There is very little Wolf ever writes with which I disagree, and he is reflecting one of Keynes’s early maxims on economic stimulation when he says you only get one roll of the dice on this stuff. Perhaps JMK went on to say “because in the long run we’re all dead” – this isn’t recorded. But what interests me is why everyone felt too timid about it. The reasons are, I think, still there for all to see: but a rainbow of deniers – Republicans, banking firms, the Labour Party and world financial leaders – are busy pouring muddy waters over the still-wet ink of recent history. This piece is a layman’s guide to what really happened to make the options open to stimulators so limited. Feel free as always to chuck in your views – but again people please, no profanity.
First point: the danger was seen too late. This is down to Bush, Blair, and Brown – but above all Alan Greenspan. He did the GOP’s bidding in 2004 when he should have brought in a credit squeeze in some form or another. The ever-megalomanic Brown never thought to do this, of course, because he had banished boom and bust.
Second, when the danger arrived, too many people said “it isn’t happening”. It took Gordon Brown fully ten months before he could bring himself to even say the word ‘recession’. Bush never did, and never acknowledged the debt mountain he left behind. “Wall Street got drunk” was the sum total of his considered analysis at the time. Bernanke and his banking chums either carried on until they went under/got bailed out, or planned quite consciously to benefit from the demise of others: JP Morgan (aided by Tony Blair), Goldman Sachs, Barclays and Santander variously did some clean and some dirty work on Northern Rock, Lehman Brothers, AIG and quite a few former mutual banks.
Third, the whole of the financial and governmental Establishment ignored the popular, academic, credit agency and professional economists’ cries for reform of the global banking system.
Fourth, most Western governments had fallen for the ‘new paradigm’ bollocks, and gone on a lottery-winner spending spree. The epithet about not fixing the roof during the summer is still the best one here. Greenspan, Bernanke and Brown, this one too is down to you. But the Greeks, Spaniards, Italians and French did precisely the same thing.
What this did was to limit the amount of money to chuck at stimulation.
Fifth, this was exacerbated by the sheer scale of over-reached lending undertaken by the banks. Not only did they disobey the first rule of banking – have richer investors than you have borrowers, and a lot more of them – they also eschewed credit quality scoring in search of bonus targets and shareholder demands.
Too late, too little, and too much (in my view, far too much) spent on bailing out failed institutions run by dumbos like Alan Applegarth and Fred Goodwin. Around the world, this exercise in government-as-saviour cost us an eye-watering $23 trillion.
So, sixth, there was a tentative approach in the air – not improved by citizens quite rightly saying “This is my money you’re using here”.
Seventh, the old gang of Bernanke, Geithner and all their hangers on who’d messed up in the first place were kept on by the nervous and unschooled new US President. This was a catastrophic mistake by Obama – and as Harry Truman said, the buck stops at the Oval Office desk.
Eighth, after an initial up, down and sideways debate about interest rates, pretty much every country in the world was cajoled into a near-to-zero interest rate policy. This too was, in my contrarian view, also a massive error: but for the purposes of this short essay I want to talk about it in the context of point eight – The Big One: economic stimulation is not a tickling contest.
If you want QE to succeed, then the results have to be rapidly visible to increase confidence – and powerful enough to kick-start re-ordering at one end and buying at the other. Decades of sterile debate about supply and demand-side solutions failed to deliver one simple message to those supposed to be in charge: “You have to do both, dummy”.
Thus – point nine – nobody adopted what I’ve been modestly calling The Slog Plan since early 2009. Viz,
1. Make central banks buy assets to free up money
2. Cut Government waste ruthlessly
3. Leave interest rates at a level where investment-earners can prosper
4. Cut taxes across the board of all those in work.
5. Coordinate private-sector QE – albeit with a light touch – to add to the overall effect.
There are two things in there that will horrify many in the commentariat, so allow me to elucidate.
Interest rates remaining medium to high. The simple demographic age reality of most Western economies was entirely overlooked. On average, a fifth of any developed economy’s population live largely or solely on investment income. These silvers buy 30% of all white goods, use 50% less credit, and represent a staggering 45% of all private motor vehicle purchases. To cut off the air-supply of such profitable retail consumers was an act of crass stupidity….or naked desire to give the banks easy income, depending on your outlook.
Private sector QE. “What on Earth are you on about?” is the most common response when I raise this issue. But those who doubt my sanity should in turn ask themselves this: from where did you get the idea that governments own all the money available for QE?
The fact is that with corporate entities hoarding cash more than ever before, the idea that the main QE pot lies in the Treasuries of the world is bollocks. The main beneficiaries of economic stimulation will be commercial firms – so why are they somehow excused PE when it comes to QE?
This isn’t pie in the sky. Several major US multiple retailers are already offering ‘bonds’ to customers against future purchases. In the short term, these will be loss-making promotions; in the long term, they could represent the difference between default and survival. To leave these massive business cash mountains untapped would represent gross negligence.
So then: what one must do is hoover up every available penny of cash, and throw it as hard and as forcibly as possible against the wall of slump. But this brings us to point ten: money squandered wastefully in the fat years on massive government hubris….and the existence of Hedge Funds, currency dealers and credit managers very quick to spot such things. Going back to point six, stimulators are running scared of all these elements – while the Americans in paticular must always have one eye on Beijing’s fears for their investment in US debt.
Naturally, come China, Republicans or Tea Party chimps, sooner or later any stimulus must end. But the Keynesian theory always was that the resultant growth would, in fairly short order, pay back any debt thus incurred by Going For It.
This is not, however, where we are now. Insistent shareholders, greedy bankers, reticent leaders and poor fiscal discipline from Athens to Washington via Whitehall mean that this time around, the very caution one must throw to the winds will be everywhere apparent – an inhibition too timid, following on from a profligacy too far.
It is for all these reasons – rather than some sort of lurid hatred of capitalism – that I’m convinced Crash 2 is inevitable. It won’t be Armageddon, but it will be sobering. It will, I think, change a lot of existing mores. And with luck, it might be the corporal punishment that infantile free market, production-model capitalism has need for a long time.