The media both here and abroad is trying to convince us that the worst of the global economic downturn is over. Perhaps it is, perhaps it is not. One of the consequences of the crash is that few people believe the experts and politicians any more. Obama gives us 'hope' for the moment, but in the longer-term, will the current euphoria (which seems to largely consist of banks making lots of money...courtesy of taxpayers) last? I've just seen an interesting article by Alexander Cockburn, which suggests that, to quote a favourite catchphrase of Ronald Reagan, the USA may have seen nothing yet:
The economic news in the near and medium term is ghastly. Retail sales crashed again in March, nowhere worse than in the car market, though electronics and building materials were way off too. They now reckon there'll be just over 2m housing foreclosures in 2009, up 400,000 from 2008. Industrial output is going through the floor at an annual rate of 20 per cent, the biggest quarterly drop since the end of the Second World War. US industry is now running at only 70 per cent of capacity, the worst number since they started tracking this stat in 1967. Job losses are currently running at 650,000 a month.
Wall Street is trying to pretend that the worst is over - no-one believes it. Round the next corner is credit card delinquency and the long-heralded slump in commercial real estate, where vacancy rates are already running at 15 per cent. Capital One, a huge issuer of Visa and Mastercard, just said the annualised net charge-off rate for US credit cards - debts the company reckons will never be paid - rose to 9.33 percent in March from 8.06 percent in February. In other words, Capital One – whose credit card promotions take up hefty space in the mailbag of every US postman – is in big trouble, and under one in 10 of these credit card holders will have a messed up credit rating for several years to come.
Wall Street and its boosters are trying to pretend that indeed the worst is over. The Dow and S&P Index have been rallying for five weeks. Wells Fargo, the huge San Francisco-based bank, second biggest home lender, announced that first quarter net income rose 50 per cent to $3 billion.
No one seriously believes the bank is in anything other continuing huge trouble, and will soon need – so Bloomberg News surmises - $50 billion to settle near-term commitments. The profit figure stems from newly relaxed rules about the valuation of Wells Fargo's assets.
In other words it's thin economic ice from here to the horizon. Robert Reich, now teaching economics at Berkeley and formerly labour secretary in the Clinton administration, wrote a piece recently, titled 'Why We're Not at the Beginning of the End, and Probably Not Even At the End of the Beginning'. There are huge problems with the whole orientation of the US economy. The "free market" outsourcing model has failed. Even at the best of times the US consumers who account for over 70 per cent of all economic activity in the country, don't have purchasing power to keep the whole show on the road, unless they put it on the credit cards which are now maxed out and going into default, or borrow on houses they can't afford.
Amid a hail of well founded criticism from liberal and conservative economists alike, Obama, with Geithner, Summers and Bernanke at his elbow, remains absolutely committed to giving the bankers everything they ask for, trillion upon trillion. As William Black, deputy director at the former Federal Savings and Loan Insurance Corp. during the thrift crisis of the 1980s, recently remarked in an acrid interview in Barron's: "Unless the current administration changes course pretty drastically, the scandal will destroy Obama's administration, both economically and in terms of integrity. We have failed bankers giving advice to failed regulators on how to deal with failed assets. How can it result in anything but failure?"
One consequence of the crisis has been increasing numbers of people questioning how our economies, societies and political systems are run. Reportedly sales of the works of Karl Marx, John Maynard Keynes and Ayn Rand (representing the political 'left', 'centre' and 'right' respectively) have been increasing appreciably since the crisis started to approach meltdown last Autumn. Whatever your opinion of these three, I think it's a good sign. People are once again thinking about the big issues which affect us all. If people are prepared to think and change their opinions there is hope yet. We may be, to coin a phrase, entered a period of 'New Seriousness'.
