Martin Wolf: Why So Little Has Changed Since the Financial Crash: "What happened after the global financial crisis? Have politicians and policymakers tried to get us back to the past or go into a different future? The answer is clear: it is the former...

...The chief aim of post-crisis policymaking was rescue: stabilise the financial system and restore demand. This was delivered by putting sovereign balance sheets behind the collapsing financial system, cutting interest rates, allowing fiscal deficits to soar in the short run while limiting discretionary fiscal expansion, and introducing complex new financial regulations. This prevented economic collapse, unlike in the 1930s, and brought a (weak) recovery. Note how closely these actions hewed to the pre-crisis policy consensus. Central banks acted as lenders of last resort, as they should. They also played the dominant role in macroeconomic stabilisation, as pre-crisis thought suggested. Their principal instrument remained interest rates, though they included long rates this time, because short rates reached zero. Shortly after the worst of the crisis had passed, fiscal policy turned towards austerity. The financial system is much as before, albeit with somewhat lower leverage, higher liquidity requirements and tighter regulation. Efforts to lower debt in the private sector were modest. (See charts.)

The financial crisis was a devastating failure of the free market that followed a period of rising inequality within many countries. Yet, contrary to what happened in the 1970s, policymakers have barely questioned the relative roles of government and markets. Conventional wisdom still considers “structural reform” largely synonymous with lower taxes and de-regulation of labour markets. Concern is expressed over inequality, but little has actually been done. Policymakers have mostly failed to notice the dangerous dependence of demand on ever-rising debt. Monopoly and “zero-sum” activities are pervasive. Few question the value of the vast quantities of financial sector activity we continue to have, or recognise the risks of further big financial crises. It is little wonder populists are so popular, given this inertia, not to mention the miserable experience of so many citizens since the crisis and, in important cases, before that....

The persistent fealty to so much of the pre-crisis conventional wisdom is astonishing. The failure of Keynesianism in the 1970s was significant but certainly no greater than the combination of slow economic growth with macroeconomic instability produced by the pre-crisis orthodoxy. What makes this even more shocking is that there is so little confidence that we could (or would) deal effectively with another big recession, let alone yet another big crisis. What explains the complacency?... An all-embracing new ideology may be unavailable today. That is probably a good thing. But good ideas do exist. A more likely cause of inertia is the power of vested interests. Today’s rent-extracting economy, masquerading as a free market, is, after all, hugely rewarding to politically influential insiders. Yet the centre’s complacency invites extremist rage. If those who believe in the market economy and liberal democracy do not come up with superior policies, demagogues will sweep them away. A better version of the pre-2008 world will just not do. People do not want a better past; they want a better future...


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