Sep 282011

What do demonstrators in the streets of American cities have in common with Molotov-cocktail-hurling anti-austerity demonstrators in the streets of Athens?

They are both reflections of the fact that things have changed permanently since the rich-world financial melt-down that began in the spring of 2007 with the failure of two Bear Stearns hedge funds and that culminated in the fall of 2008 with the failure of Lehman Brothers Holdings and all that followed, including a near-melt-down of the global banking system. The Lesser Depression (or Second Great Contraction) continues to this day.

In my favorite daily newspaper, the salmon-colored Financial Times, George Magnus, a senior economic adviser to UBS, argues (September 13, Page 22) that the global financial crisis of 2008-09 produced a “once-in-a-generation crisis of capitalism,” however unpopular it is to say so.

Here’s Magnus’s nut graph:

It is a crisis of capitalism because our economic model and policy settings can’t produce sustainable growth, adequate income formation or employment creation. We have lost the housing, financial services and credit creation growth drivers and been left with excessive levels of personal and government debt to unwind, a dysfunctional financial system, and weak labour markets. The capacity to produce and sell goods and services has now outstripped that of consumers to borrow and spend. And without credit and jobs, other fault lines have been exposed, including the long stagnation of real wages, and extremes of inequality.

Magnus argues that central banks, including the Federal Reserve, should stop worrying about inflation and focus on policies that facilitate the creation of jobs and that help consumers de-leverage. That would be a tall order in the U.S., where the hard right is carping at the Fed’s effort to keep interest rates low, and an almost impossible job in Europe, where memories of German hyper-inflation in the 1920s are still fresh.

Those demonstrators? Expect to see more of them, here and abroad. We are not going back, any time soon, to the way things were before the housing bust.

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