How the credit crunch and recession helped Britons discover the joy of being serious:
A year ago few of us had heard of quantitative easing or toxic debts - much less had any interest in knowing what they meant. But the credit crunch has changed all that and sparked a keen interest in economics and business. Suddenly, as Michelle Obama pointed out, being smart is cool and the tenor of media debates and dinner party conversations has taken a more serious turn
Gaby Hinsliff, The Observer, Sunday 12 April 2009
A year or two ago, it would hardly have been the stuff of TV executives' dreams: two middle-aged politicians in live conversation about arcane economic theory.
So it is perhaps a sign of how times have changed that broadcasters are now fighting for the rights to screen a lengthy US-style televised debate between Kenneth Clarke and Peter Mandelson over how to tackle the recession.
The two camps are still locked in talks over a date and a favoured channel, but the fact that a duel between the business secretary and his cigar-chomping rival over investment banking models could be regarded as big box office suggests something has shifted.
The recession may not have killed the cult of celebrity, as the media circus around Jade Goody recently proved, but there are glimmers of a new mood of intellectual seriousness. As the economic crisis brings once dry and dusty mathematical concepts to life, could being clever - or at least economically literate - now become, as Michelle Obama recently put it, "cooler than anything in the world"?
"Five years ago it was a conversation stopper," says Professor John Beath, president of the Royal Economic Society, about his profession. Now everyone wants to talk to him - although he admits that "they usually want to ask me about what's going to happen to house prices or interest rates".
Predicting the shape of recession - a gentle U? a sharp V? a deadly L? - is now a staple of dinner-party conversations. And while a year ago an inability to load an iPod was the mark of a philistine, now understanding quantitative easing confers more social credibility than being on Twitter.
According to Google Trends, which tracks global passions by recording which phrases internet users are searching for, at the peak of the emerging credit crisis in August 2007 more people were looking up "sub-prime" (as in lending) than "Kate Moss" (as in the supermodel whose love life dominated that summer's tabloids).
Such serious times have made stars of those able to explain them, from the BBC's business editor Robert Peston - mocked at first for his clumsy broadcasting style, now admired for his banking scoops - to Vince Cable, the Liberal Democrats' slightly nerdy treasury spokesman.
The latter's shrewd judgments on the recession have inspired jealousy among colleagues, a Facebook group called Cable the Able and even wistful talk of Vince merchandise. He will rub shoulders with novelists and Radio 4 stalwarts at next month's Hay-on-Wye literary festival to promote his book on the crisis, The Storm.
Hay's invitation to Cable, and to other surprise guests such as Howard Davies of the London School of Economics and the Financial Times global markets editor, Gillian Tett, reflects the flurry of heavyweight economic books being rushed out by publishers anxious to meet readers' cravings for an explanation of why their worlds are imploding.
Gillian Tett
Tett's book, Fools Gold, which blames unfettered greed for destroying the markets, is the culmination of years spent in relative obscurity battling to get coverage of the arcane derivatives markets in which she specialised and in which the global meltdown began. "Three years ago, writing about CDOs [complex financial instruments] did not compete with Fern Britton's gastric tummy band," she says, dryly. Now she has been crowned Journalist of the Year at the British Press Awards, a gong she hailed as a turning point for her "rather geeky" specialism.
She argues we can no longer afford not to understand what she admits is a field that many still find baffling and offputting: "You need to understand how money goes round the world, or you don't understand the world."
For those of us still baffled by credit swaps and deflationary pressures, however, there is some consolation. Professor Beath argues that beneath the complex mathematical formulae of higher economics lie familiar human desires we are all capable of understanding: "Many of the basic ideas in economics - especially those that would allow you to have some understanding of what the Bank of England is doing, why speculative markets like housing have behaved in the way they have - are to do with demand and supply and the role of expectations that people have. They are not technically difficult."
Which is why some of his colleagues are now trying to use the interest generated by the crisis to bring their message to the masses.
