For a number of years I’ve tried to understand the mechanisms at work in the economy on macro level. First by reading mainstream economic media and by dabbling in some of the courses on offer at the University of Helsinki, later by looking into alternative theories and economic history.
My admittedly superficial dip into formal economics education left me confused. Not only do the things that are taught have very little to do with how things work in reality, but they seem to ignore money and finance as drivers of large scale processes. The behaviour of money itself is in my opinion described rather unrealistically in the literature I was exposed to during the courses.
When I complained about this to professor Kanniainen, he admitted that undergraduate teaching doesn’t really concern itself with economics relevant to the real world but “that will change on post-graduate level”.
My background is in natural science and I could hardly believe my ears. In science, teaching begins with fundamental stuff and advances into deeper things as one grasps the basics. But not once do undergraduates get taught something that is false and will be corrected once you graduate.
This somewhat personal tone in my introduction is meant to explain why I will try to look at things during this course from a perspective of money and finance. It may well be that I’ll fail miserably, but at least not as badly as those courses in undergraduate economics I sat through.
The ignorance (wilful or otherwise) about money seems to concern mainly mainstream economic academia and politics, since it was very clear to main actors on Wall Street where the CDO bubble was heading and that the “ones left standing when the music stops” would be in for it – “but we’re still dancing”, as Citibank CEO Chuck Prince famously said in an interview in the Financial Times in June 2007.
The vigorous lobbying campaign for bailout money that started immediately, with a well prepared story of a looming Harmageddon if the banks were not saved, shows that the insiders knew quite well what was coming and how to orchestrate their response. As a result, those ultimately left standing when the music stopped, were taxpayers, homeowners and the real economy.
Unless the politicians making bank bailout and austerity decisions are corrupt to the bone, the only explanations I can think of for their actions are
- a) they wish to destroy the economy or
- b) they just don’t have a clue of how money works (but very likely think they do).
Cynical though I am, I do believe at least most of the miserable economic policy stems from alternative b) and the reason decisionmakers believe they know what they are doing is that they either have taken only undergraduate economics or listen to advisers who have.
The story was repeated almost verbatim in the EU once the crisis surfaced here, too, and was believed and acted upon in exactly the way the financial sector wanted. That it worked even here is quite remarkable, as we already saw what had happened after a 4 trillion dollar bailout in the US: the real economy stood still as the private sector remained in debt over their heads; mortgages for ten million homes were still about to be foreclosed; the banks did not start lending to struggling companies with a need for investment in R&D. Instead, the trillions went into inflating the following asset price bubble and, of course, into record bonuses for the managers in 2009-2010.
There simply is no logic behind paying the banks and leaving private sector debt as it stood, unless one looks at who had the final say in what should be done. And that their story was believed has a lot to do with neoclassical economics having monopolized education and the political discourse.