George H. Blackford, Ph.D.

 Economist at Large

 Email: george(at)


It ain't what you don't know that gets you into trouble.

It’s what you know for sure that just ain't so.
Attributed to Mark Twain (among others)


Economic Papers
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Ideology and Fiscal Crises

George H. Blackford, 5/15/2013

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That the free-market ideologues who dominate the Conservative Movement live in a delusional world should be obvious from their attempts to blame the financial crisis and the resulting government fiscal crises on the excesses of government.  After all:

It wasn’t the government that pursued the predatory lending practices that led to housing bubbles in the United States, England, Ireland, Iceland, Spain, and innumerable other countries around the world. 

It wasn’t the government that issued $60 trillion worth of credit default swaps without setting aside capital against the contingency that those insurance contracts might have to be paid off. 

It wasn’t the government that leveraged itself 30 or as high as 75 to 1 using short-term liabilities to finance long-term assets. 

It wasn’t the government that made bad mortgage loans or that lent exorbitant amounts of money to Greece, Spain, Italy, and Portugal at ridiculously low interest rates

It was the private sector of the economy that undertook those fraudulent, reckless, irresponsible, and foolish practices and that made all those bad loans, not the government! [1]

Governments should not have allowed any of these things to happen, but the fact is that governments all over the world just sat back and watched them happen without even batting an eye.  Why?

The dominant fact in the real world over the past forty years is that free-market ideologues have dominated the governments in most of the developed countries of the world as well as international financial institutions such as the IMF.  These ideologues have been able to convince policy makers to deregulate the world’s financial system in spite of the hundreds of years of economic history in which excesses in these markets have caused innumerable economic catastrophes—such is the appeal of their ideological logic.  (Frank Klein Stiglitz Rodrik Mayer Miller Graeber Domhoff

But logic and reality are not the same thing.  You can prove anything with logic if you start with a false premise.

When you step outside the make-believe world of ideological platitudes, and look at what has actually happened in the real world over the past forty years it becomes painfully obvious that it was deregulation of the financial system that has brought us to where we are today, not the rise of socialism or government intervention in the economic system.  (FCIC WSFC)

This crisis was brought on by private sector financial institutions being allowed to leverage themselves to unconscionable levels as they expanded private debt to the point where the economic system could no longer service that debt.  When this point was reached the entire world’s financial system in the private sector of the world’s economy began to implode as private investors tried to cover their behinds in an attempt to avoid the carnage that was to come.  The implosion of the financial sector, in turn, brought down the real sector of the world’s economy and, along with it, the government sectors in the various countries that were affected—especially those countries in the Euro Zone and Middle East—as tax receipts fell, emergency government spending increased, and the bailouts began in the wake of the worldwide recession that followed the private sector financial meltdown. 

The point is, it was the private sector of the economy that created problems faced by governments today, not the other way around.  The fiscal crises faced by governments are the result of the fraudulent, reckless, irresponsible, and foolish behavior in the private sector of the economy that led to the financial meltdown, not the result of excesses of socialism in the government sector. 

At the same time, the financial meltdown in the private sector is the result of free-market ideologues being able to convince policy makers that financial markets are self regulating and should not be regulated in spite of an overwhelming amount of real-world evidence throughout the history of finance that financial systems are inherently unstable and must be regulated if the kind of economic disaster we are in the midst of today is to be avoided.  (Dowd Fox Kuttner Phillips Smith Taleb Graeber Wren-Lewis Lindert Prasad Bair Part II)

This fact is obvious to anyone who is able to go beyond ideological logic and platitudes and view the world as it actually is.  In addition to the obvious fact that it was the meltdown in the financial sector that led to economic crisis we face today, the fiscal problems faced by governments in the Euro Zone are particularly revealing in this regard. 

These problems arise from the fact that—guided by free-market ideological distrust of government—the Euro Zone attempted to put together a monetary union with a central bank and court, but without a central government.  As a result, when the economic crisis hit, and the Euro Zone financial sector began to melt down, the Euro Zone was faced with the same kinds of problems the United States faced in 18th century under the Articles of Confederation where the central government did not have the power needed to coordinate/mediate the relationships between the individual states. 