When a group of economists set up a website in June 2007 designed to bring complex ideas within the reach of anyone who could follow an average Financial Times editorial, they did not expect to make much of an impact. Then came the sub-prime scandal, the collapse of Northern Rock and the global credit freeze - and voxeu.eu sprang to life. One article last week on how the world economy is suffering as badly now as it was in the 1930s got 36,000 hits in three days.
And it was to Vox that the government turned to recruit 50 bloggers who could report live from this month's G20 summit in a way that was immediately accessible the world over.
Romesh Vaitilingam, a member of Vox's editorial board, credits the increasing interest in his subject not just to the credit crunch but on the emergence of people such as Sir Nicholas Stern, whose report on climate change for Gordon Brown showed how economics could help save the planet. "It's partly the nature of what's going on in the world, but more and more economists are now willing to stand up and be counted," Vaitilingam said.
The Institute of Ideas, a thinktank which specialises in questioning the status quo, hopes to capitalise on that willingness next month with a public meeting in London at the Battle of Ideas festival hosted by the Royal College of Arts. The institute has assembled a clutch of eminent economists with instructions to explain and defend their arguments in public, in terms that ordinary people can understand.
The idea was born, says a spokeswoman, out of frustration that ordinary Britons seemed to have been left out of a debate polarised between a remote political elite and protesters throwing bricks through bank windows: "The economy is not a force of nature; it's created by people and by society. It's not just about Barack Obama and Gordon Brown, or bashing bankers, which doesn't really get us anywhere. It's about saying that as the public we can understand it and we have all got a stake."
Tett goes further, arguing that the public now has a duty to work out what has been done in its name. "If you as a consumer just buy crap food and don't ask what's in it, what it's doing to your body, how it's being produced, that is a real derogation of responsibility," she says. "Not asking questions about how money goes round the world, who controls it and if it's sustainable is a derogation too."
And that, she argues, means going beyond demonising bankers, since it is impossible to understand exactly what went wrong in the markets without accepting that they are peopled by human beings as vulnerable to misjudgments and mistakes as anyone else.
It is at this new frontier of economics, where rational theory meets the wilder urges of human psychology, that the lessons of the credit crunch are now being learned.
When Andrew Oswald was a schoolboy growing up in the 1970s, the backdrop to his life was recession. And it was watching the nightly news of soaring unemployment and threatened deflation that triggered his curiosity.
He studied economics in an effort to make sense of it all. Three decades later, Professor Oswald is a leading academic whose work links economic theory with behavioural psychology to help explain why markets sometimes act irrationally. And now he is watching a new generation of teenagers experience the same spark of curiosity about the powerful forces reshaping their world.
There has been a 15 per cent rise in applications to university to study economics this autumn and next, and the Royal Society of Economics reports growing interest at A-level and GCSE. Oswald is optimistic that they may be driven by more than hopes of landing jobs in the City. "In my generation we studied economics because we were very concerned about the events of the period," he says. "But the students I have taught at Oxford and Warwick, I am afraid 90 per cent of them are motivated by money. I hope in five years' time that will change. Perhaps this [crisis] will reinvigorate the purer intellectual concerns which I think drove my generation more."
Oswald's work has long attracted political interest, from Downing Street down, because of its focus on the economics of happiness: how much money do we need to feel better about our lives? Does winning the lottery make us happier? Oswald has assigned financial values to events such as marriage and bereavement, to assess how much money might have a comparable emotional impact.
But his current focus is on the psychology of crowds - or markets, as they become in the City - and how that affected the crash. He argued in a recent lecture that economists had failed to allow for herd thinking, which saw even highly economically savvy individuals within banking swept along with the crowd.
Analysts who warned the bubble was unsustainable were apt to get fired; financiers whose bonuses depended on relative performance compared with their peers were highly motivated to emulate their peers, rather than standing back and questioning whether they should be getting involved with the risky new financial instruments emerging.
Similarly, homeowners took out mortgages that they could not afford so that they could pay excessively inflated house prices rather than be left behind by a crowd all apparently reaping the benefits of a property boom. "A tremendous herd-like fever gripped the country over the last five years: people forgot common sense," says Oswald.
