Crisis and Institutional Reforms

Paul Krugman is right (see here): Elites are using the crisis to justify a significant change in the role of the state and a definitive redistribution of power in their favor.  In a different time this would have been called a "class project". The increase in wealth inequality of the last 30 or so years is affecting the political system, the moral framing and the economic outcomes (on this, interesting interpretation of Rawls).  This is the reverse of what had happened in 1929  where the suffering of the people was the center of the collective imagination (think Steinbeck The Grapes of Wrath). There is an interesting political economy issue -  rhetoric and framing matter because they determine the  range of "acceptable" strategies of the participants to the democratic game. Today we cannot say anymore as Steinbeck did that  "The bank is something more than men, I tell you. It's the monster. Men made it, but they can't control it" but is this less true? The crisis is  first and foremost a crisis of financial capitalism. Finance didn't control risk, it created it because risk is the basis for profitability of financial investment - (See Haldane here). Thus a reduction of the profitability of the financial industry is a necessary condition for financial stability (and it would also re-allocate human capital towards more productive activities, and thus good for growth). But the solution we face is the reduction of the dimension of the State.