Narratives of the Fall: Bubbles, Bailouts and the Social Construction of Economic Crisis

Abstract

current so called is a social construct. are three dimensions to the problem. One is in fact economic, one is social and psychological, and one is political. collapse of the housing market and the chaos on Wall Street is quite real. But the bankruptcy of so many financial institutions is only a symptom of the bankruptcy of federal economic policy. These failed economic policies trace back to a set of classical economic assumptions. In the aftermath of chaos, the bailout policy of the federal government is part of the moment of and is no part of any cure. basis of this critique is historical analogy. In Lochner v. New York, the era of the last depression, the Supreme Court held that government, essentially, had no power to regulate in the socio-economic realm. Of course there was no objective basis for this sweeping prohibition. court mistook certain laissez-faire assumptions for facts. It was only the rejection of the Lochner era ideology which enabled the New Deal which followed. purpose of this article is say our problem is very similar. government in the current crisis has labored under a series of blinding assumptions. Each assumption represents a story, not gospel. I then expose how these stories, which are factually unanchored, are disempowering and create false horizons for action. We explore three basic fallacies. first fallacy is that the crisis is primarily economic in origin. In a story entitled There is No Bubble I chronicle the linkage between laissez -faire philosophy, failure to regulate and failed monetary policy. I chronicle how the federal government by Greensand and Bernakhe largely enabled the crisis through a combination of low interest rates, lapse regulation, and misleading rhetoric. In a story entitled The Minsky Moment I explore the second fallacy, that the market is rational. High interest rates, foreclosure and a devaluation mentality are not part of any logical scheme of profit maximization. This pattern is part of a vicious cycle of self-defeating behavior-a symptom of not rationality. actions of the federal government are equally symptomatic of the panic moment. I would characterize the bailout as giving more steam to the engine of a sinking ship. One must stop the flooding not stoke the boiler. flooding is the tidal wave of foreclosure. This brings me to the third fallacy , that we can stand by the side-lines while the massive wave of foreclosures slowly sinks the economy. In a story entitled, The New New Deal. I provide a both a theory and a mechanism as to how the government could more forcefully intervene. story seems to be that this is a private problem which should be handled through the courts. We seek to test this through a series of impact hearings. What is the macro-economic impact of foreclosure? My hypothesis is that massive foreclosures are more systemically damaging than the bank failures-this is unsustainable. second step is the fix: I argue for a comprehensive solution based on an historical analogy to action taken by Roosevelt in the 1930's. substantial intervention that I argue for will require a kind paradigm shift, perhaps as significant as took place between Lochner and West Coast Hotel. But this paradigm shift is less drastic than our current collision course with the 1930's.