Open Letter to Our New Prime Minister
Dear John,
As you form your new government, there will be many who, for the sake of the country, will wish you well and who will hope that you have the wit and will to overcome the economic crisis that now afflicts us. This may be the moment to put to one side your experience as a merchant banker and to concentrate instead on the needs of the real economy in which most people live and work.
Your challenge is in fact twofold. You will first have to confront, with other world leaders, the global crisis that now threatens us, but at the same time you will have to look forward to the steps that will be needed if we are to improve our own endemically disappointing economic performance. The world’s big economies have been, after all, like great ocean liners which have done very well while sailing the global ocean, until they suddenly sprang a leak and started to sink. We, on the other hand, from the moment we launched our own tiny and vulnerable craft on global waters in 1984, have been waterlogged for 25 years.
The decisions you will have to take in response to the global crisis are, in a curious sense, relatively straightforward. There is a wide-ranging consensus as to what needs to be done, embracing right (George Bush) and left (Gordon Brown and Kevin Rudd), which you should have no difficulty in joining.
The steps taken so far in New Zealand are in line with that consensus. The cut in the OCR, the Bank Deposit Guarantee Scheme, the measures to improve bank liquidity, will all help to avert disaster. Even so, it is almost certainly the case that we have not yet seen the full dimensions of the crisis. As our export markets close down and our tourist numbers decline, we will feel – in addition to our own home-grown recession – the full brunt of the international recession. And, while our banks look reasonably well placed for the time being, the higher cost and greater difficulty of borrowing overseas will have their impact sooner or later.
The difficult issues, however, will arise in tackling our own deep-seated and endemic national problems. It is here that your real test will come. If your government is to slow down, or even stop or reverse, the migration across the Tasman (which has attracted so much attention from politicians over recent years), it will have to deal with the fact that if we had matched the Australian performance over the past 25 years, every New Zealand family would be $80,000 per year better off. It beggars belief that this disparity is unrelated to the policy prescriptions we have chosen to put in place over that time.
Just as the global crisis has compelled a freeing up of the debate about international economic and financial arrangements, so it should be seen as an equally strong reason for undertaking a re-appraisal of our own national policy stance. Both the global crisis and our own shortfall in economic performance, after all, have a common origin – the belief that there is no alternative to the current orthodoxy of unregulated markets and of economic decisions being the preserve of bankers rather than elected governments.
It is that simple-minded belief that must now be subjected to review. Your actions and statements so far suggest that you understand this (though you may have your work cut out to persuade your deputy and Minister of Finance that it is not “too hard” to make a change).
In case you need to buttress your resolve in this respect, you should take courage from the increasing chorus of influential voices – from Joseph Stiglitz at the United Nations, to Robert Skidelsky and Vijay Joshi in the pages of The Guardian – who are now calling for new thinking and new measures.
Nor is there any shortage of reputable New Zealand economists – Brian Easton, Ganesh Nana, Kel Sanderson, Anthony Byett – who believe that the time is long overdue for reconsidering the wisdom of relying on a single policy instrument – interest rates – to control inflation. There are many others who will concede in private that new thinking is needed. Even your predecessor as National Party leader, Don Brash, has recognised the need for additional instruments in his advocacy of a variable rate of excise duty on petrol. And the new Labour finance spokesperson, David Cunliffe, seems ready to break the shackles of current orthodoxy.
The country will hope that you might go further, and put your weight behind the growing international demand for a “new Bretton Woods”, which would put a new international framework in place – as Henry Paulson puts it – to redress imbalances and restrain excessive capital movements. No country has more to gain than we have from such a development. If we are to improve our economic performance, both at home and internationally, we must be ready to apply the lessons that both our own and the global experience should teach us.
Bryan Gould
13 November 2008
Shifting Foundations
As the global financial crisis unfolds, each country responds by seeking to protect its own institutions and economies. New Zealand is no exception. The steps we have taken have been sensible and – so far – effective in shoring up our economy as well as we can against the immediate prospects of worldwide recession and financial meltdown.
Soon, however, we and others must lift our eyes to more distant horizons – not just further into the future, but across a wider spectrum. The responses that must now be made cannot be merely national in scale, but must take an international dimension as well.
And it is when we look to that international landscape that we get a real sense of the change that has taken place. The world has truly shifted on its foundations. The agenda moving forward and the ideas now being discussed are now hugely different from anything that was thought worth considering even a few months ago.
Three years ago, I wrote a book called The Democracy Sham: How Globalisation Devalues Your Vote. In it, I developed the thesis that the global economy had dangerously sidelined democratically elected governments who found themselves no longer able to withstand the pressures placed upon them by international capital. The result was that unregulated markets were in effect out of control, with no restraining influence exercised by those we elected to protect us from the abuses and excesses perpetrated by a greedy and powerful minority.
