Note on Marx's theory of financial crises

Marx argues the C-M-C cycle has the possibility to be destabilizing because of hoarding and adding credit into the mix not only increases the possibility of a crisis, but perhaps makes a crisis inevitable due to changes in the real economy.

Gary Dymski highlights the strategic shift in banking; banks used to know their borrowers and held loans on their own books but now the lending process is disseminated across multiple institutions, "Loan making once involved assessing risk, lending funds, and holding those funds until loans were retired.  This process became disarticulated: the assessment of risk, the lending of funds, the servicing of loans, and the holding of loans all are done by different financial market players" (2013).

The more "innovative" finance becomes, the more fragile and interdependent the cycle becomes.  For Marx, merely adding one contract into the cycle led to increased fragility- think of what the cycle would look like now. 

Dissertation Idea: Monetary Policy Doesn't Work

-Liquidity trap

-Endogenous money supply theory

-Decoupling of fed funds rate and long term interest rates (Comert)

-banks hoarding reserves

-companies borrowing not to invest but to increase shareholder value (Mason)

-household consumption not on the rise (Cynamon and Fazzari)


Most of these ideas address the narrowing of the channels through which interest rates affect growth via consumption and investment. 

Mainstream Stories about Wages

On a personal note, I tend to enjoy Jared Bernstein's blog quite a bit.  He writes in an accessible manner, often embedding nerdy whomp-whomp jokes into his posts- something I aspire to.

I also enjoy his posts because they validate the fact that I am not actually a crazy person.  For example, I understand how the marginal product of labor story explains wages but could never understand how it fit in with how wages are actually determined.  In the real world.

Bernstein's post from a week or so ago makes me feel not so crazy. Apparently the MP story doesn't have much applicational usefulness for him either, "In fact, one problem with the MP assumption is that there is no distributional outcome with which it is inconsistent" (Bernstein, 2014).

I love this observation.  It just so happens that textbook way economics explains wages can correlate to any income distribution! In other words, if the top 1% has everything and the bottom 99% has nothing it must be because the bottom 99% contributes no marginal product and the wage distribution is accurate.

Another related mainstream story is the human capital theory of wages.  A worker's education, experience, sex, race, skills, etc. all contribute to their wage.

This is another theory that I believe justifies any income distribution and/or extremely high salaries.

Why are some people's salaries over a million dollars a year? Because they have better education, more experience, and superb skills.

So if white males happen to be the majority of workers earning over a million dollars a year, it has nothing to do with race, sex, or privilege it has to do with their human capital investments.

What seems to make more sense in terms of wage determination is Marx's theory.  The reserve army of the unemployed keeps wages low and extraction of surplus value high no matter if productivity or education improves. 

Changing Landscape of Jobs

(From David Ruccio)

The above figures give another reason to not be so optimistic about the official unemployment rate declining to about 6.3%.  The type of jobs being created are primarily low wage jobs and presumably jobs with no benefits. 

This can be seen clearly in academia where tenure track positions are being replaced by part-time adjuncts (i.e. UMKC). 

Other than not supplying decent, livable wages for workers, on a macro scale this is a huge drain on aggregate demand.

Macro Implications for Student Debt

(From Naked Capitalism Blog)

My brain translates: Me poor student- no buy house ever





Student debt is becoming a larger and larger component of household debt as can be seen here and here and here.  Although household debt (relative to GDP) is decreasing (more on the declining effect of monetary policy later), it is useful to think about how accelerating student debt is transforming household debt and the implications. 

Mortgages are by far the largest component of household debt but as can be seen from the first graph and from the above links, mortgages are not driving borrowing anymore, student debt accounts for most of the growth in household debt.

One of the meaningful differences between mortgage debt and student debt is that loans for houses leave the borrower with an asset- a house- that could be taken away if payments are not made.  Student loans however, leave the borrower (hopefully) with a degree that (hopefully) translates into a job with (hopefully) higher wages.

The delinquency rate on student loans has an alarming upward trend (second and third link) that I think will only get worse due to the growing portion of low-wage jobs (more later).

Macro Implication Possibility #1: Securitized Student Loans act like Securitized Mortgages

If student loans are similar to the way mortgages functioned in the financial crisis, there is a great risk for a similar crisis as student debt becomes a larger and larger portion of household debt.

However, federal student loans are a different class of debt because they are guaranteed by the federal government.  Therefore if a wave of defaults occurred, it wouldn't produce a credit crunch in money market funds like the defaults on mortgages did. 

But even if most student debt is backstopped by the government and can't infect credit elsewhere, if the percentage of private student debt loans (which do not have this backstop) is growing, then we still have to watch out for this problem.   It does seem likely the private loan percentage of student debt will grow as federal loans shrink and tuition costs increase:

 (From Equitablog)

Macro Implication Possibility #2: Consumption Suck

Secondly, even if there is no reason to worry about private student loans growing to a worrisome level, delinquencies suck consumption out of the economy.  Since student debt is so hard to get rid of (bankruptcy won't help, you don't have an actual asset- like a house that can be taken away) they debit your (presumably already low) income through garnished wages, taking tax refunds, etc.

(This isn't meant to represent causation, just a brainstorm of how these variables might relate to one other): Increasing tuition costs contribute to increased student debt.  Increased student debt decreases consumption by contributing to less types of other debt like home and car loans.  A low wage economy decreases consumption and increases the likelihood of default.  Defaults lead to even less consumption by taking way even more income.  These simple student debt relationships could contribute to the "new normal" slow growth forecast for the economy. 

Systemic!

From David Ruccio's blog: