Financial and Economic crises

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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. pragmatism and the second being inspired by policy of order 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.

Ordo theoretical 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 think tanks inspired by policy of order 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 ordo political 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 "ordo theoretical" are not to label two mutually exclusive positions but rather they designate two extremes that constitute positions within the same continuum.


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 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 explaining the crisis originating in a ordo theoretical context. 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.)
  • The rational core of Keynes’ theory instead must be considered its emphasis on the relevance of uncertainty as a cause of crises. Under conditions of uncertainty statistically relevant individual economic decision making with regard to the purchase of goods, saving for the future or investments, market processes motivated by both optimistic and pessimist orientations are each stabilized and reinforced. This is the root cause of both overinvestment and misallocation in times of boom and consumption as well as investment restraint in times of bust. The latter has been named 'liquidity squeeze'.
  • 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 is justified. Austroradicals rely on the business cycle theory of the Austrian school, which holds that interest rates are the signal for investments and the decisions on the proportions of the production structure. The market process results in an equilibrium interest rate, which allows for the optimal allocation of capital. State or central bank regulated interest rates will normally result in a rate deviating from the equilibrium rate, and causing misallocation and necessary correction crises, which will only be aggravated or prolonged by further state intervention.
  • 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.

Think Tanks and their views on the Financial and economic crisis


1. Center for European Policy - causes: (state) inflation of credits (publicly guaranteed) for the financially weak, failure of the regulatory authorities, wrong signals to market participants; (private) systematic way too optimistic profit expectations, intransparent financial instruments; consequences: expansion and internationalization respectivley Europeanization of financial services supervision, adjustment of the finance regulatory framework, limiting of public-sector borrowing
documents: 2 papers, 24 brief analyses
Most documents of the CEP brief analyses of 2 to 4 pages and refer to EU regulation proposals. They all have a uniform structure: description of planned regulation, expected changes of the status quo affected by the measure, Beschreibung des Inhalts, durch die Maßnahme bewirkte Änderung gegenüber dem Status Quo, subsidiarity statement of the responsible committee (usually the EU Commission), political context, evaluation from a economic/regulatory and legal point of view. During the years 2008 until 2010 the CEP published 24 such brief analyses in the area financial services as well as two studies. The paper "Eine ordnungspolitische EU-Finanzmarktregulierung. 'Für einen neuen Umgang mit Risiken'" - 03/2009[2] elaborates thouroughly on causes of the current crisis, its course, and on the conclusions that can be drawn from it.
ordoliberal | political consulting (by means of papers and analysis briefs the CEP takes diffentiated stances on EU regulations and orders)
(annotation: organizationally associated with the Stiftung Ordnungspolitik and the Friedrich von Hayek-Stiftung)

2. Council on Public Policy - causes: (state) inflation of credits (publicly guaranteed) for the financially weak; (private) -; consequences: the state should keep clear of any attempts to superficially influence market processes - the institute does not focus on this issue; In October 2009 the institute hosted a conference titled "The Market Society and its Morality. 250 Years Adam Smith's Theory of Moral Sentiments". The conference was motivated among others by the recent critique of the immorality of markets. Market society and moral socialization complement and advance eachother (even though markets are acknowledged as neutral). Further the necessity of a publicly guaranteed institutional framework is acknowledged to establish justice.
documents: 2 opinion pieces: 1st article by Michael Zöller, founder of the institute, was published in the FAZ "Haben wir denn im Kapitalismus gelebt?" (FAZ, Kapitalismus-Reihe, 30.07.09)[3], in which he develops the argument, using the example of the New Deal, that state intervention prolongs crises. 2nd article by Jens Lemke (fellow at the institute) "Krise der Politik nicht des Marktes" published in the institute's Newsletter 07/2009.
austro-radical | ideology production (the institute comments little on current affairs)

3. Hayek-Gesellschaft - causes: (state) alien intervention into the interest rate mechanism and credit expansion; (private) -; consequences: withdrawal of the state from monetary and interest rate policy
documents: The Hayek-Gesellschaft (Berlin) has installed a thread on its website addressing the current international financial crisis where they have gathered 40 contributions so far (among them one by Ludwig von Mises). Those articles were not written solely for the purpose of the website but rather for the general public. However the authors of the articles are predominantly direct associates of the society (either leading study groups, or they are members if the executive or advisory board). Partly those contributions are newspaper articles and opinion pieces (such as the one by Frank Schäffler (FDP-MP) or by Torsten Polleit, partly they are scientific contributions such as the article by Schüller, Alfred published in Ordo (60, 2009) or they elaborate on finance technical details such as the piece by o Konrad Hummler (president of the Swiss association of private bankers). This sample of contributions shows that the austro-radical approach dominant in the Hayek-Gesellschaft can co-exist with the ordo theoretical approach.
austro-radical | ideology production

4. Hamburg Institute for International Economics - Causes: (state); - (private); optimism/malpractice of market participants; Consequences: preserving ordo-political principles, no Keynesian conclusions, partial nationalization mistaken, further decreasing regulation, assuming of responsibility by individuals
documents: The HWWI lists 49 contributions (7 in 2010; 25 in 2009; 15 in 2008; 2 in 2007), the majority in the series “standpoints” regards the financial crisis.[4]

  • wishes to disempower rating agencies
  • opts for acctepting a higher inflation in dealing with the debt crisis in the euro zone
  • Countries leaving the euro zone is not considered an option, aid programs are necessary
  • from an ordo-political perspective the HWWI demands a different monetary policy based on the principle of anti cyclically setting interest rates and a long-term rate of interest considerably higher than 0
  • the problem of financial institutes being too big to fail must be resolved to restore the nexus of responsibility and accountability
  • shadow financial statement/ financial statements of special purpose entities should be integrated into financial statements of banks
    ordoliberal | policy and economic consultancy (main focus of the institute is on business cycle analysis and resource market observation)

