A cul­ture of mania: a psy­cho­an­a­lytic view of the incu­ba­tion of the 2008 credit cri­sis

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In his recent paper enti­tled A cul­ture of mania: a psy­cho­an­a­lytic view of the incu­ba­tion of the 2008 credit cri­sis ,  Pro­fes­sor Mark Stein devel­ops a the­o­ret­i­cal frame­work around the notion of a manic cul­ture, com­prised of four aspects: denial; omnipo­tence; tri­umphal­ism; and over-activ­ity.

A series of major rup­tures in cap­i­tal­ist economies were observed and noted by those in posi­tions of eco­nomic and polit­i­cal lead­er­ship in West­ern soci­eties,” he said. “These rup­tures caused con­sid­er­able anx­i­ety among these lead­ers, but rather than heed­ing the lessons, they responded by manic, omnipo­tent and tri­umphant attempts to prove the supe­ri­or­ity of their economies.”

All four of these of these manic qual­i­ties were appar­ent in the Aus­tralian trea­surer last week “The doom­say­ers have been proved to be com­pletely and absolutely wrong,” Mr Swan said  . Just as Aus­tralia faces a sig­nif­i­cant slow­ing of the Aus­tralian prop­erty bub­ble,  together with sig­nif­i­cant signs of trou­ble within all our trad­ing part­ners and a con­tin­u­ing Euro­pean debt cri­sis , the trea­surer stands resplen­dent  in tri­umphant denial .

About Craig Tindale

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  • mahaish

    the rba cash rate is 3.5%.

    and every 1% adjust­ment down­wards adds , what 20 bil­lion in addi­tional spend­ing power.

    so there is a bit more ammo left

    so what the gov­ern­ment takes away the rba pro­vides for the time being.

    plus we still have cumila­tive deficits from 2009 onwards of between 4 to 6 % of gdp to work their way throught the sys­tem, regard­less of the sur­plus thats been fore­cast.

    i think we have done a pretty good job of stay­ing out of trou­ble, as a con­se­quence of those cumila­tive deficits.

    the neg­a­tive wealth effects of stag­nant or declin­ing prop­erty and share mar­kets are mak­ing peo­ple grumpy, but they all have a job and ris­ing incomes, care of the cumila­tive deficits and our unique indus­trial rela­tions sys­tem.

    and thats the crux, the gov­ern­ment can have as much unem­ploy­ment as its pre­pared to put up with, and every banker knows that the unem­ploy­ment rate is the most sig­nif­i­cant pre­dic­tor of the default rate.

    i think wayne swan should rightly be happy about the power of ver­ti­cal money to cir­cum­vent a dis­as­ter in the hor­i­zon­tal money part of the econ­omy.

    now if only the yanks and the euro­peans under­stood this , instead of them being blinded by their ide­alog­i­cal obses­sions

  • bret­t123

    Ear­lier in the year (Feb) Steve com­mented “give it six months to a year and we’ll know whether ChIn­dia is going to per­ma­nently insu­late us from the rest of the world’s cri­sis”

    When can we expect and update on this state­ment, Steve? Should we give it till the end of the year?

    I’m very inter­ested as to whether Aus­tralia has been “per­ma­nently insu­lated” ?

  • Hal Hor­vath

    I think this view pegs the real­ity. Look at pop­u­lar movies. In the U.S., we have super­heroes. The pop­u­lar imag­i­na­tion loves heroes, from James Bond through Jason Bourne, who are sim­ply supe­rior to all com­ers. A down­turn (eco­nomic) brings out our worst qual­i­ties into the light, as nation­al­ists sud­denly answer the call.

    Mahaish, it’s widely thought over here that Aus­trailia is pro­foundly depen­dent on the boom­ing man­u­fac­tur­ing of china via demand for mate­ri­als, which has depended on the unsus­tain­able peg to the U.S. dol­lar.…. Only a mat­ter of time, in other words.

