The new york times editorial page attributed the lack of regulation that resulted in the meltdown of the financial markets in 2008 to the “Bush administration’s magical belief that the market, with its invisible hand, works best when it is left alone to self regulate and self correct.” But what the editorial failed to mention is that the Bush administration’s $700 billion economic stimulus plan and the Obama administration’s $789 billion American Recovery and Reinvestment Act were both predicated on this magical belief. The fundamental assumption in these plans was that the meltdown occurred because the self-correcting and self-regulating dynamics associated with the invisible hand ceased to function properly. And the intent of the plans was to create market conditions in which these dynamics could begin to function properly with a massive infusion of capital generated by deficit spending. This meltdown began after the collapse of the markets for derivative contracts that allow buyers to hedge against economic gains or losses. In the parlance of mainstream economists, a derivative is an agreement between two parties that the value of something is determined by the price movement of something else, and hedging allows a buyer or seller to protect assets or incomes against future rises in prices. In derivatives markets, debt is used to generate surplus capital, and this surplus is used to borrow increasingly larger sums of money in a process economists call financial leveraging. Traditional derivative trading was in commodity-related futures contracts, and the amount of debt that could be used as financial leverage was highly regulated. In these markets, buyers could hedge against unpredictable changes in the prices of real assets, such as wheat or cotton, and each commodity was traded separately. But this situation changed dramatically after December 2000, when the U.S. Congress banned the regulation of derivatives by passing the Commodity Futures Modernization Act. The rationale for passing this bill, which was largely written by representatives of the investment banks that would later make enormous profits in derivatives trading, appealed to two assumptions in neoclassical economic theory.
Deficit Spending in the Nazi Recovery, 1933–1938: A Critical Reassessment
