Analyzing the Crash

Jon Amsden

Epic Recession:
Prelude to Global Depression
By Jack Rasmus
Pluto Press 2010, Amazon Price $120 hardback,
$25.20 paperback.

THE PRESENT ECONOMIC crisis, which began in the United States late in 2007 and picked up speed early in 2008, may have caused production in the American economy to fall precipitously, but had the opposite effect on the production of books seeking to analyze the world economic crisis.

A brief list begins with the titanic nay-sayer Nouriel Roubini, who sounds his warnings in Crisis Economics: A Crash Course in the Future of Finance. Roubini’s prelude to future disaster is followed by the irrepressible yea-sayer Paul Krugman’s The Return of Depression Economics and the Crisis of 2008. The first Marxist contribution to the list is The Great Financial Crisis: Causes and Consequences by John Bellamy Foster and Freddy Magdoff.

Amazon Books’ distinguished list of authors confronting economic crisis includes Joseph Stiglitz, Lord Keynes’ biographer Robert Skidelsky, and Robert Brenner on the left side, while Robert Solow, Ludwig von Mises and Martin Feldstein defend from the other side of the barricades.

The Left side of the discussion blames the fundamental instability of capitalist free market production (in one way or another), while the stern mandarinate on the Right sagely point out that a resolute moment or two of austerity may now be required to keep the whole system up and running.

Somewhere in the middle, Justin Fox, the economics editor of Business Week, in The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street, tells us most atypically that “the myth of rational markets” is just that, a myth.

Yet despite the list of notables who have pronounced on the theoretical and practical problems presented by the current crisis, what the author of Epic Recession, Jack Rasmus, has to say is well worth the read. The book contains, moreover, an extensive review of recent economic data along with detailed histories of two of the most serious economic crises in the 20th Century American economy.

Rasmus’ text contains 311 densely packed pages of text, as well as a useful “Glossary of Key Terms” for those unfamiliar with financial jargon, a generous collection of “Endnotes” guiding readers to a useful list of sources, and a nicely detailed Index. Pluto Press have done a fine job of producing a paperback combining an attractive appearance, high quality stock, with a good binding in both paperback and hardback.

Epic Recession in Context

The argument on crisis presented by Rasmus may be broken down into three major parts, respectively theoretical, historical and prescriptive. In the first section of the work, Rasmus is concerned to define what he refers to as an “epic recession,” distinguishing it from what he styles “normal recessions or a depression.” (22).

Most readers on the Left, and especially those with some interest in Marxist economics, will probably be looking for a theoretical statement as to why economic slowdowns have occurred regularly throughout the history of industrial capitalism. U.S. economic history records serious economic crises in 1837; 1857; 1873; 1893; 1907; 1929; 1952; 1958; 1963; 1975; 1981; 1987; 1991; 1998; 2000; and most recently, 2007-8. In addition to these major meltdowns, there were a number of minor economic slumps as well.

Where the historical section of his work is concerned, Rasmus has his work cut out for him. Generalizing over this large number of crises and covering such a great span of history is a risky proposition.

Over the years, and especially since the views of J.M. Keynes began to dominate the discussion, liberals have tended to explain economic shutdowns by pointing to “decline of aggregate demand” as the guilty party. Conservatives, on the other hand, have tended to treat economic crises as little more than a necessary period of economic adjustment during which the working class is to grin and bear it. On the other side of the argument, some Marxists have followed Karl Marx’s analysis of economic crisis faithfully while some have deviated from the master.

Marx says in Volume 2 of Capital that lack of balance between the sectors producing consumption and production goods gives rise to economic crises. In Volume 3, he adds that there will be a tendency for the rate of capitalist profit to fall as “dead labor” (i.e. machines) replaces “living labor” (human labor power) in the production process. This decline in capitalist profits, according to Marx, leads to crisis and possibly to a moment when capitalists choose to “hoard gold,” basically sitting back and waiting for better times. When this happens, what Marx calls “the circulation of commodities” is temporarily interrupted and this is what, in our own day, we call “economic crisis.”

