On January 9, I kicked off weekly meetings for a reading group of five students from various colleges of Mumbai University. The task before the group is to closely read four or five texts on various aspects of the 2008 Global Financial Crisis, and lessons therein for policymakers and for professional and academic economists. The students are assigned specific chapters from a text each week, and then the group meets at the end of the week (on Saturdays) to discuss those chapters.
So far, the reading group has worked through two texts, Fault Lines by Raghuram Rajan and Fixing Global Finance by Martin Wolf.
In Fault Lines (2010), Rajan provides a sweeping account of the origins and consequences of the 2008 GFC. He identifies various forces at work through the 1990s and 2000s that created “fault lines” whose meeting and interaction precipitated the 2008 GFC. Some of these forces were homegrown in America (the rise of credit-financed home ownership, the proliferation of various kinds of derivative markets, etc.) while others originated elsewhere (the growth strategies of East Asian countries, the greatly increased mobility of financial capital across the world, etc.). Rajan deftly weaves a narrative of the crisis through a description of these forces and also offers several insights into how such a crisis could be avoided in the future – primarily by strengthening the social safety net in America and by regulating finance more intelligently and carefully.
In Fixing Global Finance (2010), Wolf, a Financial Times columnist and one of the most respected writers on economics in the world today, offers an account of the 2008 GFC that is different from Rajan’s in that it considers much more closely the global imbalances that led to the crisis. So there is much more macroeconomic detail in Wolf’s account – indeed, the text could be used as required reading in a Macro course for understanding exchange rate economics. Wolf traces the origins of the crisis to a shift among Asian countries after 1997 towards running current account surpluses and at the same time amassing huge stockpiles of foreign exchange reserves. This left the US in the awkward position of having to sustain those current account surpluses by stoking domestic demand at home via lax fiscal and monetary policies. These policies also created the conditions for an asset price bubble to form in the US real estate sector, so that the US is portrayed as the unwitting victim of a “global savings glut.” Wolf’s primary recommendation for reform is an unwinding of those imbalances so that the US is relieved of its burden of generating global demand.
Currently, the group is reading The Enigma of Capital by David Harvey. Harvey is a geographer and urban anthropologist and one of the foremost Marxist thinkers of our time. In his book, he provides a reading of the 2008 GFC that revives Marx’s central concern about over-accumulation in capitalist economies. Over-accumulation of capital (in the form of idle capacity or laid off workers or unsold inventory, for instance) is a fundamental feature of capitalism that is the direct and incontrovertible consequence of class struggle between labor and capital. Put simply, in driving wages down, the capitalist attempts to increase his profitability but at the same time creates the conditions for his own demise since it is the laborers’ income that will provide the effective demand for what the capitalist produces. Harvey’s special contribution to Marxist thought is to emphasize the spatial fix that capital has usually offered to this problem – namely, the joining of hands between the capitalists and the state (or the “state-finance nexus”) to extend the geographical reach of capitalism into ever newer neighborhoods, regions and territories. Seen in this light, the 2008 GFC is only the most recent incarnation of a perennial problem, but also perhaps the most devastating one at that, for it also implicates a temporal fix to the over-accumulation problem, which is to create effective demand through the advancement of easy credit. Being that Harvey is a Marxist, his recommendation for those who have been disaffected and dispossessed by capitalist exploitation in general and by the 2008 GFC in particular to organize and press for systemic change, is hardly newsworthy. Yet, like Marx’s Capital itself, the power of The Enigma of Capital (indeed the former text offered no more constructive solution than simply a workers’ revolution) is not so much in the solutions it suggests, but in its masterful explication of the deeper problem underlying the capitalist mode of wealth creation.