I canvassed a number of solutions to these pressing problems. Some were national in scale, involving changes in national economic policy – a widening of the goals of that policy, a willingness to regulate the “free” market, a proper role for government as opposed to bankers, and a greater concern for social justice.
Other proposals, however, addressed the international scene. New Zealand has more than most to gain from a better regulated international financial structure. We would benefit greatly from less volatile exchange rates, from some diminution in the huge daily flows of “hot money” around the globe, and from a more prudent policy on the part of those who have driven the credit creation on which the global economy has perilously – and fatally – depended.
Many of these ideas were no doubt dismissed as irrelevant, possibly eccentric, even dangerous and misguided. What is now intensely interesting is the extent to which this kind of thinking has now – in a remarkably short time – entered the mainstream.
A striking indicator of how the picture has changed can be found in the debate on the world economy that has just taken place in the United Nations. Some of the world’s leading economists – like Joseph Stiglitz and Prabhat Patnaik – have presented papers in which they look to a new agenda going forward and are prepared to consider proposals that only a short time ago would have been regarded as anathema by most commentators.
They have, first of all, re-stated the fundamental dilemma identified by John Maynard Keynes, the twentieth century’s greatest economist. Keynes drew a distinction between investment and speculation. Investment took place, he said, in the real economy and produced new productive capacity. Speculation, on the other hand, was a phenomenon of the financial economy, took place on a short timescale and for short-term purposes, and was often undertaken irresponsibly. The only way, he said, that speculation could be reined in was by regulating financial markets, and this was essentially a task for national governments.
Stiglitz and Patnaik go on to call for action, not just to deal with the immediate crisis, but to make deeper reforms. They want a reform of bodies like the the IMF and the Basel Committee on Banking Regulation, and “a new Bretton Woods” – a UN-brokered international agreement which would regulate the international movement of capital and the volatility of exchange rates. They want a new international financing facility. They make these calls in the interests of a better balanced world economy, and not least to help the Third World which has lost out as a result of both the creation of the credit bubble (in which they had no share) and now its subsequent bursting. The economists are in effect reminding our political leaders of their responsibilities, and telling them that they can no longer leave these important matters to unregulated markets.
In placing these issues back on the agenda, these economists (who are backed up by an increasing number of leading thinkers around the world) are putting our own New Zealand leaders on notice that they, too, must respond with an increased understanding of what is now expected of them. There is a real opportunity for New Zealand to throw its weight behind, perhaps even to help lead, a drive for a new international agreement that would redress the balance of power in favour of democratic governments and against irresponsible markets and thereby protect us all against further instalments of the kind of damage we are now suffering.
Bryan Gould
5 November 2008
Yes, There Is An Alternative
The horror stories keep coming but even so it is doubtful whether we have yet grasped the scale and seriousness of what is happening in the global economy. And, as we stand transfixed by the need to surmount the current crisis, few will lift their eyes to the longer-term implications of what is sure to be a seismic change in the way the global economy operates.
We do not yet recognise that the imperatives that have driven governments around the world to take steps that would have been unthinkable just a couple of months ago will not lose their force just because the immediate crisis is past. The measures that are now being put in place are essential in the short term, but they also point the way to a post-meltdown future where the world will (hopefully) never be the same again.
The last couple of weeks have seen the unwilling slaughter of sacred cows to which we have been solemnly assured for nearly three decades “there is no alternative”:
• Governments must be kept well away from the main levers of economic policy? No. As even George Bush agrees, government action is essential.
• Monetary policy is all that matters? No. Fiscal policy now takes its proper place in the armoury.
• Only bankers are to be entrusted with the important decisions in our economy? No. As is apparent to everyone, banks worldwide have been irresponsible, foolish and greedy and their deficiencies mean that they must in many cases be taken into public ownership.
• “Free” markets must be left unregulated and will always produce the best results? No. The market has failed and created a catastrophe.
• All that matters is the bottom line? No. The goals of economic activity are wider than profit for a few.
The truth is, in other words, that if we are to survive the crisis in reasonable shape and look to a better future, we must now abandon the nostrums that have ruled our affairs and have proved so destructive. We need governments to acknowledge their responsibilities, to take a major role in first rescuing and then regulating our economy, to use a much wider range of policy instruments, and to treat markets as hugely valuable servants but dangerous masters. John Maynard Keynes, take a bow!
We may well be living through one of those seminal moments when the tectonic plates that go to make up the most important debate in modern politics have begun to move. For as long as we have had what might be recognised as an economy – in other words, for 200 years – the pendulum of intellectual fashion has swung between two contrasting views of the proper role of government in managing the economy.