There is still little agreement on Marx’s views of economic crisis, especially among Marxists. Rasmus may have been wise, therefore, in abstaining from pronouncing his judgment on why economic crises take place. Instead, Rasmus concentrates on the problem of defining what he calls an “epic recession” as distinct from “normal recessions.” To simplify somewhat, the “epic recession” for Rasmus is one that strongly resembles long term economic breakdowns such as those that occurred in the United States between 1907 and 1914, and again between 1929 and 1942.

Rasmus analyzes the “epic recession” in terms of the following variables: “…depth of the economic decline, its duration, and levels or degrees of debt, deflation, and default.” (23)  The alert reader will notice here that in both cases of “epic recession” cited by Rasmus, the slowdowns in economic activity that took place were each brought to an end by international wars of unprecedented violence and destructive power. Rasmus observes the same but does not dwell on the point.

Deadly Triad

The essence of the argument presented by Rasmus in the first section of his book is that the current financial crisis was caused by a deadly triad of debt, deflation and default. This unholy trinity of economic phenomena, Rasmus argues, led to excessive speculation in the (unregulated) banking sector as well as in the stock market, and the (new) “shadow banking” sector all of which contributed to economic disaster.

Under conditions of runaway debt creation and excessive speculation, Rasmus argues, the liquidity bubble that was created as the Greenspan Fed repeatedly poured money on economic problems eventually led to the bursting of the bubble, a crash, and a crisis that we continue to endure.

Before following the author on a well-researched and highly detailed journey through the history of economic crisis in the United States, however, the reader may wish to evaluate the basic economic analysis that Rasmus intends to support in the second major part of his work. Rasmus argues that it was the recent financial crisis that led to the present slowdown in the productive sector of the economy. It is more likely, however, that the causality moved in the other direction.

The question is whether it was the so-called “sub-prime crisis,” which almost destroyed the financial sector of American capitalism, that led to the massive slowdown in the productive economy — or was it perhaps the other way around? While it certainly appears to most of the massed punditry and to the tribe known as “market economists” that the former is the case, the contrary possibility must also be considered.

Clearly, if the U.S. economy went into a slump after the bursting of the “dot.com bubble” of 2000 and the brief recovery that followed, then the many hundreds of thousands of Americans who bought houses in the period of mass financial hysteria that occurred between 2002 and 2007 would have eventually become unemployed and unable to make their mortgage payments.

They would then have been, after a brief period of happy home ownership, the primary victims of what is now known as the “sub-prime mortgage crisis.” Note that the very term “sub-prime crisis” tends to place the blame for the crisis on greedy mortgage salesmen and the working poor who dreamed of home ownership, rather than upon the irreproachable capitalist free market system itself.

If one chooses to follow the basic Marxist analysis of economic crisis, therefore, a different view of what took place in the housing bubble and the following crash of the real estate market will emerge. The Marxist view, after all, holds that the cycle of capital accumulation includes necessary periods of crisis, during which over-inflated values are destroyed; the smaller and more inefficient producers are eliminated; and the working class receives a useful drubbing that encourages their willing subordination to the next upswing of the cycle of capital accumulation that follows.

In this view, the necessary downturns in the cycle (i.e. “panics,” “depressions,” “recessions,” etc.) are caused by a tendency of the rate of capitalist profit to fall towards the end of a period of vigorous economic activity. This leads the owners of capital to withdraw the same from the “circulation of commodities,” causing a temporary economic collapse featuring unemployment, bank failures, loss of property and so on.

If this Marxist schema describes history better than the alternative schemas offered by orthodox “economists” and others, then it will appear that the current crisis began as American workers (and would-be home owners) first lost their jobs and only then defaulted on their mortgages either formally or by simply walking away.

Economic Crises in History

In the second part of his work, Rasmus presents a careful look at the history of economic crisis. What is very interesting about his analysis of two periods of major economic crisis in the 20th century in the United States is that Rasmus provides support for both hypotheses outlined above.

One of these crises (1907-14) has been more or less ignored and forgotten except, of course, for the fact that it was the final stimulus for the creation of the Federal Reserve after more than a century of sharp political battles in the U.S. Congress over the question of central banking.

