After Lehman-another year older and deeper in debt

17 09 2009

images[10]The anniversary of the collapse of Lehman brothers has provoked an orgy of retrospective comment. I hesitate to call it analysis because, as Charlie McMenamin has pointed out, the striking thing about all the comment has been the lack of any concensus even on what to call what has happened, let alone to provide an explanation for it. Everybody from President Obama downwards is saying that there can be no return to business as usual. Yet in the absence of any proper understanding of what happened business as usual is precisely what we will get.

If there is one emerging theme to the discussion it is that the whole thing is the product of aberrant human behaviour. In other words, there are no rational economic explanations for what happened, it is simply the product of human greed and irrational behaviour. The influence of economic behaviouralism is now making itself felt in most discussions of the recession and its causes. This approach was summed up in a  recent article on the credit crisis in the New York Times which ended with this comment,

“Ultimately, bubbles are a human phenomenon,” said Robert Shiller, a Yale economics professor and Cassandra of the current crisis. “People just get a little crazy.”

And what do crazy people need? More supervision, more regulation and tighter control of course. That is why the main thing that governments are focussing on is to try to rein in the greedy bankers by regulating what they do and their bonuses more closely. The deeper reasons for the recession are being virtually ignored. One severe consequence will be that the short term managerial approach to our economies exemplified by the last ten years of bubble economics will  be enhanced while any prospect of longer term strategic planning will diminish further.

Meanwhile it is worth reminding ourselves that in the real world the recession has taken and continues to take a terrible toll. As Mervyn King has helpfully pointed out, the end of recession does not compensate for the loss of output, the real drop in the wealth within our societies. In the UK we are only now beginning to experience this in the shape of higher unemployment and less money for public services. The OECD is predicting that a further 25 million people in high income countries will lose their jobs by next year and the World Bank that 90 million people will be pushed into extreme poverty in the developing world.

World trade is still severely depressed. There is evidence of the strengthening of protectionist tendencies, expecially in debtor nations like the US. The central problem of the imbalances between the developing and exporting nations and the rest of the world remains exactly as it was when the financial crisis started. All that has really happened over the past twelve months is that the financial system has been protected from bankruptcy. A symptom of the problem, excessive dependence on the financial sector,  has been taken for the cause, the loss of productive  economic activity in countries such as the US and the UK.

Diminished belief in the rationality of the market does open a small window of opportunity. It is not possible to plan capitalist society, but the weakening of an intellectual justification for the market opens the door to the possibility of thinking about what the advantages of a planned economy in a democratic society would be compared to the short term, chaotic character of modern capitalism.

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3 responses

17 09 2009
Johny Morris

Well I don’t want to say I told you so – but I’ve left enough notes on here pointing out that just as it was the City what got us into this mess it’ll be the City what pulls us out again. And this is what appears to be happening. Manufacturing is still declining despite a recent low pound and the city is booming again as the FTSE goes through the 5000 mark. OF course all the comentators (most of whom never saw the crash coming) are sticking with the gloom and doom scenario. My favourites are the Item Club who really should stick to predicting the past.

So my hostages to fortune are – slow recovery, with possible reverses in some quaters through 2010/11. Overall anual growth around 1 to 1.5%. Housing market to subside, no real growth, except in some sectors until 2011. Returing to normal growth 2011/12. Next housing boom 2014 and onwards. Sell off of the banking assets to balance the books in the lead up to the 2014 general election. Manufacturing sector to continue to decrease in importance, especially with the strengthening reccovery next year.

Two thougts for discussion though – does this mark the watershed in history when we can say the power of the USA really started to decline? They seem particularly incapable of resolving the debt, health and pensions issues that are killing off their productvity.

Can someone point me to the economics in the Shiller et al books? I’ve read a couple but can’t see anything that wasn’t in books like “The Hidden Persuaders”. What model are they working to? Where is the macro economic consequences of their thinking expressed?

19 09 2009
Robert Hennecke

It’s true that Manufacturing’s relative impact in the industrialized economies has been eclipsed by the service sector but what is not being truly taken into account is that the PRC’s dramatic rise in this sector is not wholly as a result of having a large cheap labour pool. There is also the fact that the Reminbi is pegged to the US dollar so that when the principal customer of the PRC’s currency declines due to a negative balance of trade the Reminbi tracks lower too. Some economist estimate that the Reminbi is undervalued by 30-40 % which in itself is a reasonable profit margin for many businesses. I say that what we have is an artificial economy with the people of the PRC sacrificing financial gain for the sake of employing millions more people so that the communist party of China which is the same group that was in power during the cultural revolution, invaded and maintain the occupation of Tibet and ordered the tanks into Tiannamen square. Why does this murderous regime get off with only the occasional complaint when if for example if the regime of Nazi Germany had survived till today (very unlikely but for the sake of argument) it is very unlikely that this regime would enjoy the same openness to trade. I argue that the communist party of China is using currency manipulation to undermine manufacturing in the west artificially in that although the PRC have a lot of people their methods of mfg are inefficient and the logistics alone make the whole process of send things across the globe to be assembled and then sent back; in short it’s not always economical. Managers in the west also take advantage of the “artificial” situation in that they get to undermine their skilled staff by using the more compliant PRC workers desperate for work. I argue that I have personal experience to show that it is not always economical to get things made in the PRC but one of actual laziness and even willfull de-skilling of workers in the West in order to make them more manageable as relatively unskilled forklift & truck drivers have less clout in the overall scheme of things. The decline of manufacturing has potentially dire implications for both the agriculture and defence industries of the West and both of these issues could someday come back to haunt those societies as manufacturing is the muscle of any society. How would the UK fare in WW2 had their mfg. capacity been as diminished as much as it has today.

21 09 2009
Russell

This blog makes for an interesting read – http://gregpytel.blogspot.com/2009/04/largest-heist-in-history.html he sees the whole shabang as a giant ponzi sheme!

Be interested in reading about how a modern planned economy might work and what it would look like…

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