“The announcement of the rescue package failed to stabilize the situation, perhaps because more people knew how deep the problems went than the government realized.. None of the central bankers had faced an international financial crisis before; they therefore had to make things up as they went along.”
- From ‘Lords of Finance: 1929, the Great Depression, and the bankers who broke the world’ by Liaquat Ahamed (Windmill Books, 2010).
Communiqués from government conferences tend to recall the words of Ralph Waldo Emerson:
“The louder he talked of his honour, the faster we counted our spoons.”
The latest official statement from the G-20 in Busan, South Korea, does not disappoint fans of irony expressed on a magnificent scale. Among the highlights from this vapid exercise in giving voice to messianic delusions of relevance, international finance ministers and central bank governors agreed to:
- “firmly secure the global recovery”;
- “put in place credible, growth-friendly measures..”
- rather wonderfully, ensure that “Monetary policy will continue to be appropriate to achieve price stability” and “reduce moral hazard associated with systemically important financial institutions”;
- hysterically, to “accelerate the implementation of strong measures to improve transparency, regulation and supervision of hedge funds, credit rating agencies, compensation practices and OTC derivatives in an internationally consistent and non-discriminatory way” [emphasis ours].
There was no commitment to deliver world peace or universal wealth and health, but that may just have been an oversight. The problem with these sorts of statements was well expressed in a letter to the editor of the Financial Times last week from a Mr Nigel Collin, referring to a piece, “solutions for a crisis in its sovereign stage”, written by Nouriel Roubini and Arnab Das. While acknowledging that the original article was “both illuminating and practical”, Mr Collin went on to point out that
“.. a closer examination reveals that the verb “must” is used in three of the five solutions advocated. Without an explanation of how a sovereign state must be compelled to adopt a solution, the solutions are rendered aspirational rather than inspirational.”
Where to begin with the G-20’s marvellous aspirational announcement ? One does not necessarily expect politicians to declare their own redundancy, but wealth creation and, in a more general sense, “recovery” are the products of private action rather than government direction. Governments take capital from their own people but they are functionally incapable of producing it. The best thing for government to do would be to get out of the way. Instead we have governments that have squandered billions in private capital (not just current billions but claims against future billions from taxpayers not even born) in supporting fundamentally bad banks.
A free market has a magically effective way of discriminating between good and bad businesses. Bad businesses fail and are purged from the system and good businesses prosper, begetting more wealth in the process. Not content with their malign achievements to date, governments have now tasked the banks with mutually contradictory objectives: strengthening their balance sheets whilst simultaneously maintaining the provision of credit to the broader economy. You cannot drive a car well by concurrently slamming on both the brake and the accelerator.
There is a similar contradiction in the pursuit of credible attempts to bring sovereign finances back toward balance. In part it constitutes what economists call the fallacy of composition and the paradox of thrift. What may make sense for individual governments to do (turn off the spending taps) could be hugely detrimental for the broader international community. Politicians may not acknowledge the fact, but the world is even more closely interlinked than it was in the crisis of the 1930s, and the economic and financial interactions are undoubtedly faster.
What is certain is that beyond a certain point, which Greece has now probably reached, slamming on the fiscal brakes transforms a heavily indebted government from muddle-through financing into insolvency, as the ailing economy, bereft of government spending to which it has become addicted, is unable to provide even sufficient tax revenues to allow that government to service its debts. Default follows.
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