Mark Blyth (4): Why they call it “going for broke”

Click to listen to Chris’ conversation with Mark Blyth (20 minutes, 10 mb mp3)

Mark Blyth confirms the the sneaking suspicion that the meltdown is still melting down — and that you get sharper economic news in from the noisy guy in a Glasgow pub than from the newspapers covering the IMF sex scandal.

“It’s like watching Fukushima — it literally is.” First: how could this happen? Then: ah, they didn’t build the wall high enough, whatever. An institutional design problem! World catastrophe averted, but then another crisis, and another. Then a kind of creeping meltdown. Not on page one any more. The problem isn’t fixed, but people are used to it. “In the Eurozone, it’s ‘Oh, yawn, another European crisis. Uh, tell me something I don’t know.’ You know what? Eventually this thing gets to a tipping point. You don’t know where it is, and then bad things happen.”

We haven’t learned a damned thing from the banking crisis. Dodd-Frank will basically put a little bit of a speed bump into the road and some airbags into the car. Other than that the model remains unchanged. And because of that, we are now more exposed and more at risk than ever. There’s no reason that this model won’t go bang again, and the next time they do that, they won’t be landing on public balance sheets with a 40 percent debt to GDP ration, they’ll be doing it with 80 percent. And that means there’s no money to bail them next time. So when they go down next time they really go down.

Now if you’re a banker at the top of the game you know that. So what’s your incentive? Is it to play nice, to reduce your profitability, to downsize your business? Or is it to go for broke before the whole thing goes up? We’re not going to bankrupt ourselves because of the so-called profligacy of the state. This is all politics by other means. What’s going to get us once again is a credit cycle: a super-boom followed by a  super-bust. Only this time we’re doing it on really highly-levered state and public balance sheets. That’s the real problem. We’re kicking the state and the state is the thing that will save you. We’re kicking away the foundations of the building that we’re relying on to protect us from the hurricane as the hurricane approaches. It’s beyond stupid.

Political economist Mark Blyth with Chris Lydon at the Watson Institute, Brown University, May 25, 2011.