On Feb 7, 2011, at 7:38 AM, SA wrote:
> Keynes would say that if corporations decide autonomously to invest less, the result will be a recession - unless there happens to be an autonomous increase in consumption at the same time. Obviously, the latter is what actually happened. Now, you're right, wages didn't cover the increase in consumption - a lot of it came from borrowing. But that's where the causal slippage happens: just because investors receiving payouts now have more cash to put "into" the financial system doesn't mean the cash will then automatically be forthcoming "out" of the financial system to finance the mass consumption needed to make up for the decline in investment. Consumers have to be (a) able and willing to borrow from (b) a financial system that's able and willing to lend. I think the revolution in borrowing happened more because of institutional changes like deregulation, the mortgage-interest tax exemption, coupled with changing norms and "Veblen effects." And I think it would be a functionalist fallacy to assume that the revolution in consumer borrowing happened "because" the economy now "needed" greater consumer borrowing (to compensate for lower investment). And it would be a macroeconomic fallacy (of an oddly orthodox, loanable-funds kind) to assume that the borrowing happened automatically "because" there was greater saving by the payout-receiving rich. Why didn't the greater saving by investors ("asset purchases") just lead to an economic contraction? Why an increase in consumption?
I didn't say the movement of funds from nonfinancial corps into the financial sector was the sole cause of the asset explosion - just that it was a factor, and probably a major one.
No one said anything about this happening automatically. But there is what is sometimes called the "weight of money" argument - when you have that much spare cash looking for an investable outlet, the finest minds on Wall Street will create the "products" necessary to satisfy them. No one in central planning directed the financial industry to devise new ways to sustain consumer demand, but it sure worked out that way. And now that it's happened, there's some worry that the machinery hasn't restarted after the 2008 crisis.
Rejecting the idea that the weight of money had any effect on the availability of credit seems an orthodoxy of its own - of a Keynesian anti-classical sort, but still with a touch of religion about it.
> By the way, one question/point about the explosion in financial assets/GDP. Depending on how you use the statistics, there can be a lot of double counting. When asset ownership is intermediated through investment funds (mutual, pension, etc.), it's possible to count the asset twice or more - once on the fund's balance sheet, and again on the individual owner's balance sheet. If there's a shift over time away from individual asset ownership, toward fund ownership, then that will show up as an increase in the volume of financial assets/GDP. Also, surely some of the underlying increase can be explained simply by: (1) higher P/E ratios on stocks in the long bull market; and (2) higher valuations of credit assets in the era of low interest rates. Once you strip out those factors, I wonder how much is left of the explosion. There's still the explosion of derivatives to account for, but surely that's about institutional evolution rather than a macroeconomic phenomenon.
I suspect that the Federal Reserve is aware of this when they calculate their flow of funds accounts (which is where all that came from).
Doug