As so many articles by Krugman and others have pointed out, it is the lack of a central government in the Euro Zone that is making it virtually impossible for the Euro Zone countries to deal with the fiscal problems caused by the private sector.  Socialism has nothing to do with it.  It’s the lack of government, not too much government, that is the problem in the Euro Zone just as it was the weakness of the central government under the Articles of Confederation that led to the problems we had at the beginning of our nation’s history. 

When it comes to countries like the UK and the US, the difficulties they are having in dealing with the fallout from economic downturn obviously arise from the ideological approach these countries are attempting to use to deal with their fiscal problems. 

Both countries approached this crisis in the beginning with central bank and fiscal stimulus policies that brought the economic collapse to an end within a year.  Then ideology came to the fore.  Both the UK and US are now attempting the same failed fiscal austerity policies that were adopted by the Hoover administration in dealing with the fallout from the crash of 1929 and revived again by Roosevelt and the Democratic Congress in 1937, namely, to reduce the role of federal budget in the economic system. 

The results of the UK and US in reverting to the austerity policies of the Hoover administration are exactly what one would expect from our experience in the 1930s where we saw the economy collapse from 1929 through 1933 under the Hoover austerity policies, then a comeback from 1933 through 1936 under the New Deal policies, and then the economy faltered again in 1937 through 1938 as the old Hoover austerity policies were resurrected.  (Chapter 15

In the UK and US we saw a comeback that begin in 2009 following the stimulus programs, and then in the wake of the austerity programs that followed the turnaround in 2009 the economies in the UK and US began to falter.  The UK, being further along in the pursuit of austerity than the US, has already succeeded in forcing its economic system into a double dip recession, but it is just a matter of time before the US is able to catch up as we continue to follow in the footsteps of Hoover and the UK in pursuit of this ideological madness. 



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[1] It should be noted that there was a concerted effort to blame the financial crisis on rising affordable housing quotas placed on the GSEs by way of the Community Reinvestment Act (CRA) during the 2008 election.  This turned out to be a red herring.  As was noted by the Financial Crisis Inquire Commission:

GSE mortgages were far less likely to be seriously delinquent than were non-GSE securitized mortgages: 6.2% versus 28.3%. . . .   Research indicates only 6% of high-cost loans—a proxy for subprime loans—had any connection to the law. Loans made by CRA-regulated lenders in the neighborhoods in which they were required to lend were half as likely to default as similar loans made in the same neighborhoods by independent mortgage originators not subject to the law.

The FCIC Report concluded that while the GSEs contributed to the crisis they

were not a primary cause.  Importantly, GSE mortgage securities essentially maintained their value throughout the crisis and did not contribute to the significant financial firm losses that were central to the financial crisis.  The GSEs participated in the expansion of subprime and other risky mortgages, but they followed rather than led Wall Street and other lenders in the rush for fool’s gold.

The FCIC also found that it was the independent mortgage securitizers and originators that were the major source of the problem, not the GSEs.(FCIC WSFC NYU Other Books Hearings)

I have been unable to find creditable evidence of any kind that supports the notion that government housing policy was responsible for the financial crisis that began in 2007.  All of the evidence I have been able to find points to the fraudulent, reckless, and irresponsible behavior of our financial institutions and the individuals within those institutions who made fortunes as a result of the housing bubble. The reality of the situation is, I believe, best summed up by Kleinbard:

. . . [C]onsider the revisionist history that the federal government caused the Great Recession , through its alleged meddling in the mortgage markets to advance its affordable housing policies. This view unfortunately does not explain why the policies in question predated the crisis by several decades without precipitating an earlier financial crisis; why real estate markets collapsed in Ireland, Spain, and other countries as well as the United States; or why affordable housing policies should be blamed when the vast bulk of subprime lending, led by new market participants like Countrywide, took place outside the ambit of regulated entities covered by the Community Reinvestment Act and the ambit of the government-sponsored enterprises that guaranteed higher quality mortgages (although those enterprises did buy some AAA tranches of securitized subprime debt for their own investment portfolios). Numerous analysts have rebutted the claim, but it persists, largely because the underlying belief system that markets can do no wrong—and governments no good—so thoroughly pervades the thinking of its proponents. Kleinbard

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