Economic Policy after the Crash

The paper analyzes the main policy responses to the financial crises and its aftermath. It is argued that - for various reasons - timid policy makers are neither willing nor powerful enough to implement the necessary radical institutional reforms of the financial markets. In spite of the revival of pragmatic Keynesian policies during the crises, economic policy will soon shift back to the orthodox anti-welfare state recipies - deregulating labor and capital markets, extending the 'funded pension system' etc. The main victim of the souvereign debt crisis now emerging will be the pay-as-you-go pension system, as the simultaneous painful deleveraging and fiscal consolidation process requires by necessity a prolonged period of forced dissaving by (politically weak) households. Contrary to expectations following the bad performance of pension funds during the crisis, for political reasons the 'funded pension systems' will become even more important as an illusionary solution to the demographic problems. This will be the case in spite of the fact that the expected rate of returns for capital will be much lower than the OECD assumes in its heavily biased forecasts (published in "Pensions at a Glance", 2009).