16 (2009) we will be attempting to tackle some of the issues raised by Sean and Gavin. Lazy comparisons with the past are out, as are false hopes that the underlying problems will just go away. Our politicians are ducking many of the central issues and at best they are offering us a future of austerity – it will be a great discussion so buy your tickets now.