• GFC Part II

    The collapse of Lehman Brothers in September 2008 ushered in the global financial crisis, and seemed to bring an era to an end. The orthodoxy that had prevailed for thirty years crumbled overnight. Markets, it was realised, are not infallible and self-correcting; private business skills and disciplines are quite different from those needed to run a whole economy; governments are not obstacles to economic development but its indispensable guarantor.

    Suddenly, lifelong sceptics sought salvation in Keynesian prescriptions, for fear that the crisis would turn into full-scale depression. The taxpayer shelled out billions to save the global economy from total collapse.

    The prescriptions worked. The depression was averted. The banking system was shored up. We lived to fight another day.

    But the stimulus to make good the sudden collapse in global liquidity took us only so far. It was enough to steady the ship but not enough to prevent the vessel from foundering in the longer term.

    Most of the taxpayers’ money went directly to the banking sector where it was used to re-build balance sheets and resume the payment of large bonuses. Surprisingly little went to re-build the economy, with the result that employment, investment and production continue to languish. But it was not only the banks that were keen to return to business as usual.

    The global establishment quickly – and without waiting for the recession to be over – put Keynes’ General Theory of Employment, Interest and Money back on the shelf. In a surprisingly short time, the old orthodoxies were re-asserted.

    Paradoxically, the main lesson drawn from a crisis that had been created by private sector failure and averted only by government intervention was that the role of government should be wound back. It was constantly asserted that governments should behave like private individuals or companies and must cut back their spending, irrespective of the deflationary impact on economies still struggling with recession.

    The Keynesian lesson that governments have a responsibility for the economy as a whole and not just for their own finances was quickly forgotten. While some economies – like China and, on the back of a mineral commodity boom, Australia – continued to prosper, most others plunged willingly into austerity programmes that, in effect, closed down their economies.

    The theory was that austerity was needed in order to preserve credit ratings and to reduce the need to borrow. The money markets, it was calculated – the same money markets that had created the crisis in the first place – had to be placated. If they did not have confidence that deficits would be reduced, they would be less willing to lend.

    But, like most fairies, the “confidence fairy” has failed to materialise. Despite doing what the money markets are assumed to want, economies continue to languish. Austerity continues to do its depressing work and remains the order of the day.

    In Europe, countries like the UK press headlong on into austerity programmes, even while the economy is stalling and less ideologically committed commentators look in vain for anything that might bring the recession to an end.

    The financial crisis in Europe is of course exacerbated by the disaster that is the eurozone – a project that subjects weaker economies to monetary conditions that are dictated by much stronger economies, that denies to them the usual escape route of devaluing the currency, and therefore requires them to deflate savagely so that they are less and less able to afford – let alone repay – the huge borrowings that are needed simply to keep them afloat.

    How is debt to be repaid and deficits reduced by economies that are going backwards? Can we be surprised that the world economy is increasingly threatened as the contagion spreads from Greece, Portugal, Ireland, and Spain to a growing group that includes Italy, Belgium and possibly others?

    The picture is equally depressing in the United States. An expensive but only partial stimulus programme slowed down but did not solve the crisis. Unemployment continues at a high level and the recession persists, yet – reflecting an almost religious zeal – a minority of legislators has ignored those pressing problems and artificially elevated the raising of the government’s debt ceiling into the USA’s number one economic problem. The consequent US credit downgrade leaves the real problems more intractable than ever.

    Almost everywhere we look, in other words, policy-makers seem determined to ensure that the conditions for recovery are displaced by the requirements of a failed ideology. Can we wonder that even the architects of these errors, as they survey the results of their handiwork, have lost confidence in the outcomes, and that another round of crisis is threatened?

    We in New Zealand will of course be directly affected if the global financial crisis is given a new lease of life. It may be thought that there is little we can do to influence the situation. But we cannot escape responsibility for making our own small contribution to the general malaise.

    We have – like so many others – treated unemployment, investment and productivity levels as of little importance and denied that government has any responsibility for them. We have eschewed intervention and treated the reduction in a modest government deficit as our over-riding priority. By placing ideology above common sense, we have played our own small part in prolonging an avoidable disaster.

    Bryan Gould

    7 August 2011