[Note: updated on 8.10.10]
What does it mean when someone refers to the “Doom Cycle,” or “Doom Loop”?
The “Doom Cycle” is a phrase often used to refer to the current boom-bust-bailout structure of the financial sector that leads to economic crises. Simon Johnson has been a major proponent of shedding light on this cycle, which he believes begins with risky investments and dangerous financial practices that lead to increased growth and profitability, but soon bust — bringing the financial sector to its knees after its inevitable collapse. After the bust comes the bailout, which, although may be necessary at the time, is more harmful in the long run because it does not address the fundamental structural flaws of our financial system. This vicious cycle only continues to grow, and with no salient regulation will continue in perpetuity, bringing with it crisis after crisis.
The “Doom Loop” has been defined in the New York Times as: “a virtueless circle in which banks take ever-greater risks to boost returns (secure in the knowledge the state will underwrite them), and governments are forced to break their promises “never again” to bankroll losses (further encouraging banks to take dangerous risks).”
What is the significance?
The “Doom Cycle” is one of the most significant ideas within the discourse on the current economic crisis. What the “Doom Cycle” offers is an explanation and a solution to the current financial crisis and the conditions which helped to create it. The “Doom Cycle” serves as a framework through which we can begin to address the economic condition of America in the twenty-first century. If we are to avoid another financial meltdown, leading thinkers believe that serious reforms are necessary. Without them, another, worse crisis may be inevitable. Through this idea, we gain a paradigmatic view of the financial system, and are able to understand the attitude and atmosphere that fosters a cycle of risk, gain, and collapse.
Who’s talking about it?
Simon Johnson has been outspoken on this issue, and has written extensively on the “Doom Loop,” and the next impending financial crisis. The “Doom Loop” has also gained popularity due to a paper published by Andrew G Haldane, Executive Director, Financial Stability, Bank of England, and Piergiorgio Alessandri. Johnson often refers to this paper as an invaluable resource for understanding the “Doom Loop.” This concept was discussed in detail at the Roosevelt Institute’s conference in New York, ‘Make Markets Be Markets‘, and in an accompanying report written by Simon Johnson, Rob Johnson (Director of the Roosevelt Institute’s Project on Global Finance), Nobel Laureate Joe Stiglitz (Chief Economist of the Roosevelt Institute), Elizabeth Warren, and others.