• Who Is To Blame?

    As the true scale and nature of the global crisis becomes apparent, the blame game is under way with a vengeance. Not surprisingly, those who find that it is their jobs and homes that are now at risk are keen to identify those who can be held responsible.

    It isn’t just those – like Bernard Madoff – who have now been unmasked as criminal fraudsters that they have in mind. They want to dig deeper for answers to the question reportedly put by the Queen – why did no one see it coming?

    Politicians, as usual and with some justice, are the first in the firing line. Even those, like the British Prime Minister, Gordon Brown, who have apparently experienced an overnight conversion to policies they had scorned for 25 years, do not seem to have earned forgiveness for their recantation. And If George W. Bush were still in office, one shudders to think how low his already abysmal approval rating would have fallen by now.

    Internationally, much of the anger felt by ordinary citizens is of course directed at the banks and at the unbelievable stupidity and greed shown by senior executives who are still paying themselves huge bonuses and pensions at the same time as receiving billions of taxpayer dollars to save their institutions from bankruptcy.

    Economists, too, or at least some of them, are being held accountable for propagating and endorsing doctrines which even Alan Greenspan now says were fatally flawed. Accountants who failed to audit, and lawyers who turned blind eyes, also come in for their share of bitter criticism.

    One group, however, who have so far escaped relatively unscathed are the media. In a democracy, as the media themselves frequently tell us, we should be able to rely on reporters and commentators to ferret out wrongdoing and to warn about unsafe and destructive policies and practices. So, where were the media over thirty years, while the excesses and stupidities of an unregulated market moved to their inevitable conclusion?

    There have been honourable exceptions, of course, but the media have too often been the loudest voices in support of the whole ramshackle structure of greed and irresponsibility that has now come crashing down. We can only conclude that they have been so keen to promote their own prejudices – or at least those of their owners – that they have allowed judgment to fly out the window.

    One of the most prominent cheerleaders has been The Economist – a weekly journal enjoying an enviable reputation for sound judgment and insightful commentary. Yet, for The Economist, no reward has been too great, no excess too outrageous, as long as it was ordained by the “free” market.

    The broadcast media have been just as bad. CNBC, a business channel claiming to be the only channel “with the information and experience you need”, has gone one better – or worse. Its so-called “experts” advised investors to trust – in turn – Bear Stearns, Lehman Brothers, and General Motors just weeks and months before they demanded billions from taxpayers as the price for staying afloat.

    Little wonder that, with “expert” advice like this, the ordinary investor was led astray. But the failure of the media was more often of the “head-in-the-sand” variety, offering assurance that the authorities had everything under control. Add to that the constant treatment of the rich as demi-gods who could do no wrong and we can begin to see the responsibility that the media must bear for the failure to sound the alarm.

    And they are still at it. We were treated a week ago to an article in the Asian edition of The Wall Street Journal, reporting an interview with our Prime Minister, John Key, conducted by one Mary Kissell. Ms Kissell was given generous air-time by our broadcast media and was widely reported in our press. The Prime Minister cannot be held responsible for the views of his interviewer but he may have jibbed a little at the cold water she poured on the efforts made by governments around the world to restore a broken financial system and to help the global economy re-establish a level of demand that had dropped like a stone.

    The value of Ms Kissell’s views may be judged by the potted history she gave her readers of New Zealand’s recent economic history. Our “island nation”, we were told, “grew smartly” following the “reforms” of Rogernomics. Growth had, however, stagnated in the last nine years when “free” market policies were not maintained.

    Even a cursory examination of our GDP statistics would reveal what a gross misrepresentation this is. New Zealand GDP growth was virtually non-existent in the seven years following 1984, and reached its highest sustained level from 1999 to 2008. Where were the New Zealand commentators who could surely have pointed this out, and judged the Wall Street Journal article for what it was – a piece of special pleading by a mouthpiece for institutions that had been thoroughly discredited by recent events?

    Bryan Gould

    13 March 2009

  • Lessons from the Crisis

    As the global crisis unfolds, the great gurus of the world economy – those who have presided over its fortunes for much of the last two or three decades – have largely ducked for cover. Some – like Alan Greenspan – have had the courage to admit that there was a “flaw” in his thinking. Others – like Gordon Brown – have made an apparently effortless overnight conversion to Keynesian economics after decades of monetarist orthodoxy. A few – like Bernard Madoff – have been unmasked as fraudulent, as well as foolishly irresponsible. But most have watched from the sidelines, silent and confused, as the results of their handiwork have become apparent.