5. Institute for Free Enterprise (IUF) -
:: Causes: (state); cheap money policy, credit expansion; (private) -; consequences: withdrawal of state from monetary policy, fiscal retrenchment, limiting of government share
The issue as only secondary priority (the author of contributions concerned with the financial and economic crisis, Prollius, also publishes for the Hayek society)

  • Bailout programs led state into a debt trap that now in turn compels states to impose radical austerity policies
  • government economic stimulus packages are considered counterproductive; reference to Rothbard’s analysis of New Deal policies
    documents/ events: 12 opinion pieces of altogether 37 published between 20008 and 2010 refer to the financial and economic crisis. In 2008/2009 the IUF hosted 5 events featuring talks and discussion round dealing with questions concerning the financial and economic crisis. Thereof on in cooperation with Friedrich Naumann Stiftung für die Freiheit and the Institute for public finances, competition and institutions of the Humboldt University Berlin (chair Beat Blankart
    austroradical | production of ideology

6. New Social Market Economy Foundation (Initiative Neue Soziale Marktwirtschaft) - / :: Causes: (state) support of unsecured mortgage loans, welfare policy via credit lever; (private) complex financial products concealing risks, doing risky business not listed in financial statements by way of founding special purpose companies; consequences: the state cannot substitute the market, retaining of ordo-political principles, necessity of frugality

  • opts for consolidation by way of austerity policy
  • criticizes bad bank concept of the last federal government because of costs for tax payers and cancelling the accountability principle
  • sees necessity of internationalizing bank supervision
  • economic stimulus packages are mostly considered inefficient, indebtedness caused by them should be solved consolidation measures.
    documents: INSM maintains a news website ("reform news" - Reformnachrichten); between April 2009 and early May 2010 the INSM published more than 370 news thereof 50 percent refered to the financial and economic crisis. A tendency in the news is only perceivable in their selection. The INSM published three dossiers, one on the financial, and one on the banking crisis, and the third on economic stimulus packages. The dossiers contain overviews compiled by the INSM, essays, and opinion pieces referring to interviews with or by experts from the finance industry, economics, and financial and economic politics. Another publication format are „standpoints“ whereof 11 were published dealing with the financial and economic crisis. Those publications are comparable to commentaries. Among them were contributions by Thomas Straubhaar, Johann Eeckhoff Stiftung Marktwirtschaft, Hans Tietmeyer and Michael Hüther (director of the Instituts der Wirtschaft. The INSM released 66 press statements between early 2008 and May 2010. Seven of those dealt with the financial and economic crisis and its consequences. Moreover the INSM maintains an economist’s blog that regularly features contributions addressing the financial and economic crisis, and government measures etc. in this context.

ordoliberal | ideology production/opinion making
(annotation: the INSM relies less on in-house contribution, more so on contribution of ist external experts which shows in detail uneven assessments of issues)

7. Stiftung Marktwirtschaft - :: Causes: (state) creation of an environment advantageous for granting problematic credits, poor response by regulatory authorities; (private) practice of loan syndication generated an asymmetry regarding information which in turn increased risks; equities were systematically reducede by outsourcing the securization business in special purpose entities, external to financial statements and were thus not regulated; consequences: considers government rescue packages as appropriate measure; regulation should advance implying all business in financial statements; enforcing internationalization of regulation; putting a time limit on government deposit guarantees to prevent moral hazard; enhance report duties; keep central banks separate from system of regulatory interventions into banking market to preserve their monetary neutrality.
A text of the series "Arguments of the Kronberger Kreis" deals extensively with the financial crisis. Further it gives a detailed overview of its chronology, an assessment of government activity regarding the crisis, and potential regulatory need.
documents/events: 2 publications (1x aus der Reihe "Studien des Kronberger Kreises" ("Mehr Mut zum Neuanfang", 2010, 42 S.), one in the series „arguments of the Kronberger Kreis" ("Lessons of financial market crisis", 2009, 16 pages); Bernd Raffelhüschen parenthetically addresses the issue of refinancing the stimulus packages in a publication of the series concerned with the generational balance (Ehrbarer Staat? (respectable state) Update 2009: economic crisis meets capacity (arguments concerned with market economy and politics, No. 108, 2009). In May 2010 the foundation hosted a conference entitled "financial market and micro coordination politics. What is the perspective for 2020 like". The keynote speakers revived the rethoric figures of the "strong (regulatory powerful) state" and the "nexus of responsibility and accountability". br> ordo theoretical – partly policy consulting, partly opinion making
(In the study "More Courage to start afresh" the foundation links dealing with the crisis of financial markets to its social reform discourse, e.g. demanding to limit the time frame for unemployment benefit for older unemployed as well as for short-time working benefit.)

8. Walter Eucken Institut - causes: (state) credit expansion, erroneous signals ; (private) irrational, insecure behavior; consequences': no cheap money policy, sustainable economic policiesk
documents/events: The Institute co-authored the open letter "To master the crisis – strengthening Germany " of January 27, 2009. Employees of the institute published 5 press statements in 2009 concerning the crisis. The institute hosted 22 events (discussion rounds and talks) between 2009 and 2010. 8 of which directly referred to the financial and economic crisis. Michael Wohlgemuth and Ekkehard Köhler, both research fellows at the Institute gave 15 external talks in 2009.
ordoliberal | ideology production

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