Olivier Blanchard and Lawrence Summers has recently called for a reflection about the macroeconomic tools required to manage the outcomes of the 2008 global crisis in their paper Rethinking Stabilization Policy. Back to the Future. The relevant question they address is: Should the crisis lead to a rethinking of both macroeconomics and macroeconomic policy similar to what we saw in the 1930s or in the 1970s? In other words, should the crisis lead to a Keynesian approach to macroeconomic policy or will it reinforce the agenda suggested by mainstream macroeconomics since the 1990s?
Since the 1990s, mainstream macroeconomics has largely converged on a view of economic fluctuations that has become the basic paradigm of research and macroeconomic policy. According to this view of unexplained random underlying shocks, the fluctuations result from small shocks to components of demand and supply with linear propagation mechanisms which do not prevent the economy to return back to the potential output trend. Considering a world of regular fluctuations: (1) dynamic stochastic general equilibrium (DSGE) models are used to develop structural interpretations to the observed dynamics, (2) optimal policy is mainly based on monetary feedback rules- such as the interest rate rule- while fiscal policy is avoided as a stabilization tool, (3) the role of the finance is often centered on the yield curve, and (4) macro prudential policies are not considered.
As the real-world of financial crisis does not fit this representation of fluctuations, Blanchard and Summers, following the influence of Romer’s reference of the DSGE regular shocks as phlogistons, assess that the image of financial crises should be “more of plate tectonics and earthquakes, than of regular random shocks”. And this happens for a number of reasons (1) financial crises are characterized by non-linearities that amplify shocks (for instance, bank runs), (2) one of the outcomes of financial crises is a long period of depressed output followed by a permanent decrease in potential output relative to trend as the propagation mechanisms do not converge to the potential output trend, (3) financial crises are followed by “hysteresis” either through higher unemployment or lower productivity, .
Almost ten years after the 2008 crisis, among the current “non-linearities” that led to the current deep policy challenges, Blanchard and Summers also highlight
- The large and negative output gaps in many advanced economies, in addition to low growth, low inflation, low nominal interest rate, reduction of nominal wages in advanced economies,
- The interaction between public debt and the banking system, a mechanism known as “doom loops” since higher public debt might lead to public debt restructuring that might turn out to decrease the level of banks’ capital and, therefore, this situation might increase concerns about their liquidity and solvency.
Considering the current policy challenges, they suggest to avoid the return to the pre-crisis agenda or even to avoid the adoption of what they call “more dramatic proposals, from helicopter money, to the nationalization of the financial system”. In their view, there is the need to use macro policy tools to reduce risks and stabilize adverse shocks. As a result, they suggest:
- A more aggressive monetary policy, providing liquidity when needed.
- A more active use of fiscal policy as a stabilization macroeconomic tool, besides a more relaxed behavior in relation to fiscal debt consolidation.
- A more active financial regulation.
Interesting to say that Blanchard and Summers mention the importance of Hyman Minsky in warning the special role of the complexity of finance in contemporary capitalism. However, in the defense of their proposal, they should have remembered the Minskyan concern: Who will benefit from this policy agenda?
Any policy agenda refers to forms of power: there are tensions between private money, consenting financial practices and national targets that emerge in the context of the neoliberal global governance rules.
Indeed, almost ten years after the 2008 global financial crisis, it is time to rethink the contemporary political, social and economic challenges in a broader context and in a broader and longer perspective. Power, finance and global governance are poweful interrelated issues that shape livelihoods.