Excessive reliance on the US Federal Reserve created more problems than it has solved says Akyuz talking about a crisis in crisis management in the US and Europe where two major policy shortcomings have put excessive reliance on monetary policy in managing the 2008 financial crisis.
February 19, 2014 Produced by Lynn Fries
LYNN FRIES, PRODUCER: Welcome to The Real News. I’m Lynn Fries in Geneva.
In a new research paper, economist Yilmaz Akyüz lays out his view on why the 2008 financial crisis is taking too long to resolve and how crisis management in the U.S. and Europe is creating more problems than it’s solving. Yilmaz Akyüz is chief economist at the South Centre and former director at UNCTAD in the Division of Globalization and Development.
Yilmaz Akyüz, thank you for joining us.
YILMAZ AKYÜZ, CHIEF ECONOMIST, SOUTH CENTRE: Thank you for inviting me.
FRIES: In your paper, you write about a fundamental systemic problem, a deflationary gap in the world economy. You say it’s due to underconsumption as a result of a low and declining share of wages in GDP in all the major advanced economies, including the U.S., Germany, Japan, and in China. Take us through your thoughts on that.
AKYÜZ: Well, the world economy is suffering from underconsumption, lack of effective demand, largely because the workers, the large majority of working population cannot really afford the goods and services they are producing. In fact, their purchasing power relative to what they’ve been producing has been falling, because the share of wages in GDP has been falling.
Despite that, before the crisis, we avoided deflationary problems and lack of effective demand because of debt-driven property and consumption bubbles in the United States, in Europe, United Kingdom, and the European periphery, which means that countries, economies do not pay wages, they were not willing to pay wages or raise wages along with productivity growth, but they preferred to lend the money, so that they were borrowing and spending. And as a result of that, we had relatively rapid growth. And this actually resulted, in the end, in growing trade imbalances, growing financial fragility, because most of these people didn’t have the debt servicing capacity needed, and eventually you had the subprime bubble bursting in the United States and the bubble bursting in the U.K. and the European periphery.
Now, when crisis came, actually the policy response has widened the gap by increasing inequality.
FRIES: Talk more about fiscal policy and post-crisis recovery in the U.S. and Europe. Some economists argue that the top tax rate on the top 1 percent of income earners could be raised to over 80 percent without impairing growth. What’s your take on that?
AKYÜZ: The top 1 percent actually got the entire increase in income in the United States since 2009. And, in fact, the share of the rest of the population has been falling. So inequality is increasing in Europe too because of the austerity policies. So we have actually now a bigger deflationary gap, because the workers are unable to afford the goods and services they are producing.
Now, how are we going to grow again brings you to the fundamental problem. Are we going back to business as usual? That means we’re going to have debt-driven bubbles in the United States or in Europe, or we’re going to be stuck in a long stagnation
FRIES: And what other policy shortcomings do you see in the U.S. and Europe post-crisis?
AKYÜZ: Well, one problem I mentioned in the crisis intervention was fiscal austerity after the initial expansion. A second shortcoming in the policy response was actually the inability, and, in fact, unwillingness, of the governments to remove debt overhang by timely, orderly, and comprehensive debt restructuring. Effectively, in Europe we saw we had some debt relief of countries like Greece. But that was not enough, and Greece was clearly unable and still clearly–it’s clear that Greece is unable to pay all this debt. And Germany and the European Union are insisting that debt should be fully paid.
In the United States, the main debt problem was, of course, among the mortgage holders. And the government has not really introduced any scheme that could succeed in decreasing the mortgages to the level of the ability of the mortgage holders to pay. And the financial intervention in the crisis effectively meant bailing out the United States banks rather than the debtors, in other words, bailing out creditors, then. And the banks restored profits quickly. They got back their pre-crisis profits in 2012, and in 2013 they reached a record level of profit. Now, we haven’t restored unemployment, we haven’t restored the incomes of the mortgage holder, we haven’t actually sorted out the debt problem. So what you have is the U.S. resolved the financial crisis for the creditors, but it did not solve the economic crisis for the workers and the large segment of the society.
FRIES: Update us on your views on the shortcomings of post-crisis monetary policy, most notably on the part of the U.S. Federal Reserve.
AKYÜZ: Well, these two major policy shortcomings, that is, fiscal austerity and a reluctance to remove debt overhang through proper restructuring, meant excessive reliance on monetary policy, that the central banks went into uncharted water, particularly in the United States, and buying large amounts of long-term bonds, both private and government, and cutting interest rates to very low levels historically.
Now, this policy has actually helped a bit in terms of lowering the long-term interest rate. There is evidence, and I’m not denying that evidence. But the problem is that it has not been very effective in stimulating spending, because the money pumped into the economy either ended up back in the central banks, in the Federal Reserve, as excess reserves of the banking system, or went into speculative activities, into stock market.
On top of it, it’s created two problems, one for the United States. As I said, U.S. growth is fragile. Fed has not yet tightened policy. And I think Fed is quite unsure what will happen if they start unloading all these bonds that they’re holding in their balance sheet. And we don’t know what an exit is going to do. And secondly, before the Fed has even started exiting, markets started pricing in the normalization of monetary policy. And this is why we have serious problems in the developing world, which have been receiving large amounts of liquidity, money, short-term money, borrowing heavily, particularly their private sector, in international markets from 2010 onwards.
And we have the first problem of the policy response coming out in the South. I think that the next problem is going to come out in the United States itself.
FRIES: We’re going to continue this conversation. Please join us for part two of our discussion on the global economy with Yilmaz Akyüz. Yilmaz Akyüz, thank you for joining us
AKYÜZ: Thank you
FRIES: And thank you for joining us on The Real News Network.
Dr. Yılmaz Akyuz, Chief Economist of the South Center, was formerly the Director of the Division on Globalization and Development Strategies at the United Nations Conference on Trade and Development (UNCTAD) when he retired in August 2003. He was the principal author and head of the team preparing the Trade and Development Report, and UNCTAD coordinator of research and support to developing countries (the Group-of-24) in the IMF and World Bank on International Monetary and Financial Issues. He taught at various universities in Turkey and Europe before joining UNCTAD in 1984 and after his retirement, and published extensively in macroeconomics, finance, growth and development. He is the second holder of the Tun Ismail Ali International Chair in Monetary and Financial Economics at the University of Malaysia, established by Bank Negara.
Originally published at TRNN