WHAT IS A CRISIS? A RETROSPECT TO THE 2008 ECONOMIC AND FINANCIAL CRISIS
By Walter Otto Otsch and Stephan Puhringer
[This article published on May 2, 2019 is translated from the German on the Internet, www.blickpunkt-wiso.de.]
A glance at the public and academic discussions of the 2008 and 2010 financial and economic crises shows that the economic guild interprets crises through an ideological lens. The borders between politics and the economy are changing.
Since the fall of 2008, dominant media reporting has described our situation as a “crisis.” Many economists joined in this debate. At that time, they presented supply-side reasons for the crisis. “High labor costs and high tax burdens,” “indirectly lower investment-readiness,” prompt reactions on the labor market and in social policy. “Labor costs are key for overcoming German growth weaknesses.”
“Discussing systemic causes and the crisis-proclivity of capitalism was impossible when “living-above-your-means” was emphasized as the determinative cause of the crisis and when the crisis was framed as a debt crisis.”
In 2008, fundamental criticisms came mostly from outsiders who connected the poor symbolic regulations of the financial sector, the conscious creation and tolerance of unregulated frameworks in offshore centers or regulatory havens (Otsch 2014) or the increase of social inequality in capitalist societies (Piketty 2014) with their susceptibility for crisis.
Those economic theories that were the foundations for the modern financial system like the efficient market hypothesis of Eugene Fama or the Black-Scholes-Martin model were problematicized. In the spring of 2009, a “Keynesian moment” accompanying the economic rescue programs was stressed (Hirte 2013) – with the temporary weakening of the supply-oriented logic. Christoph Schmid said: “A good macro-economist can never be only supply-oriented or only demand-oriented. I would not renounce on either Keynes or Friedman” (quoted in: Spiegel, 3/8/2009). With this rhetoric, most economists avoid interpreting the financial crisis as a crisis of the economic system or as evidence of a crisis of their own sub discipline.
The crisis as a US crisis was underscored at the beginning of the crisis discourse from 2008, not a crisis of the economic system. “Nothing and no one seems able to stop the spread of the American crisis to the German economy,” Thomas Straubmann explained in Spiegel, 9/30/2008. In the Salzburger News of 9/18/2008, Eberhard Felderer, head of the HIS at that time, spoke of a “chaotic situation on the American financial market” that also affects Europe.
German economists from 2008 emphasized two arguments. First, the financial crisis was “explained” morally. Moral rules were violated and bankers acted unethically. In October 2009, the German President and former chief IMF economist Horst Koehler spoke of gamblers in shadow banking and “the untamed monster” in neoliberalism. “The leading thinkers of our social market economy were right. The market alone does not order everything to the good” (Zeit, 10/5/2009). The “moral hazard” in incentives “encouraged banks to take great risks because they did not have to pay the bill at the end,” said Jurgen Stark, the former chief economist of the European Central Bank (in Spiegel, 11/23/2009). To some, the moralization debate – in apportioning blame to persons – went too far. Hans-Werner Sinn who functioned as Germany’s most prominent economist declared: “Culprits and scapegoats are sought in every crisis. No one believed in an anonymous system error in the 1929 worldwide economic crisis. At that time, the Jews were targeted in Germany; today, they are the managers” (Tagesspiegel, 10/27/2009)
Secondly, the financial sector was described with analogies to sicknesses and natural phenomena. Today’s economy has a fever. The financial crisis broke ou8t like a tsunami or an earthquake. “No one thought such an event would shake the system worldwide; that credits changed into securities could trigger such an economic tsunami and that the waves could even overtake the last small savers. The globalization of the financial industry extends much further than many imagined,” said the economist Michael Burda (Spiegel, 12/15/2008).
These analogy-filled explanations have their effects. They explain the financial crisis as a regrettable exception that does not concern the real functioning of the economic system. One’s own contribution to the genesis of the crisis was not taken seriously. For example, most economists before the 2008 financial crisis successfully urged the deregulation of the financial system. The financial markets were very near the ideal market as stressed in the textbooks. Prices formed instantaneously that always guarantee a balance of supply and demand. This price formation was the most important function of the market. That certain financial markets like the inter-bank market, the market for repo-businesses or the money market fund that nearly succumbed in 2007 and 2008 was impossible in the theory of the market (Otsch 2019). For example, the German council of experts persistently judged financial innovations positively for decades, including those financial innovations that directly triggered the financial crisis (cf. Wienert 2009). In 2010, Eugen Fama, the author of the efficient market hypothesis, was asked in retrospect how he explains the events in 2008. “Why was there a credit bubble?” His self-assured answer was “I don’t know what a credit bubble means. This phrase has become popular but has no meaning. Credits for buying homes were state policy, not a market failure. (…) We do not know what causes recessions. (…) We will never know. (…) The economy is not very good at explaining downswings in economic activity.” To the question “Do you still think the market is efficient?” Fama replied “Yes. If it is inefficient, reporting this will be impossible” (Cassidy 2010). “Apart from a few exceptions, economists today directly blame other media-effective economists,” Gerhard Kirchgassner said on the financial crisis…
In 2016, Helge Peukert described this as a vague clean sweep veiling the real causes of the financial crisis like the far-reaching deregulation triggering social changes. “There was mathematical magic or witchcraft.” “Many regarded the economic system as overcome.” In a nebulous way, it was said: many deem the unquenchable thirst for credits on both sides of the Atlantic as a reason for the financial crisis” (Mankiew/ Taylor 2012). Peukert summarizes: “Sub-prime market securities, the bonus culture and information asymmetries should be mentioned with descriptive flashes from the turbulent crisis events. Instead, a series of mistakes is often the only explanation. These are situationally defined as all too human mistakes.
