I make this introduction because it is vital to understanding what I call "the fracture" in the American ruling elite between

"Progressives" who have a new vision of how a modern society should function and evolve from its capitalist origins, and those "Conservatives" who (in the words of FD Roosevelt) would have us return "to the days of horse and buggy". One of the chief "ailments" (Freud would call them "neuroses") of capitalism is "fear" - not least "fear of stagnation", of that "liquidity trap" that Keynes theorised and Krugman reviewed (here http://www.brookings.edu/~/media/Files/Programs/ES/BPEA/1998_2_bpea_papers/1998b_bpea_krugman_do minquez_rogoff.pdf ) in relation to Japanese deflation and which is brought about by the existence of "money", which Keynes described as "the bridge between the present and the future". It is this "fear" that paralyses capitalist society - the fear of the future, the fear that the present (the capitalist established order) is in conflict with the future (the need of capital to allocate social resources only if they yield a "profit" when this outcome is obstructed by the antagonism of us "workers", that is, by all those who produce social wealth but have next to no say in "how", "what" and "how much" is produced). Once again, it is in the context of this capitalist "fear" and the "Rooseveltian Resolve" (Bernanke's phrase coined here http://www.piie.com/publications/chapters_preview/319/7iie289X.pdf ) that is needed to overcome it that we must begin to analyse the conduct of monetary policy under the current leadership at the Fed. Keynes introduced "uncertainty" to economics, just as Freud introduced "neurosis" to psychology and civilisation. Uncertainty is what separates the capitalist present from its future: and "money" is the means of "bridging" these two. Just as Schumpeter was initially wrong to believe that "entrepreneur" and "capitalist" were two "separate" persons, so were Keynes and Kalecki wrong to believe that borrower's risk and lender's risk are two "separate" entities: - they are merely "functions" of capital. It is false and meaningless to say that "risk is the engine of capitalist growth". Capital does not seek "risk" - if that were so the entire earth would have been laid waste by now! Capital seeks "safety" - "safe profits", to be exact. The "lending function" is that "aspect" (Bild) of capital that seeks at least the return "of" capital; the "borrowing function" is the one that knows that for capital even "to preserve itself" it must go through the mortal danger of "investment". No "profit" without "investment". The "lender" is the present, and the borrower represents the future. By the process of lending "money-as-capital" to the borrower, the lender "invests" in the future - because without "investment", without being perennially "in circulation", capital cannot even "preserve" itself, let alone "grow" and "be profitable" ("Accumulate! Accumulate! That is Moses and the prophets!"). So there can be no "information asymmetries" between borrowers and lenders - because both are "internal functions" of capital. Therefore, "risk" (both borrowers' risk and lenders' risk) can determine only (through higher interest rates) the internal "distribution of profit" between capitalists - but it cannot determine "profit" itself! "Risk" is the capitalist "projection" into the future - the "expectation" of the likelihood of "profit". When this "expectation" is beset with and devoured by "uncertainty", we have a "liquidity trap", we have... "the zero bound" (see M Woodford and Eggertsson, "Monetary Policy at the Zero Bound" here http://www.scribd....licyat-Zero-Bound ). When the "expected" profit is minimal, capital prefers to bide its time and remain "liquid", "ready-at-hand". But what is the "ultimate source" of this "uncertainty"? (Fahr et alii, "Lessons for monetary policy strategy" at page 6, here www.ecb.int/events/conferences/html/cbc6/Session_1_paper_Fahr_Motto_Rostagno_Smets_Tristani.pdf) Few, if any, monetary economists will answer the question properly: they will point to "higher interest rates", "higher uncertainty", or "information asymmetries" (see F Mishkin, "Spread of Financial Instability" here www.kansascityfed.org/publicat/sympos/1997/pdf/s97mishk.pdf ).

But in reality, the antagonistic reality of capitalist society, is that in order "to valorise" itself and emerge from the crucible of the production process in the shape of "products" that can be sold to yield a "profit", capital

must first contend with "us" - the workers, in the workplace and, increasingly, in "the society of capital" at large. So we know that capital seeks to valourise itself as safely as possible indeed, if this circle could be squared, capital would wish to be profitable as naturally as trees bear fruit! (- Whence comes the notion of fructiferous capital and of that more ignominious one, the Wicksellian natural rate of interest! or finally that most infamous of bourgeois phantoms, the natural rate of unemployment!) And when, in one fell swoop, two decades ago, one of the most bestial dictatorships this world has ever seen, the Chinese Politburo, decided to make the great leap forward, all the prayers of capital seemed to be answered it was Christmas all year round! Here were a billion potential workers that could produce consumption goods to keep workers in advanced capitalist countries pacified and maintain nominal wages stable whilst the cost of wage goods for capitalists declined dramatically! This was the basis of the Great Moderation. Again, Fahr at alii fail to mention this, and list the effects rather than the ultimate source: The period before the financial crisis, known as the great moderation, was the result of a number of factors that can be grouped into: a) structural change, e.g. better inventory management (McConnel and Perez-Quiros, 2000) or financial innovation and better risk sharing (Blanchard and Simon, 2001), b) improved macroeconomic policies, such as the establishment of stability-oriented monetary policies, and c) good luck, i.e. the absence of large shocks such as the oil price crises of 1974 and 1979.11 The relative importance of those factors has been hotly debated, but all three factors are likely to have contributed to a reduction of volatility.12 It is this paper by Blanchard and Simon ( http://www.brookings.edu/~/media/Files/Programs/ES/BPEA/2001_1_bpea_papers/2001a_bpea_blanchard.p df ) that Bernanke mentions in the very first paragraph of his address launching the phrase the Great Moderation (here http://www.federalreserve.gov/boarddocs/speeches/2004/20040220/default.htm ):
One of the most striking features of the economic landscape over the past twenty years or so has been a substantial decline in macroeconomic volatility. In a recent article, Olivier Blanchard and John Simon (2001) documented that the variability of quarterly growth in real output (as measured by its standard deviation) has declined by half since the mid-1980s, while the variability of quarterly inflation has declined by about two thirds. 1 Several writers on the topic have dubbed this remarkable decline in the variability of both output and inflation the Great Moderation.

