J.P. Morgan Chase

[eileendn]

The most recent event involving J.P. Morgan Chase investment bank is the NY Attorney General suing them for allegedly defrauding investors who lost more than $20bn on mortgage-backed securities sold by Bear Stearns investment bank. As David Oyler says it was defaulting on some of the mortgages in those new type of securities that sparked the financial crisis, as the economic boom was coming to an end. The housing boom began to fade towards the end of 2006 and mortgages sold to people without assets and fragile income began to go into default in the summer of 2007.
Several factors led to the current crisis: deregulation of investment banks during the last 20 years in the hope of maintaining economic expansions; banks' failure to understand and manage the new financial instruments they produced; the experimental efforts of corporations in the new financially unstable world economic environment; the complicity of government and financial security rating institutions like Standard & Poor, which only added to the impression that the system will hold; the fact that everyone irrationally took extra risks in case they might wim during the economic upswing; and the illegal actions of some now being pursued by the judiciary.
The longer term basis the crisis is the thirty year period of financial instability in a world economy following the U.S. decision to no longer manage international financial arrangements according to the postwar Bretton Woods agreement. They could no longer sell gold at US$35 an ounce. Each national currency was on its own and its value depended on its demand and supply and how national central banks managed it. As the most important currency, there was a huge demand for and supply of US dollars for trade among countries and the security of holding the currency of the most important economy and nation in the world.
We are still in the crisis but new regulations are being worked out, judicial action is being taken. Economists are in the doghouse for their failure to manage the processes of economic growth and change. I think Lonergan can help with his analysis of money flows in production and consumption, savings and investment.

[Richard Moodey]

Hello eileendn,
It is heartening that someone, somewhere, is attempting to hold an investment bank accountable.  The political, as well as economic, power of banks like J.P. Morgan Chase and Goldman Sachs is intimidating.
I am one of those who believes that the financialization of the economy is both an important part of the problem and a source of bias in our attempts to understand the problem.  Financialization is indicated by the rise of the proportion of our GDP that is the result of financial transactions, and the corresponding decline in the proportion that is the result of manufacturing.   I agree with those who say that this is a big problem.
Financialization becomes a bias because the sheer amount of digital wealth that has been created by financial transactions draws our attention away from the problems we have in the production and distribution of goods and services.  I regard this as the "real" economy, over which the trillions of dollars in derivatives expands like a giant bubble.  Corporations first sent manufacturing operations from the "rust belt" to the "sun belt," and then from the U.S. to the countries where they could find the cheapest labor.  At the same time that corporations, with the help of the government, were outsourcing jobs, the number of workers seeking jobs has been growing, not because of our birth-rate, but  because of immigration and the movement of many more women into the labor force.  The combination of increased supply of workers and decreased demand for labor has resulted in poorer wages.  The massive increase in consumer debt is a direct consequence of this. 
I have been reluctant to post this because I suspect that those who are likely to read this post have seen all of this before, and in much greater detail.  I decided to post it because I think it is part of the background or context within which a discussion of Lonergan's economics has to take place.  I am a sociologist, rather than an economist, and I think about economics in terms of what sociologists call the "sociology of economic life."   
Best regards,
Dick Moodey   

[eileendn]

Thank you for your comments. I also think the sociology of economic life is important. That was an interest of Bernard Lonergan in his Economic writings. As an economist I try to bring a social scienceapproach to Lonergan's economic and other writings. I am going to post a short comparison of Lonergan, Keynes, and Hayek on the current economic slump. Best wishes for the holiday season, Eileen de Neeve