  • TruthIs­ThereIs­NoTruth

    As every piece of infor­ma­tion you pick up from the media, I think that the depen­dance on China is over­stated. Although there is no doubt that growth spurts are under­pinned by iron and coal exports (to China), the impact of a slow­down in China may not be as direct as the bear­ish view assumes (and has assumed for the last sev­eral years…).

    There are sev­eral rea­sons. AUD being thought of as a com­mod­ity cur­rency pro­vides a buffer for falling com­mod­ity prices. The nature of the prod­ucts has a sticky long term con­tract dri­ven demand, par­tic­u­larly energy prod­ucts (i.e. once you build a power sta­tion you have to keep feed­ing it fuel). On top of that the nature of the cur­rent growth through capex, increases future capac­ity. Even with a bear­ish com­mod­ity price out­look, the extra capac­ity and future planned capex almost guar­an­tees GDP growth for a few years to come. On top of that Aus­tralian house­holds have increased their sav­ings ratio, the gov­ern­ment is mov­ing into sur­plus and Aus­tralia has a good pass through mech­a­nism of inter­est cuts directly to the house­hold, with the abil­ity of Aus­tralian banks still able to pass on most of the cuts. 

    If you want to make eco­nomic com­men­tary on the cur­rent com­mod­ity I would sug­gest study­ing past com­mod­ity booms to under­stand for how long and in what way the invest­ment in extra capac­ity fil­ters through the econ­omy and eco­nomic growth. 

    It is inevitable that the econ­omy will slow down sooner or later and the bears will have their day again, con­ve­niently for­get­ting all the years that the bear view has pro­duced some out­ragously innacu­rate pre­dic­tions. At the moment the bear view with regards to Aus­tralia has a strong “we’ll see who will have the last laugh” flavour, and with the nat­ural cycle of the econ­omy I’m sure one day the sun will shine for the bear, but I wouldn’t bet on it hap­pen­ing any time soon.

  • RickW

    Aus­tralia man­aged a 2.8% growth in GDP to Q1 2012 from same period in 2011. 

    In money terms the growth was AUD37.4bn. In the same period the cur­rent account went back­wards AUD37.2bn.

    So Aus­tralia has mod­est growth but it is entirely depen­dent on increas­ing exter­nal debt. That would be tol­er­a­ble if the debt was denom­i­nated in AUD but mostly it is not. 16% of the pri­vate bank lia­bil­i­ties, equiv­a­lent to 30% of GDP, is denom­i­nated in for­eign cur­rency.

    Aus­tralia is in a del­i­cate posi­tion being highly depen­dent on black and red com­mod­ity demand and prices hold­ing up near their record lev­els.

    It is appar­ent that the RBA is con­tent to see steady delever­ag­ing with pri­vate banks grow­ing deposits rather than being totally reliant on increas­ing off­shore fund­ing. It seems there are more econ­o­mists tak­ing pri­vate debt into account but none of the cur­rent bunch of politi­cians in oppo­si­tion have raised the issue of the dete­ri­o­rat­ing cur­rent account; growth com­ing entirely through debt increas­ing.

  • RJ

    think wayne swan should rightly be happy about the power of ver­ti­cal money to cir­cum­vent a dis­as­ter in the hor­i­zon­tal money part of the econ­omy.”

    I assume you mean Govt deficit spend­ing

    There really is no such thing as ver­ti­cal money. Rather there are just lev­els of hor­i­zon­tal money

    But any­way Govt deficit spend­ing DOES NOT result in more level 1 money (cen­tral bank reserves which is called ver­ti­cal money) or level two money (bank credit). Because bonds are issued to drain both

  • RJ

    And here’s an exam­ple of some­one (War­ren Mosler) tying him­self in knots try­ing to explain what ver­ti­cal money is

    http://community.tradeking.com/forum/categories/general/topics/5030-the-concepts-of-horizontal-vrs-vertical-money-creation-the-solvency-of-the-us-govt/forum_posts

    In my view its an inap­pro­pri­ate term to use to describe our money and bank­ing sys­tem. That will con­fuse rather than help peo­ple under­stand how it all fits together

  • RJ

    But any­way Govt deficit spend­ing DOES NOT result in more level 1 money (cen­tral bank reserves which is called ver­ti­cal money) or level two money (bank credit). Because bonds are issued to drain both”

    Cor­rec­tion

    Except when bonds are pur­chased by banks. In which case reserves are drained but not bank credit.

