Who really got us into this mess? In Wall Street, in the City, in the corridors of Whitehall and Washington DC, and in the Berlaymont Building, it's quite common for the general public to be blamed.
The argument goes that banks and supranational organizations such as the EU were merely trying to give the people what they wanted - bounteous supplies of cheap credit. If this caused the whole money-making machine to blow a gasket, then it had nothing to do with the factory bosses and the owners; it was the fault of those feckless individual borrowers who had been driving it too hard, who had been reckless enough to keep demanding more credit.
So in the US the authors of the crisis were “trailer trash” while in Europe it was voters who kept voting in fiscally-irresponsible governments.
The Nobel prize-winning economist Paul Krugman has written a New York Times column that does a great job of puncturing such nonsense. Krugman wrote,
“This seems like a good time to point out that this blame-the-public view isn’t just self-serving, it’s dead wrong.”
According to Krugman, the reality is that the crisis - of which we’re entering phase two with the intensification of the eurozone crisis - was a “top-down disaster”. He said that in seeking to scapegoat the general public, the "elites" are “ducking some much-needed reflection on their own catastrophic mistakes.”
Krugman argues that, in the US, the policies that gave rise to massive deficits had nothing to do with ordinary folk but bear the imprimatur of President George W Bush and his neo-conservative administration. The policies included massive tax cuts for the wealthy; overseas military adventures in Afghanistan and Iraq; and accelerated financial deregulation that gave rise to a "runaway financial sector".
The latter move, which led to the crisis, which in turn triggered the "Great Depression", have yet to be fully quantified. Krugman singled out former Federal Reserve chairman Alan Greenspan for special oppobrium:
"Let me give a particular shout-out to Greenspan, who played a crucial role both in financial deregulation and in the passage of the Bush tax cuts — and who is now, of course, among those hectoring us about the deficit."
Krugman concluded by demolishing the view that European citizens - Greek tax dodgers say - are responsible for the eurozone's current parlous state. He said the real problem was that the European elite constructed a single currency on flawed foundations and without properly thinking it through. "The drive for a single European currency was the ultimate top-down project, an elite vision imposed on highly reluctant voters.
Krugman is appalled at the hypocrisy of elites who try and blame the voters for their own failures, and then seek to "hector" about the need for deficit reduction etc.
"People who advocated budget-busting policies during the Bush years shouldn’t be allowed to pass themselves off as deficit hawks; people who praised Ireland as a role model shouldn’t be giving lectures on responsible government [a dig at UK finance minister George Osborne] ... We need to place the blame where it belongs, to chasten our policy elites. Otherwise, they’ll do even more damage in the years ahead."
This provocative article has not gone down well in all quarters. Robert Teitelman launched into an attack in The Deal, accusing Krugman of having been watching too much Fox Television. Teitelman added:
"More disturbingly, [the column] also takes him to a place he shares with large parts of the right: into the mental landscape of conspiracies and plots, of small groups of influential men, where you can only retain your fondest hopes of a just and rational nation by imagining that the great gentle herds of Americans have been (and have to be in the future) manipulated."
AmericaBlog's Gaius Publius was more positive but said that if anything, the economist had pulled his punches. Publius said the problem starts with motivation. He thinks the elites are not even interested in ideas, so this has nothing to do with unwisdom. He says the problem is they are motivated by personal gain above all else. Publius said:
This is 100% my main Krugman criticism. He still seems to (pretends to? actually does?) believe that people in power — and those who enable and serve them — respond mainly to ideas. This is either his great Achilles heel, or the way he keeps his column inches at the Times. (If the second, maybe a fair trade.)
Further reading on Krugman, causes of the financial crisis, and US economic policy:
- Viewpoint: Alan Meltzer What Krugman Is Saying Is Simply Untrue
- Europe's rush to impose austerity measures could prove disastrous by Ian Fraser
- As flies to wanton boys are we to the central bankers by Ian Fraser
- US coming to terms with tax rises, despite Ryan's road map by Ian Fraser
Tags: deregulation , European Monetary Union , european sovereign debt , European Union , Federal Reserve , financial crisis , G20 , regulation