Brendan Keenan

Saturday 26 July 2014

Quest for solutions to economic woes may be part of the problem

Published 31/01/2013|05:00

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THERE was, I kid you not, a newspaper column in Belfast in the good old days called "The Moving Finger Writes".

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The phrase would have been well known to the literate and Bible-reading folk of Belfast, but it seemed an odd title to me, even at the time. (Proving the other Bible saying that there is nothing new under the sun, I see there is now a journalist's blog by the same name).

The thing about modern moving fingers, like so much else, is that, having written, they seem to move on at bewildering speed. It is only five years since the crash began, but the moving fingers, digital and otherwise, have in many cases written that the entire edifice of economic and monetary theory should come crashing down.

It is true that such theories are re-modelled every time things go badly awry. That in itself should be the first lesson – but one that never seems to be learned – that the theory which would prevent things going awry has not yet been invented.

There is a lot to be said for trying to find out what went wrong and devise ways of preventing it happening again. But one would imagine such intellectual investigations must take a lot of time, and a great deal of careful thought.

It seems unlikely that credible answers will be found in four years – still less in the couple of years that it took for the new orthodoxies to gain prominence. That looks more like panic than careful thought.

The same might be said of the extreme nature of many of the remedies being touted around. One lesson which might have been taken from the events of the past decade is to beware of catch-all solutions to economic problems. The intellectual underpinning of the bubble was a belief that a formula had been found which could abolish the messy economic failures of the past.

I have just put on my reading list a book called 'Truth or Beauty: Science and the Quest for Order' (by David Orrell; published by Yale) which argues that scientists have been led astray by starting with the assumption that the universe must be an orderly, harmonious system and they just haven't figured it out yet.

Reviews

This is of no practical or professional help to me, but I hope for an interesting read. Reviews say, though, that the book also deals with economics – on the basis that the search for a stable economic system may have led to even greater instability.

To be fair to economists, they have argued even more about this than physicists have about the possibility of a universe which is not amenable to human mathematics. But then, when the subject is actually human beings – as it is in economics – instability can hardly be ruled out.

Yet the search for happy equilibrium goes on: probably for the paradoxical reason that humans are designed to look for order and chains of cause and effect, even though they also seem designed to behave in ways which are bound produce disorder, and make cause and effect too complex to track, never mind model and predict.

So, while I would like, given the depth of the crisis, to believe in the sweeping solutions now being offered, I cannot help but be sceptical about ideas which were unheard of a decade ago and which, not only run counter to much historical experience, but turn it on its head.

The failure to end the crisis, apparently, is not that wrong policies were followed, but that they were not followed vigorously enough. This has a worrying symmetry with the bubble-blowers' theories, with Alan Greenspan at the intellectual helm.

The reason past bubbles burst, they essentially said, was that everyone did not blow hard enough. Keep it going, and all will be well.

It is little consolation to look back and feel that, if only simple old rules has been followed, we would not be in this mess.

Ratios

If banks had been required to keep traditional ratios of loans to deposits, and central banks had worried about the pace of economic growth, rather than being lulled by the price of Chinese manufacturers, most of the disaster would have been avoided.

Now we are told that, thanks to the scale and nature of the disaster, the old rules of closing at least the underlying deficits as quickly as possible no longer apply.

The already startling figures for borrowing and money creation will have to be multiplied before we return to the comfortable stability which, we instinctively assume, must be the normal state of affairs.

At the centre of this debate sit, very uncomfortably, the central banks. They have to create the new money to offset the shrinking of bank credit.

If governments are to borrow 20pc or 30pc of GDP (one rarely sees the desired number calculated) central banks will also have to create that, because there won't be enough existing money to go round.

This is no longer an armchair debate. The Bank of England now owns a quarter of Britain's national debt. Most astonishing of all – especially because of the lack of attention it has received – is the US central bank's promise to keep creating money until unemployment is less than 7pc.

Well, there goes 100 years of debate about the role of central banks, the effects of money, and the nature of unemployment. One does not know what the result will be but one can be sure of one thing: the Federal Reserve does not know either.

It looks like we will find out in the end. The departing governor of the Bank of England, Mervyn King, made a remarkable speech in which he seemed to repent all that money creation which, in the case of the UK, seems to have done no good at all.

National debt

He clearly cannot accept that the answer is for the bank to go on until it owns most of the national debt, and thinks something else must be tried.

But in an equally remarkable speech, his successor, the Canadian Mark Carney, seemed to come down on the side of even more of the same.

We can be pretty sure that the European Central Bank will go that way, although it has gone further than it would once have imagined possible.

As in the 1970s, but in an even more serious crisis, it will try to play by the old Bundesbank rules of sound money and real adjustments; while the Americans and British try to change the game.

Whether or not Britain disengages from the EU, we could find ourselves in a quite different boat, with possibly dramatic consequences for currencies, prices and output.

Underneath it all is the troubling thought; is the quest for "solutions" part of the problem?

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