  • RJ

    16% of the pri­vate bank lia­bil­i­ties, equiv­a­lent to 30% of GDP, is denom­i­nated in for­eign cur­rency.”

    So that the banks can get lower inter­est rates? It is a risk though but is 16% too big a risk for a bank to take. Esp if the 16% is held in a mix of cur­ren­cies.

    And this must also mean that for­eign­ers hold Aust $s. As the say US$s can only be obtained if a US holder wants Aussie dol­lars

  • mahaish

    But any­way Govt deficit spend­ing DOES NOT result in more level 1 money (cen­tral bank reserves which is called ver­ti­cal money) or level two money (bank credit). Because bonds are issued to drain both”

    if the gov­ern­ment deficit ends up in non bank bal­ance sheets, it changes the net worth posi­tion of the non bank sec­tor of the econ­omy rj,

    the increase in net worth can be held as a deposit , or a secu­ri­tised asset.

    the con­sol­i­dated treasury/central bank cre­ates net assetts in the hor­i­zon­tal sec­tor of the econ­omy.

  • mahaish

    great arti­cle by mosler. dont know what the prob­lem is rj,

    need to get away from talk­ing about money, instead of finan­cial assetts.

  • RJ

    When the gov­ern­ment “spends,” the Trea­sury dis­burses the funds by cred­it­ing bank accounts.”

    The first sen­tence is con­fus­ing for a start

    The com­mer­cial banks credit banks accounts not the trea­sury.

  • RJ

    The result­ing increase in the recipient’s deposit account has no cor­re­spond­ing lia­bil­ity in the bank­ing sys­tem.”

    And what does this mean? The deposit is the banks lia­bil­ity

    Reserve account­ing uses the stan­dard account­ing iden­ti­ties, but the mean­ing of “lia­bil­ity” is not “debt.””

    This arti­cle really is rub­bish by War­ren. He should leave an expla­na­tion like this to some­one else.

  • Glenn Stehle

    @RickW

    I, like you, am not nearly so san­guine as Swan. But one must remem­ber that it is the job of folks like Swan to be cheer­lead­ers for the econ­omy, and real­is­tic por­tray­als are not in their vocab­u­lary.

    I see Aus­tralia to be in a sim­i­lar sit­u­a­tion as the United States. It has an 8-cylin­der econ­omy that is fir­ing on one cylin­der. In Aus­tralia, that one cylin­der is min­ing indus­try. In the US it is the war indus­try.

    Aus­tralia, like the United States, has inor­di­nate net for­eign debt. But this begs a cou­ple of ques­tions:

    1) Is the debt denom­i­nated in the sov­er­eign cur­rency? (You’ve already answered that ques­tion.)

    2) Was the debt incurred to invest in pro­duc­tive assets, or was the debt incurred to invest in non-pro­duc­tive assets?

    In the case of Aus­tralia, it is argued that the net for­eign debt was incurred “because of gov­ern­ment stim­u­lus spend­ing and pri­vate bor­row­ing to fund the min­ing and infra­struc­ture boom.”
    http://www.news.com.au/business/federal-budget/national-debt-to-reach-1-trillion/story-fn5dkrsb-1225861074909#ixzz1xIbY3bCB

    In the the case of the United States, it is argued that the net for­eign debt was incurred to finance America’s “guns AND but­ter” for­eign pol­icy:

