Musings on the Economic Crisis and the Day After
The scale of the economic crisis has begin to sink in to the point where leaders of the G-8/G-20 have begin to realize that everyone dwelling on the welfare of parochial, politically favored, financial interests ( Goldman Sachs in the case of the U.S.) is not going to get the world out of this crisis. Coordination of macroeconomic levers will be the key. Some good posts that I strongly encourage you to read, before I comment:
Status report on the financial crisis: we’re at a critical point in time by Fabius Maximus
Encouraging signs – coordination appearing by Robert Paterson
Notes to Self: What Are We Doing? by Brad DeLong
The world is at severe risk of a global systemic financial meltdown and a severe global depression by Nouriel Roubini
Equities, Pay Caps, Liquidity: Structuring a Bailout–Posner & Government Equity in Private Companies: A Bad Idea-Becker by Becker and Posner Blog
Geopolitical Consequences of the Credit Crunch by Niall Ferguson
How to view this system perturbation by Thomas P.M. Barnett
Wolfgang Munchau: Policy Errors Risk Turning Credit Crunch Into Depression and Are Hedge Fund Margin Calls Leading to Stock Rout? by Naked Capitalism ( HT to John Robb)
National Orientation by Chet Richards
JOURNAL: Cascading Bubbles by John Robb
What is to be done ?
Aside from shortsightedness that comes from playing primarily to domestic political inside interests, there is another reason that G-7 leaders in particular are moving slowly in coming to terms with reality of this crisis: the interconnectedness wrought by globalization implies that the long term solution involves a considerable erosion of sovereignty to a global entity that can coordinate and shape macroeconomic policies of the central banks of the world’s largest economies. And to an extent, fiscal and regulatory policy as well. If the G-7 leaders are bold, they will approximate such meta-policy activity this weekend to get us over this crisis but we will be back to square one for the next crisis in two or five or ten years down the road.
I am uncomfortable, make that opposed, to any Brussels style global authority. Given the predisposition of much of the world politically, representatives of such an authority will prefer to misuse their authority to micromanage to achieve social and political engineering rather than stick to a narrow mission of tending to macroeconomic trends. Yet the fact that the sum of the global capitalist system now exceeds the ability of any part, even the U.S., to control it, requires a mechanism be put into place to transnationally leverage macroeconomic policies for maximum systemic benefit during hard times.
Better to set up a simple WTO like structure today for a “coordination council” that rules natonal monetary policies in or out of international consensus against a clear rule-set yardstick, than to wait until some emergency creates a crisis large enough where we wake up some day with vast portions of our sovereignty ceded to unaccountable international bureaucrats. Sort of a “Concert of Economies” that preserves the flexibility and freedom of of capitalism and national sovereignty instead of instituting a global GOSPLAN.
The crisis points to creating a level playing field in terms of financial rule-sets with agreed upon “circuit-breakers” are put into place now. This requires various states yield on all sorts of national comparative advantages for the benefit of the system as a whole. Something that goes against every career instinct of a politician.
Ski:
October 11th, 2008 at 1:36 pm
This situation is very interesting for a number of reasons.
One of the most interesting is the reaction of the political leaders of the major market countries. Economics may be global, but governance sure as hell isn’t. This is one of the reasons why economic globalization is doomed to failure in my opinion. The political "leadership" of the individual countries cares about one thing – staying in power.
The US is a most interesting case study. The timing of this economic crisis could not have been worse. The lame duck President has done nothing to reassure the public that things are going to return to "normal" in the long term. The election cycle has frozen the national OODA loop. The Bush Administration is hoping to wait this out so someone else can fix the problem. The question then becomes: How bad is it going to be in JAN 09 when he gives up the ghost?
National political concerns will always trump global economic concerns. Always. At least in democracies or federal republics. That is the fatal disconnect in regards to economic globalization in my view.
TDL:
October 11th, 2008 at 6:59 pm
Mark,
It is doubtful that we will go in the direction of supra-central bank, or at least any type of agreement will last for a very long time. It is also an unwise direction to move in. These problems do not stem from a lack of coordination among the global political elite; in fact the statements of these people in the past few weeks have demonstrated their deep ignorance & disgust of markets in general. The problem stems from the deep desire teliminate recessions. What is needed in the economies of the world is for a re-allocation of mis-allocated capital (which developed through the inflationary inspired booms.) Preventing this process from happening will only build more "fuel" for larger busts in the future, however, this time around their are no more asset classes to inflate. With the lack of anymore assets to inflate, there will only be one solution (on the part of governments, who remain unwilling to allow recessions to clear the detritus from the system); hyperinflation.
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John Robb made some good points of a cascading effect & how this will affect the global order. It seems very plausible, but I think that John Robb and other critics of globalism have a fundamental misunderstanding of how trade works to lessens the symptoms of the underlying problems and that calls for a more insular & "independent" global order is not a solution.
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Ultimately, the solution involves governments around the world ceding power. As students of history, I assume we all know that power elites rarely give up power willingly. That being said, I don’t think there is much choice in the matter. Eventually the cause of many of the problems in the world today (and the primary cause of the financial crises), the monetary system, will resolve itself. The severity of the resolution is anybody’s guess.
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Below are some links that should add clarity to the current problems:
http://mises.org/story/3146
http://www.thedeal.com/newsweekly/features/chain-of-fools.php
Regards,
TDL
zen:
October 12th, 2008 at 10:21 pm
Thoughtful answers gents – probably moreso than my post.
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I don’t think the "genie" can be put back in the bottle quite so easily as last time (1930 Hawley-Smoot) nor in fact, should it. The major economies that try are going to be punished severely in terms of capital flows but the major commodity producer states – mostly energy but not exclusively – can get away with it because their economies generally lack sophistication or diversity outside the key export sector. Globalization is also more than just economics – the informational flows would have to be curtailed just as sharply as say, tariffs or hot money for elites to manage to pull that off.
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I agree with you TDL that the global transnational elite ( how much of which are grads of Ivy League schools ?) are frequently economic ignoramuses who dislike the creative destruction of markets and are natural aficianados of technocracy. I was thinking more in terms of central bank policies than political coordination per se, though the crisis has brought the issue to that level. My concerns were scale and levers. In the 1970’s and 1980’s, the U.S. could be the engine that pulled the global economic train – today at best we can be a catalyst as we lack the leverage relative to the gobal economy to influence it as dramatically as we once did.
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Arguably, some might say we just influenced it catastrophically but the crisis is not monocausal-American; each major economy has structural problems and political blindness of their own makings that made them vulnerable