To my mind
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.