Ge­nius of demo­cratic cap­i­tal­ism

Lessons can be learnt from the Great De­pres­sion

Finweek English Edition - - In My View - MIKE MOORE

WITH UN­ABASHED GLEE many com­men­ta­tors over the past week have again pre­dicted the end of cap­i­tal­ism, some even sug­gest­ing a world­wide de­pres­sion. It’s the cap­i­tal­ist sys­tem that’s at fault, they yell. Yet none can point to a sin­gle ex­am­ple any­where in the world as a model. They have no suc­cess sto­ries to re­port.

The past few weeks have seen bil­lions of US dol­lars writ­ten off as many of the fi­nan­cial in­stru­ments in the United States, and now else­where, have been caught out. Over­stretched bad loans and reck­less lend­ing have been ex­posed due to the col­lapse of the US hous­ing mar­ket.

Why won’t this be like the Great De­pres­sion? The big­gest dif­fer­ence is what pol­icy-mak­ers have learnt. US Fed­eral Re­serve Bank chair­man Ben Ber­nanke did his eco­nomics the­sis on the Great De­pres­sion. Maybe a tril­lion dol­lars have been spent to hold the sys­tem to­gether. At the time of the Great De­pres­sion there were few ef­fec­tive gov­ern­ment-owned cen­tral banks and there was lit­tle global eco­nomic co-or­di­na­tion. In­deed, in­ter­na­tional trade col­lapsed by 50% in a few years as gov­ern­ments put up tar­iffs to try and in­su­late them­selves and in­dulged in a de­struc­tive cy­cle of com­pet­i­tive de­val­u­a­tions to vainly try to con­trol global mar­ket share. That deep­ened and pro­longed the Great De­pres­sion, from which the twin tyran­nies of the last cen­tury emerged: fas­cism and Com­mu­nism.

No na­tion is talk­ing of jet­ti­son­ing its trade obli­ga­tions un­der the World Trade Or­gan­i­sa­tion; the sys­tem is hold­ing firm, les­son learnt. Democ­racy re­sponds. In the Thir­ties Franklin Roo­sevelt emerged with a “new deal”. A pow­er­ful cen­tral bank and new or­gan­i­sa­tion to pick up mortgages – now Fred­die Mac and Fan­nie Mae, the re­cently res­cued twin mort­gage giants. Cen­tral banks ev­ery­where have pumped more money – liq­uid­ity – into the sys­tem to avoid panic. As Roo­sevelt fa­mously said in the US’s most dark­est eco­nomic times: “All we have to fear is fear it­self.” It’s about con­fi­dence.

Roo­sevelt would have been im­peached as a so­cial­ist for less than what the Ge­orge W Bush ad­min­is­tra­tion has done. Bush’s ad­min­is­tra­tion is guilty of in­ac­tiv­ity de­spite warn­ings there was a fault line in the fi­nan­cial sec­tor that’s now cracked.

Talk of trans­parency sounds glib and clichéd. But it’s real. Out of this de­struc­tive chaos will come creative chaos as new en­ti­ties emerge pick­ing up some good, low cost, high value as­sets.

It’s cold com­fort for thou­sands los­ing their homes and jobs. A re­ces­sion is when your neigh­bour loses his job; a de­pres­sion is when you lose yours.

The past 10 years have been most suc­cess­ful in eco­nomic his­tory, lift­ing mil­lions out of ex­treme poverty world­wide. Eco­nomic gains made from lib­er­alised cap­i­tal flows now equal or ex­ceed those from lib­er­alised trade. Few jobs are lost and many gained due to open trade and fi­nan­cial mar­kets. Yet even in the US more peo­ple think trade costs jobs de­spite all the ev­i­dence to the con­trary. The les­son of the Great De­pres­sion was that the US gov­ern­ment needed to in­ter­vene to pro­tect the virtues of the mar­ket. There’s a need for pru­dent dis­clo­sure and proper com­pe­ti­tion and it be­came clear that global mar­kets needed reg­u­lat­ing through agree­ments and the World Trade Or­gan­i­sa­tion. Cen­tral banks were nec­es­sary to even eco­nomic cy­cles and po­lice ad­ven­tur­ers who took, as they al­ways will, ad­van­tage of ex­ist­ing con­di­tions.

Gov­ern­ments have a role to en­sure so­cial se­cu­rity in times of stress and un­cer­tainty and to in­vest in com­mon goods, such as skills and in­fra­struc­ture. Re­build­ing must be done in a way that pro­duces both eco­nomic and so­cial con­fi­dence. There has to be a sense of fair­ness, of equal­ity, of sac­ri­fice. In a clas­sic anal­ogy, po­lit­i­cal econ­o­mist Al­bert Hirschman once likened at­ti­tudes to widen­ing in­come in­equal­i­ties dur­ing eco­nomic change to the re­sponse of driv­ers stuck in a traf­fic jam. Af­ter a lengthy pe­riod in which all cars are stopped, one lane typ­i­cally be­gins to move for­ward. When it does even those driv­ers who are still stuck in the other lanes are usu­ally re­lieved. They in­fer that what­ever ob­struc­tion was block­ing the road ahead has dis­si­pated and they as­sume that soon their lane will also be­gin to move for­ward.

How­ever, if time passes and they re­main stuck while those in the one lane keep mov­ing ahead, their new­found op­ti­mism even­tu­ally gives way to yet greater frus­tra­tion that’s all the more in­tense if there’s no prac­ti­cal way of chang­ing lanes. That’s when pol­i­tics can get nasty.

If the stun­ning greed and bad judge­ment of some of the CEOs and cor­po­ra­tions mean the most re­spon­si­ble walk out with very few scars and big pay­outs, work­ers who lose homes and jobs will be en­raged, cre­at­ing a pop­ulist op­por­tu­nity for politi­cians to feast off.

Did his the­sis on the Great De­pres­sion. Ben Ber­nanke

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