Since the 1944 Bretton Woods Agreement, the rise of capitalism and increased integration of a free-market global economy have collectively swayed policy positions of advanced economies in the belief that continued economic growth is essential to their citizens’ improved living standards. This is an illusion. Not only have we have seen an increasing disproportionality in living standards between industrialized and underdeveloped countries, but the opportunities in underdeveloped nations to autonomously achieve any desired living standard have diminished as developed countries’ citizens continue on their insatiable quest for economic growth.
This disparity is not exclusive to individuals but also among corporations, who have grown at a time when cost-cutting measures (a result of the sub-prime mortgage crisis) begin to show material and long-lasting effects on the outlandish private debt levels of the labour force in OECD countries. While labour demand continues to tighten, health of the labour market, a central proxy of policy interest rates, has been misleading financial market participants and caused asset bubbles, induced increased systemic risk of capital flight, and shifted investment ideology towards an ever-shorter investment horizon. Therefore, the banking system is a key area policymakers of OECD countries must address. That said, it is unlikely that these policymakers will reimpose the Glass-Steagall Act. More likely, increased ‘capital requirements’ will surely bring back much needed merit to the banking system.
The recent half-century has seen unbridled free-market economics as the justification for progression in capital innovation and economic recovery, but will neoliberalism survive when unresolved issues in macroeconomics and an unevolved macroeconometric model falls apart? As Steve Keen recently pointed out to Renegade Inc., “It is supported by mainstream economists because they have a vision of how the economy functions, which completely leaves banks, private debt and money out of their thinking.” As policy interest rates of OECD countries remain in the effective lower bound, only so much unconventional monetary policy can be deployed to aid Keynesian policy objectives. Banking reform needs to start from the ground up.
Progression is needed away from today’s banking industry, where a shift has occurred from human nature’s desire for money to a society-wide imprisoned requirement of the need for money. You simply can’t default on student loans in the US. This is a reason why private debt levels are not as widely discussed as corporate and government debt levels. One on side, the banking industry has produced a quantum leap in agency cost, on the other side, our free-market has placed households in slave-like economic conditions by their dependency on debt. This dependency means that consumers are no longer endowed with intertemporal consumption, such that increased future consumption is achieved by increased current savings, but left with nontemporal consumption. More worryingly, financial market participants are hell-bent on looking for new ways to ‘innovate’ their investment portfolios to ‘capitalize’ on ‘patterns’ so that the ‘greatest returns’ can be achieved for the 1% to obtain an unrealistic, ever-increasing current consumption, which continues to be offset by our leverage on global future production. Hello, World!