New Directions in Post-Keynesian Theory
Edited by Louis-Philippe Rochon and Salewa ‘Yinka Olawoye
Chapter 8: Central Banking in a Systemic Crisis: The Federal Reserve’s ‘Credit Easing’
8. Central banking in a systemic crisis: the Federal Reserve’s “credit easing” Robert Guttmann A STRUCTURAL CRISIS 1 The current crisis, which began in mid-2007 and has yet to run its full course more than four years later (February 2012), is not just a normal cyclical downturn of the kind last encountered in 1990/91 and 2000/01. Those two recessions caused temporary pain, but were inherently self-correcting. What we have today, in contrast, can be more accurately characterized as a “structural crisis”, the result of a longer-term accumulation of imbalances (for example, leverage ratios in the private sector) and asymmetries (for example, US trade deficits) which have gathered sufficient force to explode into the open and cause massive disruption of economic activity. Such crises are obviously deeper and last longer than normal recessions. And they can in all likelihood only be overcome with institutional reforms and new policies that address the underlying imbalances. If we look back at previous structural crises, notably 1873–79, 1929–39, and even 1979–82, each one of these was triggered by a severe bout of financial instability which paralyzed the banking system, caused credit to dry up, and so forced severe cutbacks in spending. Such a historical account would suggest that there is a direct relationship between the intensity of the financial instability at the onset of the crisis and the depth of subsequent declines in production, employment, and trade. This link obviously continues to hold. We have had a very serious financial crisis, especially...
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