US Congress report confirms that mainstream economists have absolutely no clue about how and when the next big meltdown will occur

Wikileaks has released nearly a billion dollars worth of quasi-secret reports commissioned by the United States Congress. The 6,780 reports, current as of this month, comprise over 127,000 pages of material on some of the most contentious issues in the nation, from the U.S. relationship with Israel to the financial collapse. Nearly 2,300 of the reports were updated in the last 12 months, while the oldest report goes back to 1990. The release represents the total output of the Congressional Research Service (CRS) electronically available to Congressional offices. The CRS is Congress's analytical agency and has a budget in excess of $100M per year. CRS reports are highly regarded as non-partisan, in-depth, and timely. The reports top the list of the "10 Most-Wanted Government Documents" compiled by the Washington based Center for Democracy and Technology. The Federation of American Scientists, in pushing for the reports to be made public, stated that the "CRS is Congress' Brain and it's useful for the public to be plugged into it,". While Wired magazine called their concealment "The biggest Congressional scandal of the digital age".

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A report dated back in August 25, 2003, and released by WikiLeaks in February 2, 2009, that is, after the financial crisis of 2007–2008, actually proves that the mainstream economists were not have been able to predict the next big financial crisis, occurred only four years after the report.

Furthermore, the report proves the blind devotion of the mainstream economists to the dominant neoliberal doctrine, implying that the banking system should never be left to collapse so that further severe damage to the economy would be prevented.

For example, we read that “The distinguishing characteristic of the 1929-1933 episode was that an economic contraction probably set in motion by the Federal Reserve was compounded by a financial panic as the banking system was allowed to collapse.” and “Economic theory is much more advanced today on 'what not to let happen' and government has taken responsibility for the economic health of the nation. This includes a commitment to keep the money supply and the banking system intact ...”.

Although after the 2007-08 financial crisis the US banking industry was rescued with taxpayers' money, the devastated effects in the lives of millions of Americans and the terrible consequences with the rise of poverty, inequality, unemployment can still be identified clearly today. 

Furthermore, the tsunami of crisis was global and hit eurozone, one of the most economically advanced areas. Up to date, many eurozone members struggle with huge problems and deteriorated indexes similar to the ones of the 1929 financial crisis in the US. While neoliberal orthodoxy failed miserably, the neoliberal policies were dictated in Greece - the most heavily affected member - as medicine to deal with the huge economic problems. The result: even more destruction and zero prospect in the horizon for the vast majority of the Greeks.

A characteristic part of the report:

Between 1929 and 1933, real GDP fell by nearly 27%, the unemployment rate rose to 25%, and the price level as measured by the implicit price deflator for GDP fell by nearly 26%. The distinguishing characteristic of the 1929-1933 episode was that an economic contraction probably set in motion by the Federal Reserve was compounded by a financial panic as the banking system was allowed to collapse. On March 4, 1933, the day Franklin Roosevelt was inaugurated as President, not a single bank in the United States was open for business.

From 1929 to 1933, 9755 commercial banks in the United States suspended operation. This was approximately 1/3 of all commercial banks. An important reason for the collapse of the banking system was the absence of deposit insurance and a failure on the part of the Federal Reserve to prevent it. In addition, the United States was linked to other countries through fixed exchange rates embodied in the gold standard, which severely limited the Fed's ability to respond. There is now a growing body of research that links the severity and world-wide character of the Great Depression to the gold standard.

Finally, generally accepted economic theory at the time was used to rationalize and accept as inevitable what happened. Economic theory is much more advanced today on "what not to let happen" and government has taken responsibility for the economic health of the nation. This includes a commitment to keep the money supply and the banking system intact, and the United States has not had a financial panic since 1929-33. Given such changes as the institution of deposit insurance, the legislative commitment of the government to maintain high employment, and the use of flexible exchange rates, it was hard to make a case that the downturn now faced by the United States would develop into anything remotely similar to the economic contraction of 1929-1933.

The cause of the Great Depression has often been attributed to the stock market crash in October 1929. This explanation has not stood the test of time. First, it occurred two months after the Great Depression officially began. Second, in October 1987 a stock market crash of similar percentage magnitude occurred without causing an economic downturn. In fact, the economic expansion then in progress continued for nearly three more years. While the 1929 crash may have worsened the beginning of the downturn, there is no credible evidence that it could have set off the next 10 years of calamity and hardship.

http://file.wikileaks.org/file/crs/RL31237.pdf

Most importantly, the report reveals that the mainstream economists, based on, as described today's 'advanced economic theory', couldn't even imagine how another big meltdown similar to that of 1929 may have been occurred. As being blindly devoted to the neoliberal economics, they couldn't possibly guess a cause, like a big housing bubble, for example, despite previous experience from the bubble in SE Asia in the late 90s. This can be depicted on phrases like “Given such changes as the institution of deposit insurance, the legislative commitment of the government to maintain high employment, and the use of flexible exchange rates, it was hard to make a case that the downturn now faced by the United States would develop into anything remotely similar to the economic contraction of 1929-1933.”, and “in October 1987 a stock market crash of similar percentage magnitude occurred without causing an economic downturn.”

Indeed, as Costas Lapavitsas decribed a few years ago on the Real News:

           This is a deeply unequal system. It isn't just unequal; it's also a deeply unstable system. Financialized capitalism is also deeply unstable. I don't need to go in depth into this. All I need to do is refer you to the crisis of 2007-2009, which is a crisis of financialization if there ever was one. And this basically shows you what financialization is very, very clearly. That crisis was global, systemic. The entire system came very close to collapse. And it was structural. It was deep. It wasn't because of some accident. This was a crisis, then, of financialization. And where did it come from? Strikingly enough, it came out of the financial system and out of lending to the poorest sections of the United States working class. It's an extraordinary thing. And historically we've never seen anything like it, that lending to workers, and particularly to poor workers, could destroy the capitalist system. I mean, if you told people in the 19th century that something like that could happen, they would be astounded. They would tell you, there's no way. And yet that's what nearly happened a few years back. And that's an indication of how unstable the financialized capitalism is. It's a deeply unstable system.

This is another evidence that, no matter what the mainstream neoliberal economists say about the 'efficiency' of current economic theory, they have absolutely no clue about how and when the next big meltdown will occur. Therefore, they couldn't have suggest any possible measure to prevent it, inside this absolutely unstable and destructive financial capitalism.