CRISES, CAUSES, CONSEQUENCESHOW A MISMANAGED CRISIS IS CAUSING A POPULIST BACKLASH

RSA Annual Conference, 2016

Ewald Engelen, University of Amsterdam

1. CRISES

2 CAUSESFOUR STORYLINES

Storyline 1.

• This time is different: Eight Centuries of Financial Folly – Rogoff & Reinhardt (2009)

– Panics, mania’s and crises are inherent tocapitalism and so is our social-psychologicaltendency to overestimate our capacities andunderestimate risks; behavioral finance – seeemphasis on ‘greed’; there was/is nothing uniqueabout the Great Financial Crisis and the ensuingGreat Recession

Storyline 2.

• Global Imbalances; savings glut (Bernanke andmost other central bankers before the crisis) – Too much real money (export surpluses from

China, Japan, Korea, Germany and the Netherlands; pension savings from UK, US, Switzerland, Singapore, Denmark and the Netherlands) looking for yield in a low interest rate environment (the so-called “Greenspan put”) blowing up asset bubbles: equity markets (before2001), real estate (after 2001)

Storyline 3.

• Financialization– the source of the crisis is the financial economy not the

real economy; has to do with too much debt and credit rather than with hard money; private indebtedness notpublic debt (see Adair Turner 2016 for many others)

– The great leveraging up (Taylor et al. 2012)– The great mortgaging, ie the transformation of banks in

mortgage banks (Jorda et al. 2014)– The rise of globally interconnected shadow banking

markets providing banks with an ‘unlimited’ supply of funding

– Result: asset bubbles all over the place, including the Netherlands, Ireland, Spain and the UK

Storyline 4.

• Eurocrisis (2010 (?) – 2016 (?))– Euro functioned as a de facto gold standard, based on

regional monetary policies that are too lax for surplus countries and too strict for deficit countries, forcingdeficit countries into recessionary internal develuationthrough a beefed up Growth and Stability Pact andTrojka programs when the asymmetric shock of the GFC struck, instead of embarking on coordinated, more accomodative fiscal and monetary policy making and drastic debt restructuring (Krugman, Stiglitzamong others)

CONSEQUENCES

In the 1930s…

But if this view of nations and of their relation to oneanother is adopted by the democracies of Western Europe, and is financed by the United States, heaven help us all. If we aim deliberately at the impoverishment of Central Europe, vengeance, I dare predict, will not limp. Nothing can then delay for very long that final civil war between the forces of Reaction and the despairingconvulsions of Revolution, before which the horrors of the late German war will fade into nothing, and which willdestroy, whoever is victor, the civilization and the progress of our generation.

J.M Keynes, The Economic Consequences of the Peace, 1919

In the 2010s…

“Monetary union has created a conflict between a centralised elite on the onehand, and the forces of democracy at the national level on the other. This is extraordinarily dangerous,” the former governor (Mervyn King) says.

“But if the alternative is crushing austerity, continuing mass unemployment, andno end in sight to the burden of debt, then leaving the euro area may be the onlyway to plot a route back to economic growth and full employment. The long-term benefits outweigh the short-term costs,” King writes.

At times it can seem as if Europe’s electorates, like their political leaders, specialise in confusion. Ireland’s elections on Friday produced a parliament that is even more fragmented than the legislatures elected in Portugal last October andin Spain last December. To put it mildly, this is unwelcome news for the EU. Just when the 28-nation bloc needs effective leadership to cope with the refugee andmigrant crisis, economic uncertainty and various security challenges on itsborders, one country after another seems to be succumbing to political instability.

Figure 1. Far-right vote shares after financial crises (local projections)

Figure 2. Voting outcomes (post-WWII crises)

THANK YOU!