On the one hand has been the view that governments have very limited capacity to manage the economy. Any pretension to extend that power will not only be self-defeating but also – because of the distorting effect on the proper and unfettered operation of the free market – positively damaging. Governments, according to this view, should limit themselves to those aims – such as the defence of the realm and maintaining the value of the currency – that are their proper concern.
The other view is that government is a major player in the economy, both as an actor in its own right and as a coordinator of other actors and a maker of policy. It should accept, and perhaps seek and welcome, a responsibility for the performance of the economy – a performance to be measured not just according to monetary criteria but according to real phenomena such as output, employment and investment. The economy will perform better if the power of government is harnessed to the needs and interests of industry, and if government undertakes those functions – such as the provision of major infrastructure – that cannot easily be carried out by private industry.
This latter view has a significant political dimension as well. If government is to do its job properly, it must use the power of democratic legitimacy to regulate and restrain the market so that society as a whole is protected against the depredations of powerful market operators. This view is on the whole (and not surprisingly) rejected by the right. But it is one of the most surprising and shameful aspects of modern political history that it has also been rejected – and enthusiastically so – by today’s “left”. New Labour has a question or two to answer.
The lesson of this crisis is that unregulated markets certainly lead to economic disaster; but, even more importantly, they are incompatible with democracy. If markets are always right and must not be challenged, the result is not only economic meltdown but government by a handful of greedy oligarchs rather than by elected representatives. If democratic governments do not, will not or cannot exercise that power to protect their electorates, the course is then set inevitably not only for the crisis we now face but also for the abuses and failures that disfigured our economies in the years preceding the crisis.
Shouldn’t our politicians be called to account?
This article was published in the online Guardian on 14 October
Post-meltdown
The horror stories keep coming but – even so – it is doubtful whether we have yet grasped in New Zealand the scale and seriousness of what is happening in the global economy, and how greatly we will be affected by it. We know that others are in deep trouble but we see ourselves so far as transfixed spectators rather than actors (or victims) in the drama.
We may not remain in that comfort zone for long. As the world enters recession, and the markets for our goods are decimated, we will feel the pain. And, although our financial system seems unscathed for the moment, the price we will inevitably pay for being one of the world’s most indebted countries is waiting just round the corner. As foreign investors take their money home, and as our banks have to re-negotiate the credit arrangements on which they rely, stand by for a succession of damaging body blows to the already fragile underpinnings of our economy.
There is little sign yet that our political and business leaders have grasped the dreadful vulnerability of our position. The cool reception given to the thoughtful paper issued last week by Mark Weldon and David Skilling – with Peter Dunne expressing concern about the impact on the government’s deficit, as though that was the foremost of our worries – shows that we do not yet recognise the imperatives that have driven governments around the world to take steps that would have been unthinkable just a couple of months ago.
There is of course room for considerable discussion about the precise recommendations of the Weldon/Skilling paper. But it does at least represent the first awareness of the scale of the problem and of the need for new thinking. Even more interestingly, it points the way to a post-meltdown future where the world will (hopefully) never be the same again.
The paper is notable mainly for its (perhaps unconscious) willingness to slaughter some sacred cows to which we have been solemnly assured for nearly three decades “there is no alternative”. Governments must be kept well away from the main levers of economic policy? No. As the paper now asserts (and as even George Bush agrees), government action is essential. Monetary policy is all that matters? No. The paper says that fiscal policy is now the most important weapon in the armoury. Bankers should be entrusted with the important decisions in our economy? No. As is apparent to everyone, banks worldwide have failed us and must in many cases be taken into public ownership. “Free” markets must be left unregulated and will always produce the best results? No. The market has failed and created a catastrophe. All that matters is the bottom line? No. The goals of economic activity are wider than profit for a few.
The truth is, in other words, that if we are to survive the crisis in reasonable shape, we must now abandon the nostrums that have proved so self-destructive. We need governments to acknowledge their responsibilities, to take a major role in the rescuing of our economy, to use a much wider range of policy instruments, and to treat markets as hugely valuable servants but dangerous masters.
We should be in a better position than most to recognise this, since we have given those nostrums a longer and more comprehensive trial than anyone else. While the great super-tankers and luxury liners of the big economies have plied their trade on the great ocean of the global economy, and amassed large fortunes until they suddenly sprang a leak and began to sink, our tiny craft has been waterlogged for years. For us, the dogma of the unregulated “free” market has not led so much to sudden collapse as to long decline.
We now have the chance, if our leaders have the necessary wit and imagination, not only to change direction in order to escape the worst of the world recession in the short term, but to set a new course which will produce in the medium term a better balanced economy in a world where markets are no longer regarded as infallible.
The lesson of this crisis is that unregulated markets lead to economic disaster and – even more importantly – that they are incompatible with democracy. If markets are always right and must not be challenged, the result is not only economic meltdown but government by a handful of greedy oligarchs rather than by elected representatives.