A remarkable decline, indeed! So remarkable that finally it seemed as if central banks could be given a technical mandate to target inflation simply by means of small corrections to the interest rates they set and this could be set in stone even in bourgeois constitutions as part of economic management without the need to bother about anything else. The Jackson Hole Consensus (the last mantra spun out of the Greenspan put) was that asset prices are not and cannot be the concern of central banks price stability alone will suffice, and the market will take care of the allocation of capital to various investments. The entire wave of financial deregulation and liberalisation that culminated with the repeal of the Glass-Steagall Act by the US Congress in 1999 gathered its tsunami-like strength from this Great Moderation. (The tide of capitalist opinion toward privatization from the 80s is wonderfully summarized by the doyen of Italian central bankers, T Padoa-Schioppa in this, The Genesis of EMU, here http://www.eui.eu/RSCAS/WPTexts/JM96_40.html ) Because, just as in the 1920s under Fordism, the sudden reduction in the cost of wage goods for capital made possible by the opening of the Chinese frontier could allow capital to undo, to demolish and reverse what had been the unstoppable and ominous expansion of the role of the State in the US economy and worldwide. The industrial analogue of financial liberalization was the re-privatisation of entire areas of social productive activity that had fallen under the direct management of the State since the New Deal. The unprecedented profits and global savings glut (again the title of a Bernanke speech, here http://www.federalreserve.gov/boarddocs/speeches/2005/20050414/default.htm ) coming from China and other emerging economies that were concomitant with the globalization of the capitalist economy (see P Lamy here http://www.ft.com/cms/s/0/4d37374c-27fd-11e0-8abc-00144feab49a.html#axzz1C2IqIb63 ) all this had

silenced the real motor, the true engine of capitalist accumulation, just as Fordism did in the 1920s the working class, the antagonism of workers in the workplace and in society, the one and only true test of the real value and profitability of capitalist investment! Without its continuous conflict and confrontation with living labour (with workers) in the workplace and in society, capital is deaf and blind, it has no senses because it cannot gauge the actual political command it can exercise over workers and over society at large without encountering their resistance in its stage of valourisation (the productive process) and realization (the sale of products). The real life of capital is precisely this: - command over living labour in the process of production a process that through workers antagonism then becomes extended to the whole of society and that causes the State to intervene (and interfere!) in the notionally private capitalist market economy. To the extent that capital fails to engineer growth, the State needs to control growth, and this leads inevitably to the growth of its control over the economy and the society of capital as a whole. The retreat from the New Deal expansion of State activities is what the Great Moderation allowed. Capital seized the opportunity with both hands. Previously, as Hyman Minsky had perspicaciously shown, the State had been called upon to play an ever-growing role as the collective capitalist to rescue the capitalist economy from its frequent crises, its booms and busts, but each time at a higher level of social antagonism, culminating in the social struggles and high inflation of the 1960s and 1970s. Now, commencing with Arthur Burns and Paul Volcker at the Fed in the late 70s and through the 80s now was the opportunity to relaunch the capitalist dream of a self-regulating market economy. And this is what happened through the Reagan years up until 2007. We were saying the global savings glut. The breathtaking growth of the Chinese economy as the assemblage hall of consumer goods for export to developed economies generated massive amounts of capital (savings) that the Chinese dictatorship could not re-invest in domestic consumption for the simple reason that this would hasten the rate of politico-economic emancipation of its own workers. All dictatorships integrated in the capitalist world market have this good reason to privilege exports by (a) suppressing domestic wages and (b) siphoning off capital from domestic consumption, providing in effect export subsidies to their leading firms which are owned exclusively by members of the elite (from China to India to you name it, and this includes the German elite which, with its Junker and Nazi past has a brutal track record of mercantilism [cf. Schumpeters classic study on Imperialism and Social Classes]). (On China, its mercantilist policies and the Feds reaction, there is no greater authority than Michael Pettis at www.mpettis.com/2010/11/qe2-and-the-titanic/ ) Too many Marxist and left-wing critics of the capitalist economy preach the mantra that what causes capitalist crises is the underconsumption of goods produced due to excessive oligopolistic accumulation. (Keynes and Kalecki started this neo-Ricardian fable, aping Rudolf Hilferdings Imperialism thesis, and were then embraced by Piero Sraffa and Paul Sweezy and several strands of post-Keynesians. Cf this review by JB Foster on The Financialisation of Capitalism http://monthlyreview.org/2010/10/01/the-financialization-ofaccumulation ). It is quite ludicrous to argue that workers are unable to consume what they produce or simply that capital cannot be invested profitably because there are no opportunities for investment. This leads to a certain defeatism and, more important, fails to explain why indeed, given the more skewed distribution of income and capital ownership, actual social tensions rise both within nation-states and between them. In reality, the problem arises for capital when the savings generated by profits cannot be invested any longer profitably because the growth in employment and consumption or wages ends up emancipating workers. This leads to wage-push and demand-pull inflation, with all the attendant problems that that causes in terms of price stability and the normal functioning of debt contracts (which become short-term and impossible to fix predictably). (The link between Capitalism, Conflict and Inflation is traced admirably by my Cambridge supervisor Bob Rowthorn in his homonymous book). The crisis then becomes real and is not just a creature of excess or of casino capitalism. The conflict is real, not engineered artificially (by Finanzkapital) or wholly internal to the dynamics of capitalist accumulation. We will focus on these matters very shortly.

