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
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
Don’t Leave It To The Bankers
As Gordon Brown’s tribulations mount, prompting amongst other things a reappraisal of his time at the Treasury, it is perhaps not surprising that even his most widely celebrated policy innovation – the “independent” central bank – should come under scrutiny. What is even more surprising, however, is why it was almost universally believed to be such a good thing in the first place.
The independent central bank was of course seen as an important weapon in the monetarist armoury. Monetarism is, after all, an expression of an extreme belief in the infallibility of the market – an article of faith for New Labour. Governments cannot be allowed to intervene since any such intervention will frustrate the market’s unfettered operation. What could be more natural, therefore, than to ensure that elected politicians are excluded from the formulation of monetary policy?
This is not, of course, quite how the independent central bank is presented to the public. The public have been sold on the idea that an independent bank is necessary if inflation is to be controlled, since politicians cannot be trusted to take the hard decisions that are necessary. But a careful study of the recent history of the battle against inflation suggests that it has very little to do with the independence or otherwise of the central bank. Inflation in the 1970s was a world-wide phenomenon, but by the mid-1980s – reflecting world conditions – it had largely been brought under control. The claim that an independent central bank is essential if inflation is to be controlled in any case looks less convincing today, with inflation running at over 4%.
But what is really remarkable about an independent central bank is that it is a major step away from democratic government. The price we pay, in other words, is not just an economic one, but is a significant weakening of our democratic institutions. What is identified as the over-riding issue in economic policy is now the exclusive preserve, not of elected governments, but of unaccountable officials.
How this has been accepted is even more of a mystery when one considers that the “independent” central bank is in no sense objective or neutral. It is a bank. Its main clients are banks. It is staffed by bankers. It can be relied upon always to put the interests of the financial establishment ahead of those operating in the rest of the economy. Our economic policy is, in a very real sense, made in the interests of the holders of existing assets rather than of those who live and work in the real economy where new wealth is created.
This bias seems more extreme the longer one looks at it. Not only has the Monetary Policy Committee ensured that the productive sector should bear the burden of its counter-inflationary measures. It seems also to have deliberately averted its gaze from the factor that really is the primary cause of inflation – the huge rise in bank lending.
How have we arrived at this remarkable situation? It is not surprising that the bankers themselves should support and welcome it. Economists, too, will naturally feel that the authority and credibility of their profession have been underpinned by this recognition that it is only the high priesthood that is competent to address these important issues.
But why have politicians so readily accepted this substantial diminution of their powers? The answer is that it is very convenient for politicians to be able to contract out the most difficult decisions they are faced with. How useful it has been for Ministers to be able to pin responsibility on the Bank and to claim that the travails of the economy are caused by the mechanistic workings of the market and of essential monetarist disciplines rather than actual policy decisions.
But is it not time that we reminded them of their responsibilities? If they want to exercise power in a democratic society, they should not be allowed to pick and choose which responsibilities they accept.
There is of course an important role for an effective central bank. A central bank is essential to maintain a proper prudential supervision of banks and of the financial sector more generally – something that has been sadly missing from the scene over recent years. A central bank will regulate and enable the banks to interact in an efficient way that benefits the economy as a whole. The central bank will be an important source of advice on financial matters. But none of this requires the central bank to be immune from challenge or that its actions should be free from debate and discussion, particularly when it is uniquely entrusted with the power to give expression to a narrow and bank-dominated view of the true purpose of economic policy.
The growing economic crisis demands that sacred cows should no longer be immune. Even in New Zealand, where the modern fashion for an “independent” central bank first surfaced, the debate is being re-opened. If we want an economy that more faithfully serves the interests of all of us, and not just those of a small self-interested minority, economic policy should be restored to the democratic arena.
Bryan Gould
4 September 2008
This article was published in the online Guardian on 6 September.
Another Alternative
Successful managers act when it becomes evident that change is needed – and that is just as true of managers of the economy as it is of those who manage individual businesses. The evidence is now mounting that the creation of a single global economy has produced results, for both the global and national economies, that are far short of optimal. The time has surely come to consider that evidence and respond to it.
In a single global economy, the herd mentality of international investors means that they all chase the same opportunities, imposing unrealistic expectations on the recipients of investment capital, disabling those who are denied it, and creating a lurching stop-start process for the global economy as a whole.
That is why the last 25 years have been marked by a series of crises (particularly in Asia, South America, and Eastern Europe), by huge flows of “hot money”, by widening imbalances between rich and poor countries (the poor have actually got poorer), and by a dangerous dependence on the willingness of the rest of the world to finance an unsustainable American deficit. That is why, too, commentators like Joseph Stiglitz, Paul Krugman and even George Soros, are leading the charge for a reform of the world’s financial institutions and the way they operate.
There has so far been less interest in changes that might be introduced at the national level. Yet the results of globalisation have been just as damaging for national economies like New Zealand as they have for the global economy as a whole.
New Zealand has been one of the most enthusiastic participants in the global economy – but, given our small size, the results have been all too predictable. A bigger proportion of our economy is owned overseas than in almost any other advanced country. Repatriated profits and the high interest rates needed to finance our current account deficit weigh heavily on and inflate that record deficit. Most important commercial, industrial, investment and employment decisions are now made in overseas boardrooms. Wage rates are forced down to meet Chinese benchmarks. The insistence by overseas owners on “externalising” costs means that we have less capacity to make necessary social, environmental and infrastructural investment. Economic inequalities have widened dramatically.
International investors demand that the fight against inflation should be entrusted to a monetary policy that commits us to an interest rate and exchange rate roller coaster. Yet, while manipulating interest rates is less and less effective as a means of restraining inflation (particularly in the housing market), an overvalued exchange rate and the high interest rates needed to sustain it continue to inflict their familiar damage on the productive economy on which our prosperity depends.
There is no shortage of possibilities for changing tack. The issues are political, not technical. What is needed is the courage to buck the current orthodoxy. Fiscal policy, both to regulate demand and to influence the patterns of saving and investment, would help us to control inflation, while helping rather than damaging the real economy. Selective credit controls, investment incentives, and savings schemes would help stimulate domestic investment and increase New Zealand ownership and control over our own economy. Requiring more responsible performance and a greater commitment to New Zealand from overseas investors would limit the transfer of decision-making power from our political and business leaders to overseas boardrooms.
No one is suggesting putting up the shutters. But, if we are to escape the policy dead end in which we are now trapped, improve our long-term economic performance, and restore a proper degree of democratic self-government, then we must surely reclaim – in conjunction with other like-minded countries – control of our own economic destiny, before it is too late.
Bryan Gould
9 December 2006
This article will be published in the February issue of Management.