Financial and Economic crises

Variations of crisis discourses among think tanks within the Stockholm Network

The financial and economic crisis related discourses within the Stockholm Network can be located on two axes. The first being theory vs. pragamtism and the second being policy of order inspired positions vs. anti-statist positions along Mises-Rothbardian lines (here short and schematic as austro-radical).

Especially British think tanks and those being close to the partisan network of the EPP do not address issues of governments intervening into markets and do not attempt to legitimize those activities. Instead they mainly concentrate on suggestions and evaluations regarding regulation of financial markets, bailout programs and monetary measures. Arguments are developed and stated along the lines of actual governmental measures and programs. Special attention is thereby paid to activities of the EU Commission and monetary policies within the European Union. British and Spanish think tanks have had the possibility deal with fiscal measures of governments, which they oppose politically.

Ordoliberal vs. Austro-Radical Positions

This difference is also apparent in how the think tanks explain the causes of the crises. Representatives of the austro-radical position are of the opinion that state interventions into the markets alone caused this global crisis:

1. mechanisms and institutions historically originating in New Deal policies (the Federal National Mortgage Association, short FNMA or Fannie Mae -1938 and the Federal Home Loan Mortgage Corporation, short FHLMC or Freddie Mac- 1968; both were privatized in 1968)for allocating inexpensive loans to socially underprivileged real estate buyers; by means of those mechanisms/institutions credit policy became the lever of welfare policy;
2. both institutions allocated problematic subprime loans that have been made virtually risk free partly due to changes in legislation and partly by means of government backups
3. the policy of low interest rates of the Fed, which was motivated by economic policy goals, created a monetary environment in which the granting of loans of this kind was facilitated immensely.
4. Cyclical developments and increasing interest rates in 2006/2007 led to the bursting of the credit bubble and to loan defaults. The effects of which are continually spreading through the global financial system.

The focus is merely on government activities. Only peripherally the perverse consequences of regulations are discussed. If at all addressed it is pointed out that financial markets are the most regulated ones in the economic sphere. Thus regulation leads on the one hand to flawed incentives and on the other it encourages the development of innovative and risky financial products in the attempt to bypass regulation. Eventually government intervention produces a moral hazard because they offset risk liability, which necessitates the functioning of the markets. Furthermore government interventions lay the foundation for new speculative bubbles. Banks should be able to go bankrupt.

The think tanks in the regulatory oriented/ pragmatic category, however, assume that the crisis was caused by a factor mix - government and regulatory on the on side and erroneous acting by individuals on the other. In this respect not governmental monetary policy alone is made responsible for the credit expansion. Moreover those think tanks generally acknowledge the necessity of regulation by assuming regulatory failure. The underlying narrative of both the regulatory oriented and the austro-radical think tanks is essentially the same their interpretations, however, differ considerably. Even more important are the differences in assessing the crisis and state interventions. In general public bailout measures are assessed as successful attempt to retain inter-bank markets from freezing, to secure banks' solvency, and to ensure the economic functioning of the banking system.

The think tanks categorized as austro-radical hardly participate in the debate on regulatory measures and institutions, and bailout packages. Their position is specified by them demanding total neutrality of monetary policy if possible by monetary emulation or the actual introduction of the gold standard or the introduction of competing private currencies. Associated is the demand to limit the role of central banks, e.g. suspending central banks from their function as lender of last resort and thus leaving it to the market to determine the basic interest rate for assets.

The regulatory(policy of order oriented)/ pragmatic think tanks apply the figurative term of the "strong state", which implies the responsibility of the state for observing the market rules and the functioning of financial markets by means of appropriate regulation. However this position includes the demand of the central banks' monetary neutrality. The central banks should be kept clear of discretionary interventions into the bank market necessary in the course of regulatory measures. Further their autnonomy should not be impaired by involving them in economic stimulus plans. Accordingly they consider the purchase of EU government bonds by the ECB aiming at curbing the increase of interest rated as problematic.

Nonetheless both the pragmatic and the austro-radical approach form one continuum. This becomes apparent in the fact that representatives of both schools of thought are active in either category of think tanks. Documents of controversies between the two schools of thought could not be found.

However it is noteworthy that texts of one "school" indeed can be found on the websites of the other. The austro-radical Hayek-Gesellschaft in Berlin, e.g. did publish an article on its websites by Michael Wohlgemuth, who is one of the leading fellows at the ordoliberal Walter-Eucken-Institute. Wohlgemuth works on falsifying Keynes' arguments in the context of the crisis discourse. It is important to mention that the terms "austro-radical" and "ordoliberal" are not to label two mutually exclusive positions but rather they designate two extremes that constitute positions within the same continuum.