But the essential characteristic of the Great Moderation was the absence of inflation in developed economies, and the global savings glut represented by the regurgitation or re-cycling of Chinese dictatorship profits into parked savings in US treasuries and other financial investments. Combined with the absence of the working class from wage and industrial disputes, this greater availability of social resources in the form of capital could only be invested by exasperating the financial side of capital through credit creation and leveraging that resulted in asset-price speculation. As Minsky and then Mishkin explained, low inflation encourages the lending of capital at low rates of interest and the borrowing for longer contract terms in the expectation of higher future income streams from investment in financial assets. As the market price of assets on balance sheets of firms rises, the Value at Risk of debt-financed investment falls inducing capital into what Adrian and Shin have called the risk-taking channel (http://www.newyorkfed.org/research/staff_reports/sr439.html - see also J Nocera on Risk Management here http://www.nytimes.com/2009/01/04/magazine/04risk-t.html?pagewanted=1&_r=1 ). From there to the collapse of what becomes eventually Ponzi finance (Minsky) once the expected income stream from overvalued assets fails to be realized in other words, once capital can no longer be valourised in the production process -, the road is very short indeed. Once again, it is the absence of the working class, the absence of the real motor or engine of capitalist growth, the real acid test of antagonism and conflict in the production process that allows the rising tide that lifts all boats (asset bubbles) which, once it recedes, exposes those who have been swimming naked (Warren Buffett). But the problem is precisely this! That by that stage it becomes impossible to tell which investments are real and which are fictitious (the infamous mark to market)! Worse still, in the financial sphere, the implosion of asset prices and contracts and the consequent debtdeflation (correctly theorized by Irving Fisher here http://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf ) threaten to destroy not just value but indeed markets themselves chief among them the inter-bank loan market which allows the vital metabolism of capitalist equiparation of loans across disparate branches of capitalist investment and social production necessitating the use of exceptional unconventional measures by monetary authorities that in some cases may lie well beyond their legal mandate (see FT article here http://www.ft.com/cms/s/0/6a9874d6-7023-11e0-bea7-00144feabdc0.html#axzz1KP1dDuqs )! As Lahr et alii linked above put it: Malfunctioning interbank and other financial markets called upon central banks to take on a more active financial [p.2] intermediation role. They also highlighted the fact that there was no longer a single market rate due to the collapse of normal arbitrage activities. Second, because monetary policy had to be eased beyond what is possible by reducing short-term interest rates close to their lower bound at zero, a number of central banks had to pursue alternative policies of quantitative and credit easing. The notion that the policy-controlled short-term interest rate is the sole tool of monetary policy has therefore been questioned. So now we come closer to the heart of the rationale of capitalism: - the efficient allocation of social resources (what they call capital) under the control of capitalists (now [!] it becomes capital!). (This point is intended to enlighten all those who wish to have capital without the capitalist! Because capital is not a thing it is a social relation of subordination and exploitation of workers by capitalists.) The question here is that, given that it is real social antagonism and conflict over the wage relation that occasions the asymmetric information problems (moral hazard, free-rider and principal-agent) and not rather these asymmetries themselves (as Mishkin on behalf of all bourgeois economists suggests) given this reality, what has been and is the present strategy of capital (both private and social capital acting through the State, or the collective capitalist)? As mentioned above, underconsumptionist theses tend to overlook entirely the conflict of which financial crises are clear evidence precisely because they are seen only as financial and therefore fictitious in nature given that they seem to arise outside the sphere of production. JB Foster, for instance (see link above), dismisses De Brunoffs statement in Marx on Money that financial crises are tied to real relations of production, wrongly suggesting that she fails to understand the reality of credit crises. Now, to the degree

that financial crises are real and not as fictitious as the capital created, it is only because they arise directly from the conflict that capital experiences in the process of valourisation. The problem with this misapprehension starts perhaps with the very notion of surplus value which, whilst it denotes a higher rate of exploitation, also seems to suggest that capitalists accumulate a surplus that gives them a margin of manoeuvre in dealing with living labour. But this is clearly wrong because, regardless of how large this alleged surplus is supposed to be, its value quickly collapses as soon as a crisis occurs often in just a matter of hours! (The point is made powerfully by Kaminsky et al. on Fin. Contagion here http://docs.google.com/viewer?a=v&q=cache:w-TR-jguTbkJ:wwwpersonal.umich.edu/~kathrynd/JEP.Contagion.pdf+The+Unholy+Trinity+of+Financial+Contagion&hl=en&gl =au&pid=bl&srcid=ADGEEShL3CjtkRbGzIJLkO2g6VpPwzKUEi5HfFbhoFjLL4q0hgBXTrPm8UWcZFDYj _ohAIs4yaUU8ifMXp4RP02LtOgP0xTHSH3yETdPGThHsYvjDolKCIawZlK3m16ucGcGHi4CWsNc&sig= AHIEtbSLMUTN1iaXY9elevUcaIsoll79sQ ). In this regard, whilst it is true that Marx considered capitals velleity for a miraculous leap to profit (M to M), it must be stressed that he regarded this purely as ideology, whereas he considered financial crises to be not only real, but indeed critical to the analysis of capitalism itself! It is the growing opposition or conflict between the need to socialize social resources and the need to socialize the losses that capitals attempt to elude this conflict engenders it is this conflict that is real! Small wonder Foster, and post-Keynesians from Kalecki and Steindl to Sweezy and Minsky, dreamily find many similarities between Marx and Keynes where very few indeed exist! It is possible to gain a strong insight into the nature of the ailment (almost a Freudian Unbehang) of late capitalism by returning to the conclusions reached from our review of Mishkin. We saw there the contrast that has developed, to the point where it induces chronic crises, between the need of capital to retain its independence from social control because in that case it would lose its essential characteristic as command over living labour -, which occurs through deregulation and liberalization of markets; and then, on the opposing side, the fact that each time such deregulation ends up in catastrophic crises that require the massive systemic intervention of the State to rescue the capitalist economy, with consequent expansion of the role of the State which deregulation was supposed to curtail! Thus, each time that an attempt is made by the collective capitalist (the State) to allow private capitalists to run the economy, the end-result is the reassertion and aggravation of the control of growth by the State. The problem is that private capital is incapable of achieving anything like balanced growth of the economy and that each time the State is forced to intervene the level of intervention required is aggravated and its effectiveness constrained by the amount of public debt accumulated in the preceding rescue operation. The result is a fiscal crisis of the State whereby taxpayers end up paying for what, in the period of deregulation, were private profits. (De Cecco describes this process encomiably well here http://docs.google.com/viewer?a=v&q=cache:UQdyCYokYhoJ:w3.uniroma1.it/cidei/wpcontent/uploads/working_papers/cidei49.pdf+marcello+de+cecco&hl=en&gl=au&pid=bl&srcid=ADGEESj4b 907TfCwUfVkx2rWhlxHS08kNt_uK6VoDEHckIHCRzvdvc68T3IFfjp8wTt2VpXzPdJcDpTqPUgjMeaCdKp ZIOUS2V7j2K9aFq9WAocEMtauIg0ObPoBAnJ83c6TTb3GRvqE&sig=AHIEtbSWV3Qr9egLyO06ZcVQ55j FsGXWRg ) At this stage, however, a new fault-line appears in the system, because now the ability of the State to operate a return to growth within the parameters of a capitalist economy that is, if it is to respect its legal, proprietary and contractual rules, with a modicum of privacy, or indeed simply to maintain the market price mechanism (we already see suggestions, like REA Farmers, of direct intervention in asset markets) in order for the State to do so, its room for manoeuvre becomes exceedingly small and restricted, so that essentially we reach an impasse, an insuperable limit where the only way forward is to abolish the barriers to social activity which are ever more visibly the legal categories of capitalist ownership and control over production and society. The first dilemma lies between regulation/supervision and deregulation/liberalization to allow market allocation of social resources. This results in moral hazard because the public/State insurance of the private economy leads the latter (the capitalists) to game the rest of society in the knowledge that the social insurance of private investment will secure their ownership and control of social resources.

