It is gradually dawning on the global political elite that the economics they believe in do not work. They do not work, in particular, in the current crisis and continued pursuance of present policy is threatening a double dip recession (Morgan Stanley, the Bank of Englands Andy Haldane), a 1930s-style monetary collapse (Fed dissenter Richard Fisher), Eurozone breakup (Nouriel Roubini) and political mayhem (Jeff Sachs).
Free market economics caused the crisis and the rough-hewn Keynesian stimulus policies improvised in 2009 are failing to get us out of it. So, not particularly gradually, but rather with the urgency of Gerard Depardieu on an airplane, there is a sudden rush towards more radical solutions.
Haldane, in a Bank of England discussion paper today, compares the situation with the one facing Roosevelt in 1938, when Congress forced him to rein in stimulus, prompting a double dip: he ripped up bank regulations and forced banks to LEND. Policy went macroprudential and the recovery took off.
Fisher, as quoted in an excellent post by the FTs Isabella Kaminska, says:
Non monetary factors, not monetary policy, are retarding the willingness and ability of job creators to put to work the liquidity that we have provided… Those with the capacity to hire American workers – small businesses as well as large, publicly traded or private – are immobilised. Not because they lack entrepreneurial zeal or do not wish to grow; not because they cant access cheap and available credit.
Rather, they simply cannot budget or manage for the uncertainty of fiscal and regulatory policy… According to my business contacts, the opera buffa of the debt ceiling negotiations compounded this uncertainty, leaving business decision makers frozen in their tracks.
Jeff Sachs in todays FT flays the global rich for their capture of fiscal policy, condemns the outcome of globalisation and issues a plea for a policy u-turn:
The path to recovery now lies not in a new housing bubble, but in upgraded skills, increased exports and public investments in infrastructure and low-carbon energy. Instead, the US and Europe have veered between dead-end, consumption-oriented stimulus packages and austerity without a vision for investment. Macroeconomic policy has not only failed to create jobs, but also to respond to basic social values too.
There is, as the elite stare out of windows of business class at the blue skies and do some thinking, something big starting to change. Lets dissect it into bullet points:
o By deciding to bankrupt states instead of banks we avoided a Great Depression
o But some states can no longer take the strain
o The recovery is faltering in the West: in the US, UK and Eurozone. It could easily become a double dip
o Monetary policy has been now, publicly, tweaked towards semi-permanent QE and zero interest rates (except in the Eurozone where as Sachs points out policy is in the hands of dysfunctional institution and has basically had to go free form)
o There is no more money for fiscal stimulus
o The option of inflating away debts, public and private, is being quietly pursued but its impact is to flatten consumer demand
o Thus those who dream of a return to consumer and house-price led growth are being disabused.
There is, in short, a zombified situation well known to small businesses and households. Nobody wants to spend, or invest because they cannot predict the future.
Large numbers of businesses are being kept alive because banks cannot afford to declare them busted, or the liabilities rush onto the books. Ditto for many households – Haldane points out 35% of unsecured debt in the UK is with zombie households.
Fisher of the Fed is pointing to the same problem: businesses are awash with cash but – as all orthodox monetary economists know from reading Milton Friedmann – this can become a bad thing (hat tip here to the FTs Kaminska – if you can get behind the pay wall shes uploaded Friedman amp; Schwarzs graphs). In 1933 the build-up of unspent cash in the economy, as the money supply fell, provoked the final crisis.
So what to do?
It is strange to see Jeff Sachs, the man who unleashed neo-liberalism onto East Europe, calling for a global version of the New Deal, but that is effectively what is emerging as the option.
To reorient tax policy to protecting the poor, raising their skills, focusing the investment flow towards green energy etc you would have to do something approaching a political revolution in the US: because from K street to Capitol Hill politics is set up to deliver the opposite.
The Bank of Englands Andy Haldane prefers the realm of the possible – the new boss of financial stability policy in the UK is musing publicly about a macro prudential intervention into banking policy – effectively encouraging the banks to become more risk prone, throwing off fear-induced aversion to lending.
But this rather runs counter to the wave of regulation being forced onto the banks (let alone the proposed Financial Transaction Tax That Will Save The Eurozone). And since Haldane is still speaking the Bank of Englands riddle language, where nothing is ever concrete, we will have to wait and see.
One interpretation is that he has given up the idea of forcing a major shift in power between banks and states (Andy Haldane, Pittsburgh 2009) in favour of forcing the banks to once again act like Masters of the Universe.
What everybody is toying with is the idea of a big, government-led structural change within capitalism: whereby the priorities are re-oriented so that private sector growth does not return at the price of impoverishing developed world consumers and workers.
At times like this I always come back to Hyman Minsky, the unorthodox neo-Keynesian economist who predicted the crash and whose work contains the kernel of what a 21st Century structural change might look like.
Minsky, who has followers on both the left and right, argued: socialise the banking system, rip up regulation for the private sector non-financial economy so it can grow, and abolish welfare, making the state the employer of last resort but forcing the unemployed to work.
By socialise, he meant: reduce banks to the basic function of collecting and lending the savings of the population, in a variety of non-speculative businesses. Today that could be mutuals, nationalised banks, Landesbanks, credit unions etc. The difference between this and Glass Steagall is that you actively discourage the existence of a financial speculation sector.
We have come to call the crash of 2008 the Minsky Moment – but in hindsight it wasnt. Not until something big goes bust, and millions of people lose their money, is it really a Minsky Moment. Everything policymakers have done since 2008 has been designed to delay the reckoning.
So why is the thinking beginning to change?
One of the most brilliant observations in Alistair Cookes memoir Six Men concerns the difference he observed in Edward VIIIs mien, with and without access to intelligence briefing. Cooke wrote:
Daily possession of the papers is, in fact, the main and most deceptive perquisite of high office. (Cooke A, Six Men, 1977)
Without them, Edward would fume as they hustled him onto a plane at the outbreak of war: We know damn all about what is happening.
That is the situation for most of us today. I interpret the sudden flurry of blue skies thinking as a sign that those who do get daily possession of the papers are bracing themselves for more trouble in the autumn – banking trouble, real-economy downturn trouble and political protest trouble.
Tags : Monetary