While it is clear that Rasmus holds that the financial crisis caused a crisis in the basic economy, it is also possible to find support, in his treatment of U.S. economic crises from 1837 to the present, for the alternative view. In his analysis of the several economic crises of the 19th Century, and of the two “epic recessions” of the twentieth, Jack Rasmus points out that, in those cases where sufficient data exist to decide (e.g. in the financial crisis of 1907), the financial episode in the crisis usually came some time after slowdown in the basic productive economy had already begun, and that the economic crisis in the productive economy also continued until well after the financial crisis had been resolved.

Two of the historical crises examined by Rasmus (1893 and 1907) were resolved by spectacular coups de theatre provided by J.P. Morgan, after which, in each case, the crisis in the productive economy dragged on. After Morgan was no longer available to save American capitalism from itself, and after the creation of the Federal Reserve in 1913, versions of the same drama of saving capitalism from the excess of speculators were staged by the Fed Governors and the U.S. Treasury.

Rasmus also points out that the “epic crises” of 1907-14 and 1929-42 both came to an end as the United States geared up for war. Rasmus does not believe, however, that war is the inevitable outcome of the “epic crises” that he has described. The third section of Epic Recession: Prelude to Global Depression is devoted to describing the current (2007-2010) crisis and to offering a list of policies that could be undertaken to bring the present economic crisis to an end.

What to Do?

Rasmus precedes his prescription for economic change and renewal with an astute and very readable critique of the failed Bush/Obama recovery policies. The Fed gets rather poor marks in this section of the book. Rasmus introduces a note of reality into the contemporary fantasies about how the Fed shall once again ride to the rescue as follows: “True to his philosophical ‘monetarist’ roots, Bernanke’s solution to a deep financial crisis was simply to throw money at it — i.e. a liquidity solution to an insolvency crisis.” (264)

What follows this remark is a detailed quantitative analysis which shows that throwing money at problems fixes nothing, and merely shifts the burden of maintaining the present system from those who benefit richly from it to those who can least afford to pay. It’s a clear and insightful analysis, rich in interesting details.

Rasmus’ many prescriptions for preventing a “descent into depression” make extremely interesting reading, not least because some of the structural changes that he calls for would probably require social revolution in the United States today.

Rasmus presents 28 proposals for restructuring the American economy, many of which are specifically aimed at the housing problem. These include resetting both mortgage rates and principal for all loans originated in the 2002-2008 period; introducing a 15% homeowners investment tax credit; and declaring a moratorium on foreclosures.

To restart employment in the United States (Proposals 6-10) Rasmus recommends expenditures totaling $1 trillion for specific job creation projects as well as the creation of a viable “social safety net.” To finance the suggested outlay of cash, Rasmus recommends a series of taxes and controls on the super wealthy (Proposals 11-19), any one of which could inspire apoplexy in the talking heads on Fox News or MSNBC.

The list of punishments for the rich includes: the repatriation of assets held in offshore tax havens, a serious program foreign profits tax recovery, a rollback of the Bush tax cuts on capital income, an excess speculative profits surtax, and a “payroll tax” on incomes of the wealthiest one percent, among other measures.

Not all of Rasmus’ proposals are this drastic. Many are specific and quite feasible. One that will get the attention of anyone with children in college is the deprivatization of the student loan market. This is a specific reform, entirely doable, and in fact on the way to being implemented. Other structural changes listed by Rasmus are more general and also more problematic. An example of this would be a structural change that would provide “80% coverage single payer health care” (Proposal 20).

Many people, even some on the Left, will regard Rasmus’ list of proposed policies as “utopian,” “unrealistic,” even “impossible” given the economic and political system that oppresses most Americans today. This, however, is the point that Rasmus is really making on the final pages of his book. To implement even a few of Rasmus’ proposals for ending the current crisis would require not much less than a thorough-going political if not social revolution in the United States.

Since most of the people reading this review are socialists, it seems not inappropriate to point this out. What Jack Rasmus has reminded us in this exhaustively researched and highly provocative book on the current crisis is that it is once again time to start talking seriously about radical economic, social, and political change in the United States.

ATC 149, November-December 2010