Economic authorities therefore have to engage in a game of cat and mouse with private capitalists in order to induce them to invest as private owners by utilizing ever more public means, methods and resources in order to preserve the reproduction of society itself! Price stability is one target, but leaning against the wind and all manner of unconventional or non-standard measures are required (from QE to announcement effects to guide expectations or ultimately direct investment by the State to maintain aggregate demand!). The second dilemma then takes hold, of State supervision being insufficient or collusive with private capital and therefore not representing democratically the interests of society which are antagonistic to those of capital. De Cecco speaks here of credit channels that increasingly seem to be informal and channeled into too big to fail institutions. And, most important of all, of the fact that the State itself must fail (because of the fiscal and legal constraints) in its task to revive the capitalist economy which is what leads to the paralysis and fracture of the Crisis-State (and, perhaps, even of the bourgeoisie itself!). In a nutshell, it seems, this is the manifestation of the Marxian notion of capital becomes a barrier, a limit, to itself (Grundrisse). De Cecco makes another point, with characteristic acumen, on which we will need to reflect very hard. First, he traces the change of economic paradigm, from the Modigliani-Miller model of perfect knowledge and rational expectations (reconducible to Hayeks economics as co-ordination) to the existence of information asymmetries which now explain the existence of central banking itself (!) formerly exonerated by neoclassical theory. Here is De Cecco:
http://docs.google.com/viewer?a=v&q=cache:UQdyCYokYhoJ:w3.uniroma1.it/cidei/wpcontent/uploads/working_papers/cidei49.pdf+marcello+de+cecco&hl=en&gl=au&pid=bl&srcid=ADGEESj4b907Tf CwUfVkx2rWhlxHS08kNt_uK6VoDEHckIHCRzvdvc68T3IFfjp8wTt2VpXzPdJcDpTqPUgjMeaCdKpZIOUS2V7j 2K9aFq9WAocEMtauIg0ObPoBAnJ83c6TTb3GRvqE&sig=AHIEtbSWV3Qr9egLyO06ZcVQ55jFsGXWRg Neo-classical theory has its natural complement in the Modigliani-Miller theorem which demonstrates the irrelevance of the financial structure and in so doing extends the concept of monetary veil to the whole financial structure. Thus the systems determination depends on exogenous variables such as consumer choice, factor availability and technology levels and no value can be assigned to an institution, like the lender of last resort, which can acquire legitimacy only if we believe that the financial structure is relevant. In particular, we must believe that the banking system, as provider of a public good as an efficient payments system can be seen to be, is relevant to the efficient functioning of the whole economic system. This is why the most consistent among neo-classical economists, F.Hayek and G.Stigler being the best known among them, have flatly denied any institutional relevance to central banks especially as lenders of last resort. Their faithful disciples have, moreover, striven to demonstrate the free banking and currency competition are indispensable to the well functioning of the economic system. They have reproduced, without of course having any notion of it, the heated debated on free banking and currency competition which raged in Italy in the second half of the XIXth century. 3 Less radical neo-classical economists, however, have tried to rationalise the existence of institutions like central banks, which are, by their very nature, the negation of laissez faire, within the theoretical context of decentralised decision-making, by using ad-hoc arguments such as the need to protect the payments system which is a public good. They did not realise, or realised with some embarrassment, that, once a limitation is introduced to decentralised decision-making, we get into a dark night of sub-optimal choices where all cows are black and unique solutions evaporate or at least become extremely unlikely. As is well known, economists are ill at ease when they think without a precise theoretical framework. This is why they have welcomed the arrival of a new theoretical paradigm, which has been constructed in the last two decades, the theory of asymmetric information and of decisionmaking under uncertainty. Within the new paradigm, the central bank and the lender of last resort function in particular, can be found a comfortable and legitimate ubi consistam. With the speed of diffusion which characterises mass societies the new information theories have replaced theories of the real cycle and rational expectations as the winning paradigm, as scholars previously wed to it rapidly repudiated their old beliefs.

