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Saturday, 2 January 2010

Stiglitz's Six Lessons?

There have been times when white bearded Nobel prize-winning economist Joseph Stiglitz has taken on the mantle of Father Christmas in expressing a positive view such as over what should be done by World Bank for poor countries, and again now in respect of summing up where we have got to in learning from the Credit Crunch and the global recession it triggered.
In the China Daily, Joe Stiglitz summarised his view, “The best that can be said for 2009 is that it could have been worse, that we pulled back from the precipice on which we seemed to be perched in late 2008, and that 2010 will almost surely be better for most countries around the world. The world has also learned some valuable lessons, though at great cost both to current and future prosperity – costs that were unnecessarily high given that we should already have learned them.”
It would be a comfort to know that the world learns from mistakes - not so, in my view; the world so-called merely adapts to whatever the compelling circumstances of the time and place are and will otherwise repeat whatever is self-serving. Just as warnings of the crash ahead of time by the BIS, a few other central bankers and a handful of economists, and others here and there, these were discounted or lost in the noise in the trading rooms etc. Learning lessons requires playing politics and it remains a struggle to get the hard lessons accepted and then harder again to get these translated efficiently into succinct actions; there is no shortgae of resistence and red herring distractions, the 'blame game' is still being played.
"Better for most countries" is a debateable forecast given that there remains much unravelling, ever-yet widening ripples and aftershocks - businesses closing down and unemployment high or rising (except UK). Many countries, perhaps most, have gaping uncertainties about their external account and therefore of their growth prospects if any?
Brookings Institute recommended in a report late last year as a positive outcome that we could look forward to a massive trade deficit this year and next by emerging countries, sufficient to further narrow the trade deficit of the USA, and thereby replace it to help pull the rest of the world via export-led growth, what China, japan and Germany especially rely upon, however irresponsibly that is i.e. pull the rich world into better growth by improving its trade balances - a most unseemly paradox that the poor should, by getting deeper into debt, help smoothe the prospects for the rich, who will then finance that via more aid to poor countries!
But, anyway, what are the six so-called “harsh” lessons, according to Stiglitz?
1. Markets are not self-correcting, and without adequate regulation, they are prone to excess. We could just as easily say markets are prone to Bilateral vestibulopathy - a condition involving loss of inner ear on one or both sides that causes giddy, woozy, false sensations of movement, spinning, or floating i.e. unbalancing themselves or indulging in fashionable gyrations among different sectors.
Markets have what call a 'camera shake' that is roughly 1.5% price moves either way, up or down, whereby individual stocks have a 3% average price vibration daily given that market indexes are the aggregate of gains and losses. This fact is how dealers can make money by zero or minimum thought and by being in the thick of what is just inter-day and intra-day spreads & shakes - the more you leverage the more you make, that is until several days in a row go in the wrong direction. Regulation has yet to find a way to enforce quality and more stability; regulatory rules are more about accommodating losses and avoiding systemic risk, however forlorn that may be - and not about mintaining some securely safe balance in behaviour. Markets are self-correcting by their vibrations, but not within the limits that would leave government out of the recovery equation when recession strikes.
2. There are many reasons for market failures. Too-big-to-fail financial institutions had perverse incentives: Privatized gains, socialized losses. This is pandering somewhat to popular anger. There are also massive privatised losses and there will be socialised profits from government support of the banks - stepping into replace private finance in funding banks' funding gaps. Self-correction is a matter of boundaries and timeframes, but self-correct they do, just not as painlessly as would be politically tolerable.
3. When information is imperfect, markets often do not work well – and information imperfections are central in finance. This is a non-sequitur; perfect information would also be disasterous. It would be more sensible to say markets work best when information is less than perfect but not so imperfect that they behave suicidally, or some equally asinine further insight into the bleeding obvious.
