Professor Galbraith draws attention to the existence of one overarching worldwide crisis. "Yesterday," he says, "Professor Nouriel Roubini give a magisterial and very high speed tour of the world situation making it clear of course that the promised recovery has not occurred. But if Nouriel is Sir Isaiah Berlin’s fox, who knows many things, let me try this morning to be the hedgehog who knows one big thing, and that one big thing is that what we are experiencing is a single, unified, global crisis of the economy and of the financial system. It is not a cluster of distinct and separated events; a subprime crisis in the United States; a public debt crisis in Greece; a bank crisis in Iceland; a real estate bust in Ireland and Spain; nor are there distinct U.S. and European crises, nor can the financial be separated from the real, nor is Germany a country to which crisis has not yet come with the suggestion that there might be some separate way out. There is one crisis, only one crisis, a deeply interconnected crisis of the world system. This crisis has, I think, three deep sources going back not twenty years but forty years to the early 1970s and the end of what we sometimes call the “golden age,” the “glorious thirty” years in the immediate aftermath of the second World War."
This calls to mind Noah Smith's observation that "something big" happened early in the 1970's. Smith doesn't know what.
Professor Galbraith has some ideas.
"The first of the three deep sources is, I think, the rising real cost of the resources that we use, of energy and of everything that we use energy for. This was a problem that emerged in the 1970s and was then submerged again; it was deferred by new discoveries, by the geopolitical situation, and by the financial power of the western countries, which because of the debt crisis in much of the rest of the world had the effect of suppressing demand for these core resources. But this is a problems that can no longer be avoided or deferred. The cost of energy is roughly twice of what it was a decade ago and the future is far more uncertain. Both of these factors, cost and uncertainty, place a squeeze on the surplus or profitability in regions, continents, and countries that are importers of these resources. And as we confront, as we must, the problem of climate change and as we begin, as we must, to pay the price of climate change this problem is going to become more difficult. That’s just an economic reality that we have to cope with as we face the imperative before us."
"The second great underlying issue ....is technical change, the particular character of which in our time is quite different from ... before. If you take the digital revolution together with globalization, the ease of transnational manufacturing and ... the outsourcing of services, we ... live in an era where technology ... supplants workers. ...[T]he computer and ... associated technologies ... are now doing to the office worker what a century ago the internal combustion engine did to the horse."
"And the third great source of our problem is ideological. It is the neo-liberal idea that has given us deregulation and de-supervision; that has given us the notion that markets can function on their own without breaking down or blowing up. It is this notion as applied especially to finance. This is the great illusion of the last generation, and it fostered a form of economic growth that was intrinsically unstable and unsustainable. Why? ... [I]t was based on declining standards for loans and ... lax accounting standards, it was based upon financial fraud, on the most massive wave of financial fraud that the world has ever seen.... It was known to be such to the lenders at the time. This was true of housing loans in the United States made by the tens of millions that were known to the lenders as “liar’s loans,” as “ninja loans,” no income, no job, no assets; as “neutron loans” destined to explode leaving the building intact but destroying the people. This was known at the time. These were loans that had to be refinanced or they would default.
"It was also true of loans to the public sector, for example Greece....The fact that Greece had a weak public sector and a weak tax system was not a state secret before the crisis...."
"Rising inequality is often linked to these phenomena. But I think we should be clear about what the linkage is. It is not the case that inequality rose and people compensated for it by borrowing more so they could have a higher standard of consumption. This is not what happened. It certainly did not happen in the United States. What happened was, is that the lenders went out to find new markets often fostering fraudulent loans on low-information borrowers, poor borrowers, inner city home owners, for example, forcing those loans to be refinanced so that the recipient only saw a fraction of the debt with which they were ultimately saddled. And the inequality arose from the booking of fees on those loans. This is how bankers get rich. They make their money in this way. And you can see this in their tax statements and you can see it in the geographical distribution of income gains in the United States."Professor Galbraith goes into more detail. You will find it rewarding to read the entire presentation.
You may not find it reassuring.
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