    The immediate task and focus of governments around the world is, of course, to put in place measures which will limit the damage, avoid a depression, and restore the world economy to some semblance of health as soon as possible. In this endeavour, the supposed experts of yesterday necessarily have little to say. It is, after all, their nostrums that have driven us to this point, and the crisis has cruelly exposed the limitations of the monetary policy which they said was all that was needed. What does liquidity matter if no one wants to borrow and spend?

    But, once the authorities have done their best, and the course to recovery of a sort is (hopefully) set, the debate will move on. The issue then will be not so much the steps needed for recovery as the lessons to be learned if the disaster is not to be repeated in the future.

    At that point, we can expect the champions of “free” markets to re-enter the debate. The battle will then be on to write (or re-write) history, and what now seems undeniable will again become hotly contested. There will be no shortage of explanations and excuses for what has happened, ranging from the nonchalant (the crisis was a minor blip in what has otherwise been a triumph for the “free” market) to the aggressively ideological (it was the failures and mistake of governments that frustrated and distorted legitimate market operations).

    It is vital, therefore, that – while reality still imposes itself on perceptions – an account is drawn up of the lessons we must learn from this disastrous episode. Some of those lessons will be widely accepted, but others – even for those who are most critical of the errors of recent times – will be more difficult to digest.

    The crisis has been so damaging and so all-engulfing that it might be argued that virtually nothing of past doctrine can survive. There are some particular lessons, however, that absolutely demand attention. I would select six leading contenders.

    The first and most obvious is that “free” or unregulated markets are extremely dangerous mechanisms which inevitably go wrong. All markets, left unregulated, will produce extremes, and that is particularly true, as Keynes pointed out, of financial markets, because of their inherent instability. The case for regulation cannot be disputed, but even so, the counter-attack will certainly come. The merits of self-regulation, the salutary effects of competition, and the advantages of a “light hand” will again be rolled out in order to deflect any real attempt at disciplining market operators. That is when our public authorities must be strong-minded, and remind themselves that is their responsibility to the public interest that demands effective regulation.

    The second lesson is that government involvement in the management of the economy is essential. After decades of being told that the only thing we should ask of government is that it “get off our backs”, we can now see that it is governments – not banks or the private sector – that, as the authority of last resort, maintain the value of the currency, guarantee appropriate levels of liquidity and credit, and make irreplaceable investments in essential infrastructure. We must not wait again until the eleventh hour before we deploy the power, responsibility and legitimacy of government to keep the economy on the right track.

    The third lesson is that fiscal policy, decided by governments, is more important and effective than monetary policy. We have again been told for decades that monetary policy is all that is necessary, and indeed all that is effective, both in controlling inflation and in setting the real economy on a sustainable course. We now know that using monetary policy to ward off recession is no more effective than pushing on a piece of string and that an exclusive reliance on monetary policy to restrain inflation is just another reflection of the view – now surely discredited – that the markets always get it right.

    My fourth inescapable lesson is that gross imbalances in the world economy will inevitably cause it to topple off the high wire. The growing gap between rich and poor nations is bad enough, from both an economic and moral viewpoint. But the imbalance between surplus and deficit countries is equally damaging as a strictly economic phenomenon. The surpluses drive us toward recession because they represent resources that are hoarded rather than spent, while those countries with deficits are likely, as Keynes pointed out, to try to control them through deflating their economies, thereby reinforcing the deflationary bias. To the extent that others are willing to finance the deficits (as, for example, China’s financing of the US deficit), this simply encourages uneconomic production and an excessive reliance on credit, meaning that the world economy wobbles perilously on an unsustainable foundation.

    A related and fifth lesson is that the freedom to move capital at will around the world has exacted a heavy price. The total removal of exchange controls meant that international investors could ignore and, if necessary, blackmail national governments; this became a major factor in allowing market operators to escape and defy any attempt at regulatory controls. We have to make up our minds whether we trust accountable governments, with all their imperfections, or the unrestrained and totally irresponsible market. Our recent experience surely makes this a no-brainer. What we now need is a new international regime, negotiated between governments, to regulate exchange rate volatility, international lending practices, and the obligations of international investors.

    My final lesson is that bankers should not be trusted with the most important decisions in economic policy. No policy measure was more widely welcomed than the handing of monetary policy over to “independent” central banks. We now have good reason to know that their decisions are not only likely to be wrong, but will certainly be self-serving – no more reliable or impartial than those of casino operators who will always set the odds in their own favour. If we are truly to grapple with the lessons set out above, we need to restore the main decisions of economic policy, including the effective regulation of markets, to democratic control.

    Bryan Gould

    18 January 2009

    This article was published in the online Guardian on 19 January and the New Zealand Herald on 26 January.