It has been interesting to watch how various members of my profession are dealing with the on-going crisis over the last 4 years. Clearly, imbued with the notion that the “business cycle” is dead, which the mainstream macro economists had been attempting to establish as a given in the public debate, most economists were in denial at the outset of the crisis. That denial moved into the manic deficit terrorism that has sought to reconstruct the private debt crisis into a sovereign debt crisis – which allowed them to vent on their pet topic – dislike of government fiscal policy when used to increase employment. They have no problems with active fiscal policy when it is aimed at contraction. They just hate the public sector supporting growth even when the private sector is incapable of doing so. But as the empirical reality has increasingly rejected the predictions of the mainstream macroeconomic models – there has been no inflation breakout or rising interest rates or sovereign government insolvency – there has been a shift going on. Some of those that were advocating austerity now seem to be advocating growth. But when you dig a little deeper there is no fundamental catharsis in my profession going on. The only motivation for those now saying Europe needs growth not austerity is that they are trying to distance themselves from the train wreck that the political leaders are creating there. As the title suggests – yesterday austerity, today growth – but leopards don’t change their spots.

A repeating narrative during this crisis is that fiscal austerity is required in order to satisfy the “markets”, that amorphous collective of bond traders, gamblers, speculators, crooks and whatever else. The regular threats coming from the ratings agencies (those crooks who lied to investors in order to make profits via cosy deals with the originators of the “assets”) reinforce the idea that markets are the “regulators” of good judgement. Economics students are taught that one of the imperatives of government is to deregulate in order to allow the market signals to be clear and strong so we can act in accordance with the “markets” judgement of prudence. It is a paradigm built on a myth. Markets fail and easily become corrupted and arenas where criminals dominate. The signals they send are also deeply flawed and should not be acted upon. One of the lessons of this crisis is that our agents – the governments we elect – have to make markets work for us not the other way around. When markets fail to establish benchmarks that we do not consider to be in our best interests then it is time to reform them.

I notice that a speech made yesterday (November 8, 2011) in Berlin – Managing macroprudential and monetary policy – a challenge for central banks – by the President of the Deutsche Bundesbank, Jens Weidmann has excited the conservatives and revved them back into hyperinflationary mode. The problem is that the content that excited them the most is the familiar mainstream textbook obsession with budget deficits and inflation (through the even more obsessed German-lens). That means it is buttressed with misinformation about how monetary operations that accompany deficits actually work. It tells me that the European Central Bank which is the only institution in Europe that has the capacity to end the crisis is in fact a major reason the crisis is deepening.

Last weekend, on the eve of the G-20 meeting in Paris over the weekend, the Australian Treasurer was talking tough and giving ultimatums to our Northern friends – telling them that the “time for half measures is over. The time for action is here. So people will be looking for a comprehensive plan on October 23”. Of-course, in the Communiqué of Finance Ministers and Central Bank Governors of the G20 from the Paris meeting you don’t get any sense of urgency. Not once do they mention the word “unemployment”. The problem is that the world leaders remain in denial and still want us to believe that you can have “growth-friendly” cuts in spending. To increase spending you do not cut it.