    *quote*The U.S. has been per­fectly happy to accede to the cur­rent state of affairs in spite of the immense eco­nomic dam­age it has inflicted on its domes­tic man­u­fac­tur­ing sec­tor (and the con­comi­tant evis­cer­a­tion of its mid­dle class) because it has pro­vided the coun­try with a cheap form of war finance, a par­tic­u­larly import­nat con­sid­er­a­tion as it has grad­u­ally miita­rized its energy policy.*end quote*
    http://media.pimco-global.com/pdfs/pdf/WP007-090607%20Renegade%20Economics%20FINAL.pdf

    The min­ing invest­ment appears to have ren­dered higher div­i­dends than the mil­i­tary invest­ment. Aus­tralia has got­ten an increase of about 40 cents in GDP per dol­lar of increased debt (and this is all debt, not just for­eign debt), whereas the United States has only got­ten an increase of GDP of about 17 cents. (As all empires since the Renais­sance have dis­cov­ered, empire always reaches a point where it is no longer prof­itable.)

    http://www.businessinsider.com/david-stockman-youd-be-a-fool-to-hold-anything-but-cash-now-2012–3

    http://www.macrobusiness.com.au/2012/05/the-rise-of-unproductive-debt/

    His­tor­i­cally, a dol­lar of increased debt has yielded about 65 cents in increased GDP. This had been the “golden con­stant” for a hun­dred years prior to the 1990s in both the United States and in Aus­tralia.

    So even though Australia’s min­ing invest­ment has been far more pro­duc­tive than the United States’ mil­i­tary invest­ment, is it pro­duc­tive enough?

    And what will hap­pen to Australia’s min­ing invest­ment should world com­mod­ity prices crater?

    Another thing: when the debt cri­sis finally descended upon the United States, we did not see the cap­i­tal flight and rapid out­flows of hot money typ­i­cal of Third World style debt-trap dynam­ics. Just the oppo­site occurred, and there was a mas­sive flight to U.S. dol­lars. Why were U.S. dol­lars per­ceived to be a safe haven despite the fact that the U.S. econ­omy is such a bas­ket case?

  • RJ

    !Another thing: when the debt cri­sis finally descended upon the United States, we did not see the cap­i­tal flight and rapid out­flows of hot money typ­i­cal of Third World style debt-trap dynam­ics. Just the oppo­site occurred, and there was a mas­sive flight to U.S. dol­lars. Why were U.S. dol­lars per­ceived to be a safe haven despite the fact that the U.S. econ­omy is such a bas­ket case?

    Because the US is not a bas­ket case. Far from it

    And there is no real (just make pre­tend) GOVT debt cri­sis. US Govt debt is miles too low (this is the main US prob­lem). Its only because the clue­less equate US Govt debt to house­hold debt that some are con­cerned about US Govt debt lev­els.

    The big investors under­stand this. US Govt debt is almost risk free. The US Govt will never default for eco­nomic rea­sons. The only risk of default is for polit­i­cal rea­sons

    US GOVT DEBT IS A LIABILITY cre­ated by the US trea­sury with­out limit as required. And it is always sup­ported by a NON GOVT INTEREST BEARING ASSET held by another party.

  • Glenn Stehle

    ? TruthIs­ThereIs­NoTruth said:

    On top of that Aus­tralian house­holds have increased their sav­ings ratio, the gov­ern­ment is mov­ing into sur­plus and Aus­tralia has a good pass through mech­a­nism of inter­est cuts directly to the house­hold, with the abil­ity of Aus­tralian banks still able to pass on most of the cuts.

    Maybe so, but still: “Aus­tralia Has High­est House­hold Debt to Dis­pos­able Income Ratio in World.” http://www.dailyreckoning.com.au/australia-has-highest-household-debt-to-disposable-income-ratio-in-world/2010/02/03/ In a speech just last week, RBA gov­er­norn Glenn Stephens stated this ratio still stands around 150%.

    The House­hold Debt to Dis­pos­able Per­sonal Income Ratio in the US of 128% is a tad lower than the 150% the Gov cites for Aus­tralia.

    http://www.aiminvestments.com/pdf/ConRec.pdf

    In the United States it has fallen from a peak of 133%, mostly due to bank­rupt­cies and fore­colo­sures.