On the basis of asymmetric information theory, with its important complements, adverse selection and moral hazard, the non-relevance of the Modigliani-Miller theorem can be easily established outside a world of perfect information. The relevance of the financial structure for the dynamics of an economic system can be then inferred. From that it is only a short step to proving that banks are unique or at least peculiar credit intermediaries and organisers of the payments system which makes a decentralised decision-making system a working proposition. At this point, it is not difficult to introduce central banks, as institutions necessary to safeguard the payments network. If attention is paid to an important feature of a fractional reserve banking system, namely its capacity to multiply and demultiply credit, it is easy to notice that such a system will be inherently unstable, and that an economic system based on fractional reserve banks, and therefore unstable, will require an institution which will play the role of lender of last resort in the lamentable but frequent cases when the banking system will demultiply its credit creation powers. It is now appropriate to introduce the concept of moral hazard. In an asymmetric information context, the well known formula known as the Bagehot Rule for the activation of the lender of last resort function will be vitiated by a difficulty: it is practically impossible for a central bank to know whether banks requiring loans of last resort are illiquid or insolvent . As is known the Bagehot rule mandates that only illiquid banks be admitted to last resort lending. But if the lender of last resort faces an insolvent bank, if it refuses to bail it out it will by this action most probably determine a serious demultiplication to occur to credit available. The payments system will be accordingly weakened and since the latter can be considered a public good, it is clear that the Bagehot Rule is not easily applicable and that last resort loans must be provided every time the payments network is in danger and severe demultiplication can occur in the countrys credit system. It follows, of course, that if the Bagehot Rule is modified to include insolvency, all banks which, because of the state of their balance sheets, represent a potential threat to the stability of the credit system are perfectly aware of their being indispensable and therefore virtually immortal as institutions .From this awareness they can derive a cavalier attitude toward risk, in the quest for higher profits. The banking system can accordingly develop an excessive propensity to expansions followed by equally excessive interventions by the monetary authorities. The latter, aiming to reduce the volume of reserves which they have themselves created to bail out the risk-prone banks, may end up destroying the smaller banks, which are too small to influence the trust of the public in the credit system, while the real culprits, the banks that are too big to fail, manage to escape unscathed and can start, after a short period of quiet, all over again on too bold a path of expansion.

Now, this is a point of inestimable importance: - because now, if we admit that central banks are no longer capable of determining who is illiquid from who is insolvent the entire game is well and truly up! Bernanke makes the same point when discussing Fishers debt-deflation (in the Macroecons of GD, where he also reviews sticky wages). And, like De Cecco, notes the switch in economic approach to the monetary channels leading to instability that Mishkin operated, applying the game-theoretic notions of information asymmetry. Here is Bernanke: http://www.mrfaught.org/macroecondepression.pdf (p17)
Fisher's idea was less influential in academic circles, though, because of the counterargument that debt-deflation represented no more than a redistribution from one group (debtors) to another (creditors). Absent implausibly large differences in marginal spending propensities among the groups, it was suggested, pure redistributions should have no significant macroeconomic effects. However, the debt-deflation idea has recently experienced a revival, which has drawn its inspiration from the burgeoning literature on imperfect information and agency costs in capital markets.14 According to the agency approach, which has come to dominate modem corporate finance, the structure of balance sheets provides an important mechanism for aligning the incentives of the borrower (the agent) and the lender (the principal). One central feature of the balance sheet is the borrower's net worth, defined to be the borrower's own ("internal") funds plus the collateral value of his illiquid assets. Many simple principal-agent models imply

that a decline in the borrower's net worth increases the deadweight agency costs of lending, and thus the net cost of financing the borrower's proposed investments. Intuitively, if a borrower can contribute relatively little to his or her own project and hence must rely primarily on external finance, then the borrower's incentives to take actions that are not in the lender's interest may be relatively high; the result is both deadweight losses (for example, inefficiently high risk-taking or low effort) and the necessity of costly information provision and monitoring. If the borrower's net worth falls below a threshold level, he or she may not be able to obtain funds at all. 13. Kiyotaki and Moore (1993) provide a formal analysis that captures some of Fisher's intuition. 14. An important early paper that applied this approach to consumer spending in the Depression is Mishkin (1978). Bemanke and Gertler (1990) provide a theoretical analysis of debt-deflation. See Calorniris (1993) for a recent survey of the role of financial factors in the Depression. 18 : MONEY, CREDIT, AND BANKING From the agency perspective, a debt-deflation that unexpectedly redistributes wealth away from borrowers is not a macroeconomically neutral event: To the extent that potential borrowers have unique or lower-cost access to particular investment projects or spending opportunities, the loss of borrower net worth effectively cuts off these opportunities from the economy. Thus, for example, a financially distressed firm may not be able to obtain working capital necessary to expand production, or to fund a project that would be viable under better financial conditions. Similarly, a household whose current nominal income has fallen relative to its debts may be barred from purchasing a new home, even though purchase is justified in a permanent-income sense. By inducing financial distress in borrower firms and households, debt-deflation can have real effects on the economy. If the extent of debt-deflation is sufficiently severe, it can also threaten the health of banks and other financial intermediaries (the second channel). Banks typically have both nominal assets and nominal liabilities and so over a certain range are hedged against deflation. However, as the distress of banks' borrowers increases, the banks' nominal claims are replaced by claims on real assets (for example, collateral); from that point, deflation squeezes the banks as well.'' Actual and potential loan losses arising from debt-deflation impair bank capital and hurt banks' economic efficiency in several ways: First, particularly in a system without deposit insurance, depositor runs and withdrawals deprive banks of funds for lending; to the extent that bank lending is specialized or information-intensive, these loans are not easily replaced by nonbank forms of credit. Second, the threat of runs also induces banks to increase the liquidity and safety of their assets, further reducing normal lending activity. (The most severely decapitalized banks, however, may have incentives to make very risky loans, in a gambling strategy.) Finally, bank and branch closures may destroy local information capital and reduce the provision of financial services.