The whole point of democracy is that it ensures that political power will be used to offset the otherwise overwhelming economic power of the big market players. If democratic governments do not, will not or cannot exercise that power to protect their electorates, the course is then set inevitably not only for the crisis we now face but also for the abuses and failures that disfigured our economies in the years preceding the crisis.
Shouldn’t our politicians be called to account? Shouldn’t these issues be what our general election is all about?
Bryan Gould
12 October 2008
Meltdown
As the world economy threatens meltdown, Alan Greenspan – who, as Chairman of the Federal Reserve Bank, had presided over its fortunes from 1987 to 2006 – expressed himself as being taken aback by what he described as a once-in-a-century crisis. We were all invited, by implication, to join in his bewilderment at the apparently unheralded disaster that has suddenly struck us. If even Alan Greenspan had not seen it coming, we could all be excused for a similar failing, couldn’t we?
Well, no. This is a crisis that has been thirty years in the making. Its approaching outline has been visible for a very long time. Only those who did not want to see (and that includes almost all the so-called expert commentators and actors in the drama) could have failed to register the warning signs.
The first little alarm bell might have rung when, at the end of the 1970s and early in the 1980s, much of the world – following the lead provided by Margaret Thatcher and Ronald Reagan – removed exchange controls and allowed capital to move freely around the world. The result was a huge increase in capital flows as multinational investors roamed the globe, looking for the most favourable long-term, and often short-term, investment opportunities.
In one bound, the controllers of that capital had decisively changed the balance of power between capital and governments, whether elected or otherwise. It was now the international investors who could face down governments, threatening to move their investment elsewhere if they did not get their way. The capital flows they controlled were sufficient to dwarf the resources of all but the biggest national authorities. The political agenda had been transformed; the democratic process, which was supposed to protect ordinary people from the predations of capitalism, had been disabled.
This is not, of course, how it was portrayed at the time. On the contrary, it was represented as a dismantling of unnecessary and damaging controls. The way was now clear to establish a single global market which, by definition, excluded governments, since any government intervention in that market would mean that market conditions would vary from one part of it to another and it would no longer be a single market.
As the external environment changed, so too did domestic conditions. The fashion was now for monetarism – the mechanistic application of supposedly simple rules for controlling the money supply and therefore inflation – a process which could safely be entrusted to officials and market operations and removed from the unreliable attentions of democratically elected politicians.
Again, these developments were almost universally applauded as an overdue expression of the “free” market, not least by those who – it might have been thought – would most resist them. Yet, even then, they were not satisfied that they had done enough to shunt off democratic processes to the margins. They determined to ensure that governments were definitively excluded from economic policy by proclaiming that there was only one goal of that policy – the control of inflation – and that that task should be removed from those elected to undertake it and handed over to an unaccountable central bank. The principal decisions in economic policy were thereby virtually insulated against public debate and discussion.
This, too, was greeted enthusiastically around the world as an inspired piece of Solomon-like wisdom. And, as the inevitable consequences began to take shape, as those who now controlled huge financial assets worldwide and could manipulate them for their own benefit without any fear of interference began to cream off a higher and higher “return” and to pay themselves more and more outrageous salaries, bonuses, commissions, and “perks” of all kinds, while at the same time making decisions not only exclusively in their own interests but without regard for the consequences for millions of people around the world whose lives and livelihoods simply no longer mattered, the politicians of the day joined in the celebrations. Typical was the New Labour government which, we were told, was “intensely relaxed about people getting filthy rich.”
And, as the banks and financial institutions focused on making as much money as possible through manipulating assets and irresponsible lending, they could relax in the knowledge that the central bank was not only too busy with the task it had been given of shaping economic policy to bother about prudential regulation, but also that it would be too solicitous of the interests of its fellow banks to do anything about it anyway.
So, the whole de-regulated international money-go-round whirled ever faster, the music played louder, the champagne flowed faster, and the world economy lurched from one crisis to another. But there was always another tranche of credit, or another clever idea for securitising debt, or another mega-merger, to keep the bubble floating.
And then, in slow motion, the souffle began to collapse. As always, it is the victims of the excesses who now have to pay the biggest price for correcting them. It is all those who will lose their homes and their jobs and their living standards and their sense of self-worth who will bear the heaviest burden.
In the meantime, poor Alan Greenspan! He couldn’t see it coming. Nor could all those bankers, politicians, commentators, financial experts and multinational potentates who so enthusiastically drove it all forward and were so dazzled by their good fortune that they could not recognise reality.
But some of us saw it coming. You bet we did.
Bryan Gould
17 September 2008
This article was published in the online Guardian on 20 September