The 2008 financial crisis and neoclassical economics

Abstract

The 2008 global financial crisis was the consequence of the process of financialization, or the creation of massive fictitious financial wealth, that began in the 1980s, and of the hegemony of a reactionary ideology, namely, neoliberalism, based on self-regulated and efficient markets. Although capitalism is intrinsically unstable, the lessons from the stock-market crash of 1929 and the Great Depression of the 1930s were transformed into theories and institutions or regulations that led to the "30 glorious years of capitalism" and that could have avoided a financial crisis as profound as the present one. It did not because a coalition of rentiers and "financists" achieved hegemony and, while deregulating the existing financial operations, refused to regulate the financial innovations that made these markets even more risky. Neoclassical economics played the role of a meta-ideology as it legitimized, mathematically and "scientifically", neoliberal ideology and deregulation. From this crisis a new capitalism will emerge, though its character is difficult to predict. It will not be financialized but the tendencies present in the 30 glorious years toward global and knowledge-based capitalism, where professionals will have more say than rentier capitalists, as well as the tendency to improve democracy by making it more social and participative, will be resumed.Keywords: financial crisis; neoliberalism; deregulation; financialization; political coalition JEL Classification: E30; P1.The 2008 global financial crisis will remain in the history of capitalist development not only for its depth and scope, but also for the radical fiscal and monetary policies that were adopted to reduce its economic consequences and avoid a depression. Why did it happen? Why did the theories, organizations, and institutions that emerged from previous crises fail to prevent this one? Was it inevitable given the * Emeritus professor of Getulio Vargas Foundation.

Distinguishing Financialization from Neoliberalism

“…For many scholars they appear as elements of the same emerging political economic configuration, and are frequently discussed in such terms (e.g. Crotty, 2005; Epstein, 2005; Bresser-Pereira, 2008; Fine, 2012). Some see financialization as a character in a neoliberal drama, whether as an ‘apparatus’ (Lazzarato, 2009) or a ‘central project’ (Tomaskovic-Devy, 2015) of neoliberalism.…”

Defining speculative value in the age of financialized capitalism

“…In the US in 2007, the official dollar money supply was recorded as being $9.4 trillion. However, securitized debt had reached four times that level, and the total value of derivatives in the economy 10 times that (Bresser-Pereira, 2010, p. 9).…”

The International Economic Crisis and the Crisis of Economics

“…In short, many consider this idealisation of the markets and the neoliberal fanaticism allowed for excessive financialisation and creation of fictitious economic wealth. A group of wealthy individuals and financiers, aided by powerful political lobbies, came to power, refusing to regulate markets, especially those for new products, which only made the markets riskier (Bresser‐Pereira, 2010). One example of this is the repeal of the 1933 Glass‐Steagall Act in the USA in 1999, a law which had required that commercial banks be separate from investment banks to protect the public.…”

“…Complex, non‐transparent and risky derivatives and forms of collateral, methods for openly selling securities on the market without collateral and so on were considered to be welcome market innovations. It became possible to generate financial wealth independent of the real economy (Bresser‐Pereira, 2010). Opportunism and speculative mania were considered to be normal phenomena in the market economy and were not thought to entail any risk to the stability of the whole structure.…”