The debate over state debts from the fall of 2009 can be understood as a continuance of the crisis discourse since 2008 based on the specific explanations of the 2008 financial crisis that did not require urgently pressing actions from politics. A clear shift in the crisis discourse could happen surprisingly quickly. The austerity debate on the 2008 financial crisis as a systemic crisis of the economic system was repressed. Debate on the financial crisis nearly ended in the media. “State debts and the `euro crisis’ were moved into the foreground instead of the (poorly thematicized) 2008 financial crisis in the fall of 2009 or spring of 2010. The moral discourse from 2008 was repeated. This happened in two directions: in relation to foreign countries (above all Greece) – a moral misconduct by politicians – and in relation to domestic reality (the claims on the social state had to be scaled back for moral reasons. The “Swabian housewife” was the most powerful picture in this moral discourse in Germany. One cannot live above one’s means. That is the lesson of the crisis according to Angela Merkel at the CDU Party Convention in Stuttgart at the beginning of September 2008 (cf. Spiegel, 12/1/2008).
With the metaphor of the Swabian housewife, the moralization of the causes of the financial crisis was reinterpreted to a general narrative of “living above one’s means” and transferred to the problematic of higher state debts (Puhringer 2015). At a 2010 press conference, the EU monetary commissioner Olli Rehn declared: “Sanctions should be the normal and almost automatic consequence for countries that breach these commitments.” Lukas Oberndorfer (2012) correctly described these legal steps of an increasing austerity as “authoritarian constitutionalism.”
On the discursive plane, a reversal of crisis causes and crisis effects is manifest in the reinterpretation from a financial crisis to a state debt crisis. In many studies, the rise in state debt rates in Europe was referred back to the economic- and bank rescue programs carried out in 2008 and 2009 to contain the economic instabilities and the dramatic economic effects of the crisis, particularly on the labor markets (cf. Heimberger 2015). These higher state debts are now problematicized and identified as crisis causes in Angela Merkel’s mantra on “living above our means” and in the changed framing of the crisis as a debt crisis. This happens mostly without great public opposition.
In this interpretation, illuminating the systemic causes of the crisis or discussing the crisis proclivity of the capitalist economic system as a whole is not possible anymore. So Hans-Werner Sinn said in ZEIT on 6/25/2009: “It is a systemic error in the financial sphere, not an error in the capitalist system. The inadequate capital-holding regulations that made Wall Street managers into soldiers of fortune were a problem. The market economy is not a system where everyone can do whatever he wants.”
A shift in the question about the best approach to the crisis accompanies the shift in the perception of the causes of the crisis. Consequently, an ever stronger fixation on the amount of state debts occurred, a fading out of other causes of the crisis and abuses in the financial system revealed in the outbreak of the financial crisis. In the political and public discourse, the economic narrative was followed that debts per se should be rejected or that an absolute maximum of the state debt rate would b e economically disastrous. This narrative relied on the works by Carmen Reinhart and Kenneth Rogoff (2010)…
In summary, a “Keynesian moment” (Krugman) may have occurred in the course of a financial crisis with the discursive reinterpretation of the crisis from a financial crisis to a state debt crisis but the possibility for new orientations within the economic discipline were increasingly narrow. The moral frame of “living above our means” as the core of the crisis that ultimately led to the debt brake and later to the fiscal pact on the EU plane was strengthened with an explicit appeal to the (shaken) trust between EU states…
The basic intention of the debt brake and EU austerity policy is and was to narrow the fiscal possibilities for states. Now – as in 2005 – a failure of politics is undeniable. “The speed and clarity to send the right signal to the markets at the right moment are lacking. Political processes in our democracies are not suited to break taboos overnight or to send shock signals very quickly.
Walter Otto Otsch is an Austrian economist and professor of economics at the Cusanus Academy.
Stephan Puhringer is a post-doctoral researcher at the University of Linz.