    ? TruthIs­ThereIs­NoTruth said: 

    If you want to make eco­nomic com­men­tary on the cur­rent com­mod­ity I would sug­gest study­ing past com­mod­ity booms to under­stand for how long and in what way the invest­ment in extra capac­ity fil­ters through the econ­omy and eco­nomic growth.

    That’s a good idea, and I would sug­gest as a start­ing point study­ing the per­for­mance of the economies of places like Texas, New Mex­ico, and Lou­siana, which all had economies heav­ily depen­dent on oil pro­duc­tion, dur­ing the oil boom which began in 1973 and in the wake of the pre­cip­i­tous declines in oil prices which began in 1982. 

    It wasn’t a pretty sight, and I think you will find pre­cious lit­tle in actual expe­ri­ence to sup­port your the­o­ries.

  • Glenn Stehle

    RJ said:

    Because the US is not a bas­ket case. Far from it

    Well I sup­pose that if enough peo­ple actu­ally believed that, that could have some­thing to do with it.

    But I would think that cur­rency manip­u­la­tion by gov­ern­ments in emerg­ing Asia, the Mid­dle East, Japan and the Nordics has a lot more explana­tory power.

    When Dia­ly­nas and Auer­back wrote the report I cited above, for instance, China had accu­mu­lated (as of June 30, 2007) $1.33 tril­lion in for­eign cur­rency reserves. Four years later, in July 2011, China’s forex reserves stood at $3.2 tril­lion. http://the-diplomat.com/2011/07/31/china%E2%80%99s-2-trillion-hole/

    In my way of think­ing, both China and the United States are bas­ket cases.

  • Steve Hum­mel

    In my way of think­ing, both China and the United States are bas­ket cases.”

    Indeed. We’re not just pay­ing our­selves this debt. Its another nation. And likely the vast major­ity of the rest of that debt is owed to the TBTF Banks and the TBTF CEO’s and their cor­po­rate stock­hold­ers.

    Debt is prob­lem­atic as above, and RE-dis­trib­u­tive tax­a­tion in order to pay it is elit­ist advan­taged and the bur­den on already inher­ently scarce pur­chas­ing power for the indi­vid­ual is oppres­sive. Why give away your power? DISTRIBUTE IT TO EVERYONE INSTEAD!.…..and then let the ambitious/unambitious work for any (hope­fully) just reward. 

    Wis­dom and fatherly advice sim­i­larly come from the heart which is a deeper place than the tables of the money chang­ers.

    Nei­ther a bor­rower nor a lender be.
    For a loan often loses both the loan and the friend,
    And bor­row­ing dulls the edge of the econ­omy.
    This above all, to your own self be true,
    And it must fol­low, as the night the day,
    You can­not then be false to any man.
    Good­bye. My bless­ing instill these things in you!” (Ham­let)

  • Hal Hor­vath

    @Glenn — “Why were U.S. dol­lars per­ceived to be a safe haven despite the fact that the U.S. econ­omy is such a bas­ket case?”

    Evi­dently, a lot of money thinks the U.S. is pretty much the oppo­site of a “bas­ket case”.

    This could be, for instance, due to the fact the U.S., unlike china, Ger­many, Aus, is *not* espe­cially depen­dent on exports, but instead has the world’s great­est amount of demand, the one thing in short­est sup­ply.… Of course, U.S. busi­nesses have this huge advan­tage right in their own yard.…

  • mahaish

    need to under­stand the dif­fer­ence between trans­fer pay­ments from the trea­sury and a bank loan RJ.

    dont see what the prob­lem is with what mosler is say­ing.

  • Blot

    Why were U.S. dol­lars …”
    When peo­ple sell US stocks they are buy­ing USD.
    Later the mon­e­tary base was dou­bled, but the fed is pay­ing inter­est so the real money sup­ply did not change.
    (I think.. I am no expert).

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