What Bernanke and Mishkin forget is that the capitalist economy has little to do with use values in terms of what is socially useful allocation of resources, and even less to do with (Hayekian) co-ordination in the sense of exchange and pricing of information on anything resembling democratic principles! This last is a crucial point, and it is our central point of attack! Because what Mishkin would have us believe is that debt-deflation occurs when there are simple asymmetries in the exchange of information. But we know all too well. that these asymmetries (free-rider, principal-agent, moral hazard) arise because of.the very real antagonism of capitalist social relations of production, with the wage relation at the centre! Indeed, it this antagonism that explains the ultimate source of financial instability that Mishkin relegates to the nevernever or to shocks or black swans or unexpected disinflation or uncertainty or sudden rise in interest rates or other exogenous factors!! Perhaps before we leave "Bernanke" (save to return to him - so "central" is his contribution, if read critically, to the theorisation of the present "crisis"), could I rapidly "situate" the discussion in a "theoretical" context - an essential task if we are to rise above the "noise" of the quotidian "random walk". Indeed, it will be recalled that in neoclassical theory, it is the very assumption of "perfect information" (Modigliani-Miller), of "common

knowledge" (game theory), and Walrasian "tatonnement" (in equilibrium analysis) that make the exchange of information "symmetrical" and that reduce the entire field of "economic science" to "the problem of coordination" (see Hayek's "Individualism and Economic Order", discussed in Loasby's "Equilibrium and Evolution" for an attempt to "historicise" the problem). It is evident that there can be no space in all of these "theories" for central banks, nor indeed for "financial intermediation" (hence Hayek's virulent opposition to central banks and fractional reserves as a "negation" of the market pricing mechanism). The "separation" of borrower's risk and lender's risk first raised by Kalecki and Keynes - and the consequent recognition that "money is not neutral" - remains "internal" to the function of capital: it is, as it were, a "division of labour". But an understanding of why, how and where "information asymmetries" arise in the "channel" that links investment decisions with financial structure is absolutely essential. To leave the entire matter to "asymmetric information" arising "after" some "exogenous shock" (see any of Mishkin's papers on the subject) is quite simply inadequate. (Similarly, the "New Institutional Economics" of Coase, Williamson and Demsetz, explain away the "internalisation" of these "asymmetries" as the need to minimise "transaction costs" - which then raises the conundrum of why the capitalist economy is not constituted by one "mega-firm"!) In this paper on Financial Fragility and Economic Performance ( http://docs.google...RZZR4PoOaJYKaKF07Q ) , Bernanke and Gertler identify the "ultimate source" of asymmetries in the "borrowers' net worth position" - the lower the net worth, the higher the risk of implosion. Again, this fails to isolate "the virus" responsible for the disease, but it offers some hints. The first hint is that "high net worth firms" will be "ensconced" from debt-deflation initially by their "oligopolistic" and hence "systemic" importance (too big to fail). And the second is that each successive "crisis" brings about a series of "mergers and acquisitions" whether voluntary or "shot-gun marriages" that increases further the degree of "oligopoly" of capitalist enterprise and therefore its future "fragility" - the "systemic riskiness" of the system. (See this FT story on M&A activity following GFC http://www.ft.com/intl/cms/s/0/3f85f56c-849a-11e0-afcb00144feabdc0.html#axzz1LO5gFBdI ) And finally, the growing "systemic riskiness" of the structure of capitalist enterprise, together with the parallel "centrality" of State authorities in "crisis management", mean that central banks become "lenders of first (not last) resort". Indeed, Bernanke and Gertler zoom into this specific chasm or lacuna (Keyness slip twixt the cup and the lip) seeking to determine what factor would trigger a debt-deflation implosion of the credit pyramid (remember: a pyramid of term contracts enabled by low inflation for prolonged periods). This is what they come up with at p88:
In this paper we take a step toward an operational definition of financial stability. We argue that financial stability is best understood as depending on the net worth positions of potential borrowers. Our basic reasoning is as follows: generally, the less of his own wealth a borrower can contribute to the funding of his investment "project," the more his interests will diverge from those of the people who have lent to him. When the borrower has superior information about his project, or the ability to take unobserved actions that affect the distribution of project returns, a greater incompatibility of interests increases the agency costs associated with the investment process. We define a financially fragile situation to be one in which potential borrowers (those with the greatest access to productive investment projects, or with the greatest entrepreneurial skills) have low wealth relative to the sizes of their projects. Such a situation (which might occur, e.g., in the early stages of economic development, in a prolonged recession, or subsequent to a "debt-deflation"') leads to high agency costs and thus to poor performance in the investment sector and the economy overall.

We illustrate this general point in the context of a specific model of the process of investment finance. In this model individual entrepreneurs perform costly evaluations of potential investment projects and then undertake those projects that seem sufficiently worthwhile. The evaluation process gives the entrepreneurs (who must borrow in order to finance projects) better information about the quality of their projects than is available to potential lenders. As in Myers and Majluf [I9841 and others, this informational asymmetry creates an agency problem between lenders and the entrepreneurs-borrowers. This agency problem (which is more severe, the lower is borrower net worth) raises the prospective costs of investment finance and thus affects the willingness of entrepreneurs to evaluate projects in the first place. We show that,, in general equilibrium, both the quantity of investment spending and its 1. The term is due to Irving Fisher [1933]. See Bernanke and Gertler [I9891 for an analysis. FINANCIAL FRAGILITY AND ECONOMIC PERFORMANCE expected return will be sensitive to the "creditworthiness" of borrowers (as reflected in their net worth positions). Indeed, if borrower net worth is low enough, there can be a complete collapse of investment.

Now, the thing to be noticed instantly is that, unlike Mishkin who leaves the question of the precise operation of asymmetric information in the actual structure and function of capitalist enterprise might give rise to these asymmetries, preferring to attribute them to exogenous factors (listed above), B&G concentrate here on the structural endogenous factors that might pre-dispose the system to debt-deflation and find (or hypothesize) that it is the net worth position of the borrower that is determinant. This would seem to support our initial hypothesis that the functional predisposition of the lending aspect of capitalist investment is to reduce risk, even at the cost of sacrificing profit maximization. This stands to reason because maximizing profit is never the real goal of capital it is merely the pursuit of safe profit above what is called the risk-free rate of interest which merely represents the interests of social capital. Note (!) that B&G look at fragility from an ex post position, that is, after a debt-deflation has occurred and therefore what they mean by fragility is the inability of the investment cycle to re-start owing to the low net worth of entrepreneur-borrowers. But in fact it can be argued that this situation can arise even ex ante, that is, that instability increases before debt-deflation. A surfeit of capital in the sense of either excessive liquidity vis-a-vis actual productive activity (note that B&G themselves refer to productive [!] investment projects and fail to specify what they m e a n by this!) and therefore the ability to find productive investment projects except those of entrepreneurs lacking the requisite skills - either of these possibilities reduce the net worth, the skin in the game of the entrepreneurs selected by lenders for loans. Hence the fragility b e f o r e debt-deflation occurs once the volume of investments reaches a critical stage. Again, Fishers debt-deflation, or Minskys hypothesis, only tackle the implosion of Ponzi finance but not its generation! They do this desultorily in the Conclusion:
Putting aside the reasons for the increase in leverage, it still may be asked whether the higher level of debt implies greater financial fragility. Our answer is, "It depends." We believe that the focus on debt versus equity ignores the primary determinant of [p111] financial stability-the net worth of borrowers, or, as we may call it for the purposes of this discussion, the "insiders' stake."z3 If the insiders' stake is high, debt need not be harmful. For example, as

