The contradictions of the new Keynesianism
The way the crisis was rooted in the economic system as a whole was shown by the sheer difficulties governments had in reacting to it. This was a crisis that hurt big capitals and not just those who laboured for them. Humpty Dumpty had indeed fallen off the wall. Yet it seemed that all the king's horses and all the king's men could not put him together again.
The response of virtually all governments to the crisis that erupted in 2007-8 was to turn away from the free market policies they had proclaimed for three decades as the only ones that would work. Overnight they ditched Hayek for Keynes and kept only that bit of Friedman that urged increasing the money supply to ward off deflation.76
But the conditions for applying Keynesian policies with any hope of success were worse than they had been when they had been tried and abandoned 30 years before. The known scale of the losses made by the banks dwarfed those of the mid-1970s-and no one knew, as each bank went bust, which other banks were owed money by it and might go bust too.
The promised bail-outs were massively bigger than those attempted by Roosevelt's New Deal in the 1930s. US federal expenditure then peaked at just over 9 percent of national output in 1 936. This time round it was already 20 percent before the crisis began, and the Bush and then the Obama administrations raised it several percentages more. But the levels of debt in the system that somehow had to be covered were also much greater if the financial system was to begin to function again. George Soros calculated "total credit outstanding" at 1 60 percent of gross domestic product in 1 929, rising to 260 percent in 1 932; in 2008 it was 365 percent and "bound to rise to 500 percent".77 The Bank of England estimated in the autumn of 2008 the global losses of the financial system to be as high as \$2,800 billion.78 Nouriel Roubini estimated the losses of the American banks alone at \$1,800 billion early in 2009.79 As governments poured in the money, mainstream economists ofering advice debated with each other whether it would be enough to halt the transformation of recession into slump, whether governments would be able to raise the money without forcing up the interest rates they were trying to lower, whether they should turn to "quantitative easing"-that is, printing money-and whether any success with this might not risk bringing about a new inflationary spiral and an even greater slump.80
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The New Age of Global Instability