"We have assumed super-rationality and forgotten that occasionally the herd takes over, to everyone's detriment. In a world where you are rewarded according to relative performance, it is rational to behave rather like sheep in a field and to cluster together for safety.
"Very often that is a rational thing, but occasionally for the group it is a disaster. The interplay between psychology and economics is going to get more and more important, and the crisis will probably help sharpen that interest."
Similarly Beath argues that crowd psychology can help to explain why consumers do not always respond logically to "rational things to do with prices or incomes", a key concern for the chancellor of the exchequer, Alistair Darling, as he finalises a budget which must attempt to restore consumer confidence.
What our neighbours buy and do can have a profound effect on our spending patterns, which is not always allowed for in strict economic models, Beath points out. He cites the work of US economist Robert Frank who has argued that many Americans were lured into unsustainable debt by trying to keep up with richer neighbours - at a time when the incomes of the wealthy were increasing much faster than those of the middle class, widening the gap between them to levels that could not be bridged.
Tett, who trained as a social anthropologist before becoming a journalist, has a similarly sociological approach to her work. For her PhD thesis she lived in a remote mountain village in Tajikistan, observing rituals and ethnic conflicts. She tackled the City in the same way. "I went into the community and tried to see how the bits fitted together and see what was driving the financial village."
As a result, she thinks, she got an overview of the financial system enabling her to identify trouble brewing in the derivatives market early - which is more than many economists did, as Oswald acknowledges. "Economists in my view have to take some of the blame. We didn't understand the world as well as many economists thought," he says.
And if even economists still need to get smarter about the financial earthquake that has engulfed the world, that suggests the rest of us have a lot of dumbing up to do.
The credit crunch gurus
Vince Cable, deputy leader, Liberal Democrats
No one fully understands the scale of the complex but extreme economic crisis we face or has any simple "silver bullet" solution to it. The problems are partly international - the "credit crunch" - and partly national.
The latter is a legacy of a long period of economic growth built on debt-financed household consumption and a grossly inflated bubble in house prices. Both of the international and homegrown problems are difficult; together, they are potentially lethal. This crisis could drag on for a decade.
Robert Peston, BBC business editor
The moral authority - that America can lecture the world on the best way to run their economy - has been shot to pieces. And that will have a profound impact on, the way countries run their economies, because if you live in a developing economy, you're just going to say, 'We're not going to take any lessons from you!'
Gillian Tett, assistant editor, Financial Times
Behind the vast numbers and the alphabet soup that mark out the credit world lie human beings, social organisations and incentive schemes. During the past decade, most banks have mishandled human management. But hard lessons can now be learnt. It is to be hoped that the next generation of managers will learn not just what has gone so wrong, but also what did not go quite so badly wrong at the few banks that are now emerging as survivors.
Be an instant expert: What to say at the dinner table to show off your knowledge
On the risk of a depression
"It's terrifying how stock markets are crashing faster now than in 1929. But we reacted faster this time. Is our memory of the 1930s all that's stopping history repeating itself?"
On printing money to inject more cash into the economy
"Of course, they don't actually print the money any more. It's created electronically now." (The Bank of England buys securities from banks and just adds extra zeroes to the accounts).
On the reprinting of J M Keynes's 1936 book, The General Theory of Unemployment, Interest and Money
(For left-wing dinner parties): "I prefer the original, don't you? Paul Krugman's new foreword oversimplifies ... "
(For right-wing dinner parties): "As Margaret Thatcher liked to remind us, economics is too important to leave to economists."
On bankers
"They're not evil people per se. But when the psychology of crowds infects the market, what do you expect?"
On interest rates
"I'm sure you're delighted with your tracker mortgage but the smart money is on long-term fixed rates - the real value of sterling's headed down."
No comments:
Post a Comment