1929 once more?
Comentario: La edición dominical de The Guardian incluye el artículo que adjuntamos a continuación en su idioma original. Lo hacemos porque una visión sobre el fenómeno libre de las fantasías que se difundieron en el mundo el año pasado cundo se produjo el derrumbe del mercado hipotecario en Estados Unidos. Según la autora cinco son las falacias que impiden comprender lo que viene ocurriendo en el mundo.
La primera de ella afirma que la economía mundial goza no tiene en realidad ninguna problema fundamental; la crisis se limita al sector financiero pero no afectará al sector real de la economía. La segunda nos dice que la causa de la crisis se encuentra en las turbulencias que afectan los mercados hipotecarios. Dice la tercera que la tasas bajas de interés y la política monetaria que ejecutó Estados Unidos dese el 2001 es la causa de esta turbulencia. La cuarta fantasía causa al gobierno de estas políticas. Finalmente, la quinta introduce nuevamente miedo a toda política expansiva.
In debates about the financial crisis - on the left and right - there are five oft-repeated economic fallacies.
The first of these is that 'economic fundamentals are sound' and that the crisis is limited to a finance sector previously celebrated as vital to prosperity but now somehow detached from the real economy. The second is that the crisis is caused by 'turbulence' in the housing market. The third: that the crisis was caused by low rates of interest, in particular monetary easing since 2001. The fourth: that the UK government was guilty of profligacy during the good years. The fifth: that we should remain fearful of inflation.
These fallacies arise because our leaders have not learned from parallels in history; and because they refuse to correctly analyse the long process that has led us to the end-game that is today's systemic crisis.
The parallel with the Great Depression is frequently drawn, while parallel events that were the cause of the disaster are ignored. After 1918 policymakers liberalised finance under the banner of the gold standard. Winston Churchill reflected on the consequences:
"The year 1929 reached almost the end... under the promise and appearance of increasing prosperity, particularly in the United States. But in October a sudden and violent tempest swept over Wall Street......... The whole wealth so swiftly gathered in the paper values of previous years vanished. The prosperity of millions of American homes had grown up a gigantic structure of inflated credit, now suddenly proved phantom. Apart from the nation-wide speculation in shares which even the most famous banks had encouraged by easy loans, a vast system of purchase by instalment of houses, furniture, cars and numberless kinds of household conveniences and indulgences had grown up. All now fell together."
For a brief period, lessons were learned. John Maynard Keynes worked with politicians and policymakers to develop a new financial order for the world, with interest rates low and the financial sector returned to its role as servant, not master of the global economy. The Bretton Woods Agreement was not his ideal, but it led to a 'golden age' of prosperity unknown before or since.
Tragically, in the 1970s politicians capitulated again to the lobbying of bankers, and set in motion that which caused the Great Depression - financial liberalisation. As in the 20s, the result has been a 'gigantic structure of inflated credit'. Bankers have lent huge sums at high, not low rates of interest. Very crudely, after adjusting for inflation, rates could be said to have doubled. High interest rates do not inhibit borrowing, but they greatly reduce the probability of repayment.
As a consequence, many firms and households over-extended themselves, and are laden with debts that ultimately cannot be repaid. This is a crisis of insolvency.
Over the same period crises became endemic worldwide. Economies collapsed in poor countries and emerging markets, but also most notably, Japan. The present Anglo-American credit crunch is rooted in the private investment collapse of 2001 - the bursting of the dot-com boom. By 2001, financing to firms had dried up because of solvency fears. Monetary easing and fiscal relaxation by Greenspan and others were a reaction to this crisis; the beginning of the end-game. Few criticised them at the time. "Essentially we took the view that unbalanced growth was better than no growth at all - which was the only other option we had," the Governor of the Bank of England remarked in 2003.
Households and governments were encouraged to join the corporate sector's plunge into debt to rescue policymakers - 'guardians of the nation's finances' - from the consequences of financial liberalisation. The low rates of interest that powered the household boom are a consequence, not a cause of the crisis. However cheap and easy money was a privilege reserved mainly for financial intermediaries. Bankers lent to financial institutions at cheap rates. These in turn made 'easy' loans available, but often at much higher interest rates to firms and consumers. 'Teaser' and NINJA loans (no income no job or assets) became notorious, and real rates of interest paid on mortgages, credit cards etc were much higher than base rates.
Government profligacy was backed because it played a role in keeping the economy afloat through the years of the end-game. Now household and corporate debt, viewed as a share of income are at unprecedented levels in both the US and UK, and government debt is on the rise from already relatively high levels.
On 'Debtonation 9807' day, the finance sector finally publicly admitted that a mountain of the debts/assets on its books was bad. That many borrowers were insolvent, with sub-prime debt merely the tip of the iceberg. The consequence, as Irving Fisher analysed in 1933, will be a debt-deflationary Depression - not inflation.
Despite higher oil prices UK headline inflation was just 2.5% in March. But the core rate is falling. In March it fell again, to 1.2%, and since June 2007 it has fallen 0.8%. One has only to walk the high street to witness endless sales, special offers and two for one bargains to note that the real threat to businesses is not inflation - but deflation. Asia and emerging markets have aimed their economic capacity at providing goods and services for British and American consumers. Anglo-American recessions will cut back consumption and render this capacity spare. Factories and labour will become idle, prices will fall and deflation, not inflation, will haunt the global economy.
Sadly, economic fallacies continue to stand in the way of sensible policy-making. The Governor of the Bank of England, for example, in recent evidence to Parliament refused to concede the existence of a solvency crisis and even regards a slowdown in economic growth as helpful in reducing inflation.
In the 1930s it took driven individuals to understand the scale and systemic nature of economic failure, to get a grip on finance, to regulate lending and to subordinate the sector to the interests of the nation and the economy as a whole. At that point it was possible to apply economic remedies. In Britain we had the wise leadership of John Maynard Keynes and the US had President Roosevelt.
Their leadership drew on lessons from the past, and on a correct analysis of the crisis, not on economic fallacies.
The global financial system is in a fix. How did we get here, how bad could it get, and how can the worst be avoided? All week commentators are assessing the damage on Comment is free. Read more on the global financial plight here.