Financial Crisis, Macro-Stabilization Policy and the Debt Culture: Are We Thinking Out of the Box Yet?

Abstract

Every global crisis presents a new learning experience for the humanity. Some crises also have paradigm-shifting significance. The last crisis of 2008 might be one of those. Yet, the macro-policy approach of the major industrialized economies seems to be still based on macro-stabilization or counter-cyclical policy frameworks within the well-established, conventional economic and financial paradigms. Fiscal stimulus packages are to revive the economy as fast as possible and the monetary policies have tinkered with the lowest interest rate in many decades. As per fiscal policy, more debt is incurred by the governments and as per monetary policy, especially resorting to Quantitative Easing (QE), more private sector debt is encouraged and facilitated. More debts to cure excessive debt! Might these policies still be effective, even though so far their effects have been non-sustaining throughout history? In future there will be better assessment of the situation. However, the general solutions that continue to be applied by the leading conventional economists representing various mainstream schools and pursued by the governments to counter the negative effects of the crisis have a fundamental disconnect with the reality in regard to why such crisis occurred and how it can be prevented in future. This paper examines the conventional framework for macro-stabilization policy and makes the case that while these policies might bring some non-sustainable reprieve from this contagion, one area that needs to be identified and probed into further is the role debt culture plays in modern, industrialized societies. This paper also draws on the theories of indebtedness from both cultural, moral and structural/legal perspective and experience in our modern time. Understanding the current crisis in light of the interaction between cultural, moral and structural factors in fostering a debt-prone culture – a culture that is debt-seeking, debt-promoting, debt creating and debt-proliferating - provides critical insight into why economic policies that are delinked from some fundamental wisdom and principles of healthy and sustainable lifestyle, especially in the grip of financialization and ignoring the real economy, might not be that effective.