Mature Capitalist Economies Trend Towards Stagnation Triggering Financial Innovations

[Crewleader]

By: Mike_Whitney

British economist John Maynard Keynes, believed in capitalism, but he was also sharply critical of its structural flaws. He summed it up succinctly like this: "Our analysis shows... that long-run development is not inherent in the capitalist economy. Thus, specific 'development factors' are required to sustain a long-run upward movement."

What Keynes was alluding to is the fact that mature capitalist economies tend towards stagnation. What happens, is that the rate of return on investment begins to dwindle as overcapacity builds. That causes declining profits which lead to belt-tightening, rising unemployment and falling demand. As investment drops off further, growth slows correspondingly and the economy dips into a protracted slump. This corrosive stagnation is the challenge that all advanced capitalist economies face. The solution--as Keynes notes--lies in "specific development factors", which in today's terms means "financial innovations".

Financial innovation, like derivatives contracts and securitization, have created vast new opportunities for investment and profitmaking. This complex netherworld of highly-leveraged debt-instruments and off-balance sheet operations, constitutes a shadow economy where the process of capital accumulation persists despite pervasive inertia in the underlying economy. This is why the Fed and the Treasury have been doing their best to stitch the system back together without changing its basic structure. The same is true of Congress, which has gone to great lengths to preserve the profit-generating instruments which brought the global financial system to the brink of disaster. This is from the Wall Street Journal:

http://www.marketoracle.co.uk/Article16217.html

[blue97keet]

1. Stop making stuff and make disaster instead

[silverhandorder]

2. You do realize Keynes was for lowering worker wages?

FED is to blame for "financial innovation" shenanigans. They allow for huge expansions of credit that otherwise could not possibly happen. If we had FED governors worth their damn they would have raised interest rates a long time ago.

[sendero]

3. Says John Kenneth Galbraith...

... ‘As to new financial instruments, experience establishes a firm rule... that financial operations do not lend themselves to innovation. What is recurrently so described and celebrated is, without exception, a small variation on an established design, one that owes its distinctive character to the aforementioned brevity of the financial memory. The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version. All financial innovation involves, in one form or another, the creation of debt secured in greater or lesser adequacy by real assets. ... All crises have involved debt that, in one fashion or another, has become dangerously out of scale in relation to the underlying means of payment.’

Nailed it, I'd say. There is no such thing as "financial innovation", just ever more complicated shell games that make a few money at the expense of everyone else.