To my mind

Finweek English Edition - - Front Page - MALCOLM RAY malcolm.ray@fin­week.co.za

JUST AS THE po­lit­i­cal shenani­gans of the new caste in the ANC re­stored a pre­car­i­ous kind of con­fi­dence in the do­mes­tic mar­kets, the fi­nan­cial chi­canery of po­lit­i­cal pun­dits in Congress in the United States raised a new spec­tre. The in­terim res­o­lu­tion by the US Congress last Wed­nes­day – to pass the Fi­nan­cial Re­cov­ery Bill – has de­cep­tively thrown up that old ch­est­nut of mar­ket fail­ure on the back of the preda­tory prac­tices of the US bank­ing sec­tor.

Ac­cord­ing to an emerg­ing con­sen­sus in South Africa’s new Gov­ern­ment, the push for US ad­min­is­tra­tion in­ter­ven­tion to res­cue that coun­try’s em­bat­tled bank­ing sec­tor from col­lapse (and pre-empt the econ­omy slip­ping into full-blown re­ces­sion) should re­mind us of the folly of an ide­o­log­i­cal com­mit­ment to dereg­u­la­tion. State in­ter­ven­tions – the ar­gu­ment goes – are nec­es­sary now more than ever, par­tic­u­larly in de­vel­op­ing mar­kets as­so­ci­ated with so­cial in­ef­fi­ciency.

Not sur­pris­ingly, the lib­er­al­i­sa­tion poli­cies pushed by for­mer Pres­i­dent Thabo Mbeki have gen­er­ated enor­mous re­sent­ment among a glut of poor peo­ple. But the dan­ger of an over­ween­ing State in the mar­ket would ap­pear to be lost in pop­ulist in­ter­pre­ta­tions of the cur­rent fi­nan­cial cri­sis. Far from sim­ple “mar­ket im­per­fec­tions” as the root of the cri­sis – a view held by sec­tor strate­gies co-or­di­na­tor in the Pres­i­dency, Neva Makgetla – the story is a lot more nu­anced. It all be­gan in the mid-Nineties, when a “Tech” bub­ble be­gan de­vel­op­ing in the US. When Tech stocks ig­no­min­iously crashed in the late Nineties, the US Fed­eral Re­serve – un­der its long-serv­ing chair­man Alan Greenspan – planted the seeds of de­struc­tion: seeds that wouldn’t yield their nox­ious fruits for years.

By re­lax­ing the lend­ing cri­te­ria be­tween com­mer­cial banks in a bid to pump liq­uid­ity into the US econ­omy, Greenspan fed a cer­tain ir­ra­tional ex­u­ber­ance in the hous­ing mar­ket. With their backs against the wall, the banks started throw­ing money at the real es­tate in­dus­try. Real es­tate tax havens mush­roomed, use­less build­ings rose in city af­ter city, stock mar­ket spec­u­la­tion was es­pe­cially blessed and the bub­ble was in­flated even fur­ther.

In other words, dis­torted in­cen­tives com­bined with an ir­ra­tional ma­nia in­duced Amer­ica’s fi­nan­cial be­he­moths to dole out money (read: debt) that un­der­wrote the hous­ing bub­ble and fore­shad­owed the sub-prime credit crunch.

To come back to my point: the les­son for de­vel­op­ing coun­tries such as South Africa is in how Gov­ern­ment and the pri­vate sec­tor per­ceive the ori­gin and de­vel­op­ment of the cri­sis. Trou­ble is, there al­ready ap­pears to be a cyn­i­cal mood of ide­o­log­i­cal tri­umphal­ism in Gov­ern­ment cir­cles, where the pre­vail­ing in­ter­pre­ta­tion of the US Congress’s in­ter­ven­tion is that of a “nec­es­sary cor­rec­tive to the free-mar­ket ide­ol­ogy” that took root in the US dur­ing the Eight­ies.

Yet the flip­side of that ar­gu­ment is his­tor­i­cally and con­cep­tu­ally plain: by fail­ing to see the push for a new equi­lib­rium in the late Nineties as the hid­den hand of the mar­ket, Greenspan’s short-ter­mism threw the bal­ance be­tween sup­ply and de­mand out of kil­ter and fore­stalled the cur­rent cri­sis.

Surely that’s the les­son Gov­ern­ment must im­bibe in its at­tempt to find the right bal­ance – be­tween the role of col­lec­tive action and pri­vate, be­tween the State and the mar­ket – to cre­ate the foun­da­tions for long-term growth?

PS: Note to SA’s re­tail and fi­nan­cial sec­tor: stop spread­ing credit like con­fetti among cash-strapped con­sumers.

* Fin­week Ed­i­tor Colleen Naudé will be back in two weeks.

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