has been frequently pointed out, Japanese corporations have traditionally relied much more on debt than have U. S. firms. This has not posed a problem for the Japanese, however, because managerial decisions are tightly monitored by financial backers-banks or parent corporations. Effectively, insider stakes in Japan are high; among other things, this means that firms' finances can efficiently be restructured when circumstances change. Thus, whether the U. S. economy is in a financially fragile condition depends fundamentally more on the magnitude of insiders' stakes in the United States than on the composition of firms' external liabilities. There have been factors pushing insiders' stakes in both directions in the United States during this decade. For example, to the extent that the wave of takeovers and buyouts has represented the seizure of corporate control by well-financed management teams, there may have been an effective increase in insiders' stakes; likewise, increased monitoring of management by takeover specialists and investment banks may have had a salutary effect. Working in the other direction, increasing securitization (for example, the greater reliance on junk bond financing a t the expense of commercial bank loans4)has typically reduced the overlap between the providers of financial capital and the insiders in the corporation; greater use of "arm's length" financing trends to increase financial fragility. Measurement of the effects of these countervailing forces on the stability of the U. S. financial system is a difficult, but not impossible, empirical challenge.

So here we have an evident divide between social capital (capital as a whole represented by finance capital) and individual capitals. And when B&G remind us that the creditworthiness of borrowers is a function of their net worth position, then we know we are on to something extremely important. Because this net worth will depend in large part not merely on the individual position of the borrower, but above all on the specific weight (weight!) that this individual capitalist plays in the capitalist economy, in terms of how pivotal it is to social reproduction overall and its specific role in a certain sector (or market, if you like) in other words, on the degree of oligopoly (recall Sylos-Labinis point on how lollies differ from steel!). B&G touch briefly on this at Part V on debtor bail-outs. Indeed, the ultimate significance of State intervention in a crisis to restore the flow of capitalist activity threatened by the disintermediation of financial institutions and the emergence of the central bank as lender of first resort have to do with the impossibility at a certain level of debt-deflation of the monetary authorities to distinguish between liquidity and solvency and between idiosyncratic and systemic shocks or crises (p108), that is , to tell apart the real and the fictitious parts of capitalist activity or investment in terms of use value and of arms-length allocation of social resources between individual capitalists. In the end, it is the systemically important capitalist firms that simply must survive they become too big to fail once a relevant degree of oligopoly is achieved. Mishkin, to be fair, had already insisted on the ability of large firms (oligopolies) to issue securities to finance themselves an evident adoption of the B&G thesis on the importance of net worth for surviving debt-deflation. Worse still, each crisis simply tolls the death-knell for smaller capitalist firms (financial and industrial) that are then acquired and merge with bigger ones in a growing spiral of capitalist concentration. Until, that is, the collective capitalist has to intervene in first person, through financial disintermediation, tighter regulation and supervision, and (in extremis) outright nationalization (anathema but nearly a reality in the latest US crisis!). We find here a curious but undeniable and significant inversion or contra-diction of Schumpeters entrepreneurial spirit, in that the trustification of capital either saps and suppresses or at least internalizes the Innovationsprozess that he had singled out as the differentia specifica of capitalism. It is in this perspective or dimension that one must read Schumpeters late doubts about the very survival of capitalism as

a form of social organization. Thus, here not only the process of innovation but also that of concentration that is to say, the internalization of information within individual firms or units of command which the NIE had attributed (foolishly) to the reduction of transaction costs - become critically subordinate to that of wage-relation antagonism. It is the capitalist imperative to preserve the private character of the allocation of resources, the artificial separation of the social division of labour the need of capital to avoid at all costs the democratization of the process of production in the face of its re-composition by workers (by society! even by social capital!) that leads inevitably to the crisis. And, in an apparent paradox, it is the higher level of social interdependence or integration of production the very process of capitalist concentration that provokes crises and necessitates ever-higher levels of State intervention to restore the broken co-ordination, to abolish the asymmetries that had emerged as a result of the peculiar private character (or Trennung) operated by capitalist private ownership of the means of production and their separation of workers from them and from one another. Bernanke and Gertler have not ceased to surprise us with their insights, however. This one is at p89:
This paper also contains some novel policy results, not discussed in our earlier work. The most striking of these is that, if "legitimate" entrepreneurs are to some degree identifiable, then a policy of transfers to these entrepreneurs will increase welfare. We show that a number of standard policies for fighting financial fragility can be interpreted along these lines.

We will look closer at what legitimacy means here. The central problem is that from being purely friction and relegated to externalities such as transaction costs, which together were bundled up in the unification of micro- and macroeconomic theory just the embarrassing fact that money is central to a capitalist economy (Patinkins you cant buy goods with goods; see also Wicksell on Walras in IandP, p22) -, now these frictions (impossibly generalized by Williamsons NIE to the point of destroying any and all economic theory) come to the fore of the entire bourgeois science to the point that they replace the maximization of welfare as the sine qua non of economic activity and regulation. In other words, truly with Hayek we have shifted from an economics of price to an economics of information. (On all this, see the wonderful review by Klaes here
http://docs.google.com/viewer?a=v&q=cache:lGMSjLCsCB8J:www.eshet.net/public/981068400_klaes.pdf+Hellwi g,+Martin+(1993):+'The+Challenge+of+Monetary+Theory',&hl=en&gl=au&pid=bl&srcid=ADGEESgQ84n9NomI Qw14Ug8Rkxu0sDSuFw9SUiYKoj0CgiYSERM8xHLnLCZtZPUgYWcASB20qA0jqwh0QoWehjc8k9pN4HM3ldAPmbSJirs2zojNbr_0xgy-TLXp1JXBHjNijfvKMA&sig=AHIEtbQ8j6otJa5aXBgnMBFw71SqMZ25Zg

