The Economic Situation (4/6)
What 1929 showed was that a large section of the ruling class had started to become addicted to the idea that what was more important to them than the revenues they obtained from interest/dividends was the large capital gains they made when the prices of shares and bonds, and property inflated rapidly. The Wall Street Crash could only occur, because there had been a massive bubble, a huge inflation of share prices, and bond prices preceding it, just as had happened in 1847 and 1857. The difference, now, was that the dominant section of the ruling class depended upon those assets for its wealth and power, rather than on its ownership of productive-capital.
By the time the 1987 stock market crash occurs, what was in its infancy in 1929, had now become mature. And, in 1987, it was not just the wealth and power of the top 0.01% that was at risk in such a stock market crash. Large numbers of middle class and working-class people had been encouraged to be a part of a “property owning democracy”, and to take out mortgages to buy property rather than rent, to buy shares via unit trusts, investment funds and so on, and economies had become addicted to debt collateralised on these inflating assets as the means of maintaining levels of consumption, as the stagnation of the 1980's meant that wages were stagnant or falling.
Capital had become equated with interest-bearing capital, as opposed to real productive-capital, and the financial markets had become the measure of social wealth, as opposed to the accumulation of productive-capital. So, the protege of Ayn Rand, and proponent of sound money and the Gold Standard, Alan Greenspan, as Chairman of the Federal Reserve, becomes the proponent of funny money, of continual injections of liquidity whenever asset prices begin to tumble. The preservation of high asset prices, the form in which the top 0.01% now owns its wealth, becomes the aim of all economic policy above all else, including ruining the currency and the real economy, if necessary to achieve it. 
When, in 2007, the economic expansion begins to cause interest rates to rise, and especially given that repeated injections of liquidity after 1987 (The Greenspan Put) had inflated both share and bond prices to ever higher levels, and reduced yields to ever lower levels, even a small absolute rise in interest rates, translates into a large proportional rise, which leads to a proportionally large fall in asset prices. What caused the 2008 global financial crisis was not a crisis of overproduction of capital, not any fundamental economic crisis or weakness, but the opposite. What caused the 2008 crisis was a rapidly expanding economy which caused interest rates to rise modestly, which caused the repeatedly inflated bubbles in asset prices to burst spectacularly.  |
| The 2008 Financial Crisis was the result of rising interest rates, as a long expansion started to take hold. Asset prices are capitalised revenues. Between 1965 to 1985, inflation adjusted asset prices also fell, as interest rates rose. |
But, the economic fundamentals of the long wave upswing remained intact. Economies suffered a shock, because of the credit crunch that accompanied the financial crash, but, as in 1848 and 1857, simply introducing the required liquidity, and ensuring the mechanisms for the circulation of money and capital was sufficient to resolve that issue. And, indeed, in the immediate aftermath of 2008 that is what happened. But, then, unlike 1847 or 1857, and unlike after 1929, central banks and states did something else.
In 1847, the bubble in railway shares stayed bust. It took until 1954 for the Dow Jones to recover its pre-1929 crash level. After 2008, the actions of central banks to keep pumping liquidity into the purchase of assets, was combined with fiscal measures by governments to restrain economic growth, and so reduce interest rates, so as to again quickly reflate asset prices. Within a matter of just a few years, stock markets surpassed their 2008 bubble levels, even as economies stagnated under the weight of austerity. Today, the Dow Jones stands at double its 2008 bubble level, and nearly four times the level it fell to during that crash!
In 1847 and 1857, the economy was also in a long wave uptrend. On both occasions, the Bank of England ended the credit crunch by suspending the 1844 Bank Act. That was sufficient for the underlying strength of the economy to assert itself, and growth to resume. No additional liquidity was injected. In 1929, the economy was in a period of long wave downtrend. Roosevelt responded by providing a large fiscal stimulus in The New Deal. In 2008, the global economy was again in a period of long wave uptrend, but, now, as soon as economies had stabilised, by 2010, central banks continued to pump liquidity into the system, long after the credit crunch had ceased. They did so to inflate asset prices once more, as they had done on each occasion over the previous 20 years. But, illustrating that this was entirely in order to reflate asset prices rather than stimulate economic growth, it was accompanied by policies of harsh fiscal austerity across Europe, and in the US, wherever Republicans had control.
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