Example

In "Rückkehr des Keynesianismus: Anmerkungen aus ordnungspolitischer Sicht"[1] Wohlgemuth and his co-authors Thomas Straubhaar, president of the Hamburger Weltwirtschaftsinstituts (HWWI), and Joachim Zweynert, director of the Wilhelm-Röpke-Institut argue in defence of the thesis that the government's monetary and credit policies are responsible for the current financial and economic crisis. All three authors are prominent representatives of the ordoliberal school of thought. The article was published in Das Parlament, the journal of the German parliament, which represents arguments originating in the regulatory/ordoliberal context for explaining the crisis. Those arguments partly contrast with austro-radical positions and partly they are compatible. Summarized you can find the following arguments in the article by Wohlgemuth, Straubhaar, and Zweynert:

• The monetary policy of the central banks and discretionary state interventions into economic processes are pointed out as co-perpetrators of the financial and economic crisis. (Austro-radical: sole perpetrator)
• Vulgar Keynesianism, which motivates aforementioned policies has been revived during the current crisis. The authors define Vulgar Keynsianism as recourse to a combination of state-controlled monetary policy, anti-cyclical fiscal policy and national industry policy established by Keynes. (This is an accepted fact in both schools. The austro-radical position, however, considers non-discretionary regulations in the financial area as problematic.)
• Dagegen sei der rationelle Kern der Keynesschen Theorie die Hervorhebung der Bedeutung von Unsicherheit für die Entstehung von Krisen. Unter Bedingungen von Unsicherheit, der resultierenden Orientierung individueller Kauf-, Vorsorge- und Investitionsentscheidungen an den statistisch dominanten Handlungsorientierungen würden sowohl optimistisch wie pessimistisch motivierte Marktprozesse verstetigt und verstärkt. Hier würden sowohl investiver Energieüberschuss und Fehlallokationen in Zeiten des Booms begründet liegen, wie auch erstarrte Kauf- und Investitionszurückhaltung in Zeiten der Krise, ein Tatbestand, für den der Terminus Liquiditätsklemme eingeführt wird.
• The neo-classical discussion about business cycles and government policies regarding the same has shown that anti-cyclical monetary policy, i.e. monetary expansion and expansive fiscal policy in times of recession do not result in any sustainable outcomes. The conditions for an economic equilibrium are not affected by those policies. The only results are inflationary tendencies or the increase of the national debt.(This is generally agreed upon.)
• The theory of rational expectations can explain speculative bubbles only insufficiently. At this point the Keynesian term of uncertainty of market decisions trete in sein Recht. (Von austroradikaler Seite wird auf die Konjunkturtheorie der österreichischen Schule zurückgegriffen, die den Zins als Signal für investitive und die Proportionen des Produktionsaufbaus bestimmende Entscheidungen begriffe. Im Marktprozess ergebe sich ein Gleichgewichtszins, der die optimale Allokation von Kapital ermögliche. Staatliche oder Zinspolitik bzw. -setzung durch die Zentralbanken gehe im Regelfall mit einer Abweichung vom Gleichgewichtszins einher, daraus resultierten Fehlallokationen und mit Notwendigkeit Reinigungskrisen, die durch weitere staatliche Eingriffe nur verschärft oder verlängert würden.)
• The current crisis is not characterized by the Keynesian panic saving as was the Great Depression but rather it is characterized especially in the U.S. by a wave of consumption financed by credit.
• In their concluding remarks on the causes of the current crisis the authors explicitly draw on contributions by von Mises and Hayek referring to business cycle theory: "Austrians (e.g. Mises, Hayek), as well as monetarists(e.g. Friedman) consider the flood of central bank money and circulation credits (cash generation in the banking sector) as crucial trigger of the recurrent over and malinvestment bubbles that inevitably cause painful crises."
• Furthermore a practice that is motivated by socio-political consideration is mentioned - the institutionalized and fiscally secured allocation of risky credits that are secured by mortgages to socially deprived real estate buyers. This practice led to failing credits on mass scale, which caused the current crisis. (This historic narrative is held true by both schools.)
• Suggestions about how to cope with the crisis are symmetrical to the explanation of the causes of the same: further expansion of money supply, stimulus plans, discretionary state interventions into markets are considered as inappropriate instruments. On the contrary,it is imperative to reinstate the liability principle, which was virtually annulled by means of intransparent financial instruments, regulatory failure and the easy money policy. It lies in the state's responsibility to create a stable transparent framework, which is characterized by minimizing disincentives and the state's renouncement of discretionary intervention.

Adding to this last point about the reliability of a state-guaranteed framework for markets, the Stiftung Marktwirtschaftspeaks of the "Strong State". In half-ironically using this term the Stiftung means to counter the reproach addressed at the neoliberal discourse that the neoliberal mindset only trusting in the market's efficiency and its self-healing power. Anyhow, it becomes apparent the ordoliberal and austro-radical positions do not differ fundamentally in how they comprehend the relation of state and market: both demand economic neutrality and stability of the monetary system, the state's renouncement of intervention into economic processes, and they demand that the state minimizes its share in the net product. The two positions only disagree on the question of what kind of methods should be applied to this end - strongly marked in their views on the configuration of the monetary system.