Monday 22 July 2019

The crash is upon us. Now we must avoid the bang wallop

Brendan Keenan

Brendan Keenan

REMEMBER economist Alan Ahearne's story about Ben Bernanke lecturing Japanese central bankers for not doing enough to fix Japan's post-bubble deflation? No? Well, perhaps you weren't paying attention.

Anyway, Mr Bernanke thought the Japanese authorities ought to be doing more to rescue the economy from what turned out to be a decade-long slump. Their reaction is not recorded: but suppose they did not want to rescue it?

There must have been elements in the all-powerful Japanese bureaucracy who did not like the opening of their economy to the forces of globalised finance in the first place. They may have been content to let the enormous Japanese bubble swell and burst, and then let the full pain of that burst be felt all round.

This is mere surmise on my part, athough I have heard the possibility mentioned. We do know that Mr Bernanke is sparing no effort, or inflationary dollar, in making sure he rescues the US system from the follies of the credit bubble.

It would not be a surprise if a certain amount of pleasure were found on Japanese faces at the sight of Mr Bernanke now being lectured widely for bailing out greedy and foolish bankers and investors with public money.

That lecturing, along with the demand -- some from unexpected quarters -- for more regulation, may be symptoms of something wider. The long-run business cycle appears to be accompanied by a long-run thought cycle.

It can be said to have begun with the Great Crash of 1929, and the long-run is so long that, if a new such cycle is now beginning, it will be only the third since then.

The first can be said to have lasted from 1930 until the early 1970s, although World War II was an interruption which may have prolonged things. Before that, in the 1920s, the great men of Wall Street were regarded as Masters of the Universe, just as they have been for the past 20 years. Then, as now, it seemed a very good idea that a Wall Street investment banker should be US Treasury Secretary.

After 1929 and the Great Depression such an idea would have been regarded as very unwise. Wall Street went about its business, of course, but it kept its head down. Governments would play the main role in the management of economies and the distribution of resources. Look at how well they had organised things during the war; what a far better way to do things in peacetime, the theory went.

As in the 1930s, economic crisis marked the turning point for this school of thought. In this case it was the oil price shocks of the 1970s, even though it had little to do with the domestic management of the developed economies.

It was the oil producers not unreasonably seizing control of their resources from the customers, but it was a crisis in tune with its times.

OPEC, after all, was the epitome of planned control and rationing. Much of the response from its customers involved governments trying to deal with the crisis via the then orthodox route of fiscal policy.

Both OPEC and the oil-consuming countries came to regret their policies. OPEC now tries to follow the market rather than drive it, and governments now adhere in principle to fiscal balance rather than fiscal management; nowhere more so than in the euro area.

These ideas are part of the cycle of the last 30 years; summarised, however unhelpfully, by the word "globalisation". Thanks to a remarkable contribution from Peter Sutherland, the World Trade Organisation replaced the more limited GATT system. Trade expanded mightily, although it has never been liberalised to the degree that was hoped.

Instead, it was global capital flows which were freed on a scale not seen since the 19th century. This is not only a revolution, but a recent one. Albert Reynolds was Taoiseach and Bertie Ahern Minister for Finance when the last controls on Irish citizens moving money in and out of the country were abolished in 1992. For us, the brave new world is as new as that.

But this latest crisis may mark another turning point as the flaws in the current system become impossible to ignore. The main one is instability; the Asian crisis followed by the dotcom bubble and bust, followed by the credit crisis; which at this stage looks the most serious of the three.

The central belief in the self-correcting mechanisms of financial markets -- so remarkably articulated by Alan Greenspan -- has been shattered.

When all this is over, one certainly expects a much more traditional approach from Bernanke's Fed. Officials are talking about the need to try to curb excessive rises in asset prices, although no-one is quite sure how this is to be done.

There will certainly be more banking and stock market regulation-- much of it replacing 1930s regulation which had gone out of fashion and been abolished. If that is as far as it goes, it will probably be all to the good. But if the pessimists are right about a long, grinding correction of US imbalances and excesses, it might go a lot further than that.

The danger is exactly the one which infected the 1930s and became part of the organised international system after the war -- protectionism. It is certainly a concern that cheap Mexican workers seem to be getting more stick in the US presidential campaign than the mega-rich bankers of Wall Street. The impact of low cost labour is easier to understand (and misrepresent), but it is not where the problems lie.

Before opinion swings too far against the excesses of the 1990s and 2000s, we should remember that the period saw the fastest growth in global incomes -- more even than during the Industrial Revolution. Around 500 million people have been removed from subsistence poverty -- five times as many as in the 19th century.

All technical and financial revolutions breed volatility and increase inequality, alongside the rapid rise in total income which they create. The current revolution is no exception. A previous generation went too far in trying to control these undesirable elements but, equally, it is now clear to almost everyone that they cannot be left to their own devices. Can this generation do any better in getting the balance right?

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