In his sweepingly devastating conclusion,

While the folk history of transaction costs is often told as a story of remarkable success, the historical sketch presented here, which focuses on the transaction cost notion itself, suggests a rather different picture. The study of the use of transaction costs in the literature of modern economics turns out to be the history of the quixotic struggle of the discipline to endogenize one of the most pervasive residual categories of the neoclassical heritagethe category of institutional friction. )

Now two problems arise in this respect. The first lies with the meaning of information. And the second is with establishing why this information is subject to asymmetries! Bourgeois economists steadfastly refuse to face these two questions that go to the heart of economic science, preferring instead (quite wisely) to hide within the bounds of their meanings and simply seeking to squeeze the status quo (capitalist relations of production) safely within these categories what they call endogenising all these frictions or what I call internalizing the externalities! As long as this grex venalium (this venal herd) steers very clear of the ultimate questions those questions that undermine its very rationale, its very basis and foundation

they can play on very safe ground. But the problem is that the reality of capitalist antagonism never ceases to intrude! And it intrudes most lo and behold! in the monetary sphere, the root of all evil, not just in popular lore, but in bourgeois economic theory as well! Go figure! Here is Gertler in his review of the AI literature right in the first paragraph
(http://docs.google.com/viewer?a=v&q=cache:rQj4f2aRvoJ:www.nviegi.net/teaching/master/gertler.pdf+Gertler,+Mark.+1988a.+Financial+Structure+and+Aggregate+Eco nomic+Activity:+An+Overview.+Journal+of&hl=en&gl=au&pid=bl&srcid=ADGEESjePSmKGnv4tBG9iehLMyO HBzJzZdzT5cQoRRKJ8-OCi8Ujtc4oMVo2rKjP1a3_GZc3P6RHyYFO6cLcgT3SBLHEQbXIt_Ql526t74gT_1KIeIsyDslME9tbW6ZkstEC5mPpjyb&si g=AHIEtbQyzovE3ISeumKKudjlTD0GoltoXw ) Recently, interest has grown in exploring the possible links between the financial system and aggregate economic behavior. This interest partly reflects the ongoing beliefs of applied economists and policymakers that financial markets and institutions deserve serious attention - that they play important roles in the growth and fluctuation of output.

The reluctance to tie the two questions together financial structure and growth of output is too evident. The cancer at the core of economic theory was and remains money, because money is the one institution that bourgeois theory cannot digest, cannot assimilate. But that such externalization of money is an abject admission of defeat a further proof of the insolent scorn that bourgeois economists have not just for truth but even for intellectual coherence is shown not only by the frantic and desperate attempt to endogenise money, but above all by the prepotent emergence of the reality of capitalist practice the utter inveterate yelp for help of the bourgeoisie for the State to rescue it form its theoretical-ideological blindness! The crushingly inconfutable reality of late capitalism is that, in Fishers words (quoted by Gertler at p561) "they (debts) [are] great enough to not only 'rock the boat' but to start it capsizing." Thus, not only is the monetary question central for bourgeois economic theory; it is also increasingly critical for the survival of capitalism itself! (Interestingly, Gertler relates how later conventional Keynesian theories, including the monetarist perversion, tended to divorce monetary from real factors and then again credit from monetary factors: Considerable debate arose over the empirical significance of the mechanism linking money to real activity. Indeed the early Keynesians emphasized the importance of "real factors" such as the multiplier/accelerator mechanism and fiscal policy. The monetarists, with an intellectual foundation tied closest to classical theory but nonetheless influenced by Keynesian thinking, provided the main support for the importance of the monetary mechanism, (p562).) We should stress here that whilst borrowers and lenders risk are only internal functions of capitalist command, this is not to say that therefore the valourisation and realisation hiatus ceases to bind or that money and finance are secondary to real considerations in the production process. On the contrary, the hiatus binds even more because now the distinction between real and monetary becomes superfluous in the sense that the two are aspects of a single unitary process in the circulation of capital. That bourgeois science seeks to conceal the reality of social relations that gives rise to fictitious capital with equally fictitious asymmetries, transaction costs and other externalities or frictions is yet another sign of its perennial attempt to mystify those relations. Paradoxically, money is precisely what living labour imposes on capitalists; for, not only does the capitalist wish to pay as little as possible, but also he seeks to pay in kind! Money is the uncertainty that gnaws at the bourgeoisie, that mortal loss of Sekuritat (the refuge of Individualitat), the slip twixt the cup and the lip. Money is what stands between investment and profit that P in the formula M-CPC-M that stands for process of production that symbolizes the chasm, the hiatus, the insuperable antagonism of the wage relation. Money dissolves the feudal link at the dawn of the capitalist era. But it also dissolves every

bond, every bridge that capital may wish to project to tie living labour to its own fate and destiny, to its goals. Here is Gertler on AI: Another current limitation is that these frameworks have very ambiguous policy implications. In analogy to the intermediation literature, the basic issue involves whether the government can improve on the types of contractual arrangements that would arise in an unfettered private economy. The results are highly sensitive to the postulated information structure Finally, the analyses are not well integrated with monetary theory. The major obstacle is probably the general difficulty of incorporating money into general equilibrium frameworks. As a result, it is difficult to sharply evaluate the effects of monetary policy, (p582). As Klaes (at p111) quotes Hellwig,
In the words of Martin F. Hellwigs 1992 Presidential Address to the European Economic Association: [T]he problem is to find appropriate conceptual foundations for monetary economics. I believe that we do not, as yet, have a suitable theoretical framework for studying the functioning of a monetary system. The main obstacle to the development of such a framework is our habit of thinking in terms of frictionless, organized, i.e. Walrasian markets (Hellwig 1993, p. 215).