4. Keynesian policies do work. Countries, like Australia, that implemented large, well-designed stimulus programs early emerged from the crisis faster. The US, UK and others have implemented what can be classed as Keynesian if by that is merely meant higher deficit spending adjusted to whatever will propel economies back to a path of net new job creation. Emerging from the crisis, faster or slower cannot be fairly judged simply. The Eurozone, for example, had a sudden deep recession and then regained positive ground, but is likely to face its 'normal recession' in 2011 and 2012 if it follows normal lagged response to US recession. The UK recession may have just ended, but in world terms of US$ terms its economy has shrunk to a level going forward far below what is reflected merely in the economic cycle measured in domestic currency. China may look invilate but its official data is subject to shameless positive spinning and it cannot continue to rely on export led growth as before - it is not an energy exporter and has not yet learned how to rely on its domestic demand. Keynesianism that Stiglitz refers to is at local level - country-specific - when in our 'globalized world' we need to gauge Keynesianism in world economy terms and few are thinking in those terms beyond G20 meetings and UN or IMF research papers.
5. There is more to monetary policy than just fighting inflation. Excessive focus on inflation meant that some central banks ignored what was happening to their financial markets. The costs of mild inflation are miniscule compared to the costs imposed on economies when central banks allow asset bubbles to grow unchecked. Central banks actually worry about much more than inflation; they worry about the stability and integrity of their national or currency zone financial markets i.e. about banks, currency rates, external obligations and government bonds. It was hard for them to address the property bubble when there were many rationalisations justifying tolerance of fast rising property values, which let us not forget was a boon to emerging markets trade balances and debts as well as underpinning so much of bank debt and solvency in OECD countries. It is the residual high value of property assets and low mortgage defaults in Europe that are furnishing a floor or basis for banking recovery. Moreover, central banks and many others would accept that asset bubbles are an inevitable part of economic cycles that in turn are inevitable, even desirable. Therefore, the concern is about not letting asset bubbles become excessive like the famous Dutch tulip mania of John Law's Mississippi Scheme or Scotland's Darien Adventure and the many bubbles since then - but this would require giving central banks a power that many would call despotic and politically or democtraticaly intolerable? Stiglitz wants a Keynesian less Monetarist, less inflation-obsessed economic policy thinking - fine, but lessons will no be leatned or new thinking instituted without a new macro-economic theory and who is coming up with that - no-one that I can see getting that out to become the new othodoxy. Keynesianism is certainly helpful, but today we need a new Keynes - where is he, or she? A new theory however developed out of reconstituting past theory and lessons learned will also need a new central conception of economic growth, one less based on micro-economic analogy such as Adam Smith's pin factory and one based more on economic systems such as the economy of cities and far more global in scope. My advice is to look at economists such as Francis Cripps and Wynne Godley and their adherents, at UN models and at macro-economic policy models, which in future will need to have fully-interconnected macro-financial models. Even then, what happens if all we get is a cynical knowing perfect information outlook about the world's macro-economy. The Credit Crunch may have been disarming and impoverishing for those, many of whom who had much to lose, but has been a boon to others, not least a major transfer of wealth and income from rich to poor countries - suely a great thing?
6. Not all innovation leads to a more efficient and productive economy – let alone a better society. Private incentives matter, and if they are not properly aligned, the result can be excessive risk taking, excessively shortsighted behavior, and distorted innovation. Again, twas ever thus, and why should it ever be otherwise. I admire Stiglitz for having a go, but cannot see how his six points are lessons we have learned or should learn, and it disheartens me when great economists slip into journalistic statements that cannot stand rigorous examination. Would our economics graduates have come up with anything less and would they not have been sent back to the drawing board by any viv committee if these 6 points were the sum net total of their theses?
Stiglitz has elsewhere estimated the cost of the war in Iraq and Afghanistant to the US budget or economy as over a number of years costing about $3 trillions, which is on the same scale (or more) than the government finance gross investment-cost of Credit Crunch bailout and banking recovery (see Vanity Fair, April 2008). Given that Credit crunch and wars are coinciding surely we cannot learn economy lessons from the one and not the other, and from whatever other major singularities that can be pointed to and given a mult-$trillion price-tag or butcher's bill?

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