Academic journal article The Economic and Labour Relations Review : ELRR

Yanis Varoufakis (2011): The Global Minotaur: America, the True Origins of the Financial Crisis and the Future of the World Economy

Academic journal article The Economic and Labour Relations Review : ELRR

Yanis Varoufakis (2011): The Global Minotaur: America, the True Origins of the Financial Crisis and the Future of the World Economy

Article excerpt

Yanis Varoufakis (2011)

The Global Minotaur: America, the True Origins of the Financial Crisis and the Future of the World Economy

Zed Books, London and New York.

pp. xi + 252

Paperback: ISBN 978-1-78032-014-4 RRP: GBP 16.99

Hardback: ISBN 978-1-78032-015-1 RRP: USD 107.95

This is a fascinating book: not only do we learn about the Global Financial Crisis (GFC) that has plagued the world since 2007-2008, but we also learn some Greek mythology! The 'Minotaur' comes from Cretan mythology: King Minos of Crete asked Poseidon for a sacrificial bull as a divine endorsement of his rule, but he decided against the sacrifice and in vengeance the gods had Minos' wife (Aphrodite) fall in 'lust' with the bull, and they produced a Minotaur (Minos' bull or taurus, half-human, half bull)! The other states had to pay tribute to King Minos. However, King Aegeus of Athens eventually slaughtered the bull and freed Athens from Cretan domination. For Varoufakis, the Minotaur represents the USA, and the tributes paid to the USA are the capital flows from the rest of the world. Is the US Minotaur going to be 'slaughtered' by China? This book is based on a previously published 'academic' book, Modern Political Economics, jointly authored with Joseph Halevi and Nicholas Theocarakis, but the book under review is single authored. Varoufakis provides an excellent exposition of the origins of the GFC.

To provide an explanation of a crisis we need to explain (a) the underlying causes of the crisis; (b) what is the (immediate) trigger that led to the crisis; and (c) the transmission processes (the propagation mechanism). The underlying causes of the GFC can be traced to the stagnation of real wages and increasing inequality in the USA (and also Europe, although Europe is not mentioned by Varoufakis). In the USA, although the economy was going through a prosperous period, real wages for workers remained almost constant for over two decades and inequality was increasing. Workers, in an attempt to cope with stagnating wages, took out larger and larger loans based on their inflated housing values, and the financial sector was more than happy to lend. The government with its increasing expenditures on defence (the Iraq and Afghanistan wars) and lowering of taxes (especially for the rich) had increasing debts. This led to an attempt to keep up consumption expenditures by increased private sector debts with collateral based on inflated asset/house values. A loose monetary policy and an inadequately regulated financial sector provided low-doc loans (subprime mortgages) that led to a rapid growth of asset and housing bubbles. At the same time, as the Americans were consuming more than their GDP (dis-saving), they had increasing current account deficits which were being financed by foreign borrowing. The deregulation of the financial sector (repeal of the Glass-Steagall Act) led to unregulated lending which was growing at an enormous rate. The impact of the growth of private and public sector debts made the economy fragile and susceptible to shocks.

The immediate cause (the trigger) of the GFC, most economists would agree, is the collapse in September 2008 of Lehman Brothers, which was not rescued by the American government. The transmission or propagation mechanism of the crisis was the slowing of housing demand that led to a crash in housing prices, the bursting of the financial assets and housing price bubbles (herd behaviour) and defaults and bankruptcies. This was transmitted to the financial sector via the growth of complex financial instruments (e.g. collateralised debt obligations, CDOs and credit default swaps, CDSs) that had been created based on the so-called 'assets' (the subprime mortgages) when the financial institutions suddenly found that their assets were worthless. The inevitable consequence of this downgrading of assets meant than many financial houses were no longer solvent, and the collapse of Lehman Brothers was the final straw that broke the back of the financial industry. …

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