Monthly Archives: September 2012

A mess beyond fixing?

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I’ve thoroughly enjoyed reading Robert Peston’s [amazon_link id=”1444757091″ target=”_blank” ]How Do We Fix This Mess?[/amazon_link] Its author is so famous, as the BBC’s Business Editor, that his photo is on the front cover. Yet he’s modest enough to start the book with: “I don’t know. But don’t stop reading now.” Indeed, the title is misleading because he sensibly does not try to dole out generalised policy prescriptions. (Oh and – note to publishers – that’s enough long and chatty subtitles, thank you. They’re becoming annoying.)

[amazon_image id=”1444757091″ link=”true” target=”_blank” size=”medium” ]How Do We Fix This Mess?: The Economic Price of Having it All, and the Route to Lasting Prosperity[/amazon_image]

The book draws on Robert’s long experience as a journalist covering the banking industry. (I should say that I’ve known him for years and followed, albeit far less successfully, in his footsteps at The Investors Chronicle and then a national newspaper, The Independent in my case, the FT and Sunday Telegraph in his.) As he says, it must seem to others to have been a boring reporting beat, but it has paid off handsomely in equipping him with the knowledge and the contacts to report superbly on the financial crisis to UK and worldwide audiences.

How Do We Fix This Mess combines chapters giving the context for the crisis, and – the heart of the book – chapters describing what happened in the course of the crucial events starting in late 2007. Scene-setting chapters describe the process of innovation and growth in financial markets and the creation of new kinds of derivatives; the inadequacy of the regulatory regime, and how it came to be so feeble; and the globalisation of the world economy and rise of China. These are all excellent overviews, although some readers will find this familiar territory.

I found the chapters on the early days of the unfolding crisis the most interesting, from the warning signs about Northern Rock through 2007 and the extraordinary run on the Rock in September that year. As Robert points out, the fact that Northern Rock’s business model involved online banking, with very few branches, meant that even a small proportion of depositors wanting to withdraw their money (my sister was one of them) translated into a big queue outside the branch. Some people accused him of causing the crisis, as if the drying up of credit markets and an unsustainable business model were somehow caused by the reporting of it. He is also very interesting on the part played by the Bank of England, much criticised for its handling. As Robert says, Mervyn King was right to say bailing out the banks would contribute to moral hazard – look at where we are now, still hostage to these titanic, toxic institutions – but the book criticises the Bank of England for not raising interest rates or taking other actions in the years before 2007 to puncture the evident bubble in asset markets. MPC minutes from 2005 and 2006 show little concern with its unsustainability or the need to raise interest rates: they were reduced once in 2005, and raised twice in 2006, but by just 0,25% points each time.

The book then turns to the Euro crisis and ends with the Libor scandal, and, rather than a list of things governments and regulators must do, Robert writes: “Perhaps the most important [cause of sluggish growth] is that there is a growing realisation that we have to take steps to live within our means, over the longer term….  The innocent pay a price for the national indebtedness that they did not cause or choose.” He professes himself optimistic:

“The clean up will take years. And there is no quick fix, so you need to brace yourself for perhaps a decade of economic stagnation. As it happens, I don’t think that is reason to weep. We are a very rich country. And we can be a very happy country if we learn how to make the most of what we have got.”

I must say, I’m far less optimistic about the way the economics and politics of the coming lost decade will play into each other. Let’s hope I’m wrong and the mess is fixable. Either way, this is a terrifically interesting and well-written book, which benefits greatly from its author’s detailed knowledge of the banking industry that is at the heart of this crisis.

Oh no, not happiness again!

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There are some things some people so fervently want to believe that no amount of evidence or logic will persuade them otherwise, no matter how brilliant they are. Adair Turner’s book [amazon_link id=”026201744X” target=”_blank” ]Economics After the Crisis[/amazon_link] is a good book, and I’m a great admirer of his. But my heart sank when I read this new review of it in the TLS by Robert Skidelsky. Lord S writes:

“The case against making increased GDP per capita the overriding policy objective is that it doesn’t deliver the increased happiness or welfare if promises. In 1974, the economist Richard Easterlin published a famous paper, “Does Economic Growth Improve the Human Lot?”. The answer, he concluded, after correlating per capita incomes and self-reported happiness levels across a number of countries is probably “no”. In a refinement dating from 1995, Easterlin found no relationship between income and happiness above an average per capita income level of between $15,000 and $20,000. Other findings confirm Easterlin. Data from the UK show that from 1973 to 2009, there was a continuous rise in GDP per head, but no increase in reported life-satisfaction.”

Er, no. The error of logic is that if you compare a stationary (reported life-satisfaction) and non-stationary (level of GDP) time series via a chart or regression, they will as a matter of construction not be correlated with each other. And the evidence has recently flowed in that GDP growth and reported happiness are positively and strongly correlated with each other – for example, Stevenson and Wolfers. Finally, common sense should tell everyone that abandoning economic growth as a policy objective is a political and practical no-hoper: we have that now and it’s called recession. It cements current inequalities, reduced job opportunities, and voters just hate it. So actually, the task of achieving satisfying and sustainable growth is a pretty difficult one (it’s why I wrote the [amazon_link id=”0691145180″ target=”_blank” ]Economics of Enough[/amazon_link]…).

[amazon_image id=”026201744X” link=”true” target=”_blank” size=”medium” ]Economics After the Crisis: Objectives and Means (Lionel Robbins Lectures)[/amazon_image]

Update: broken link replaced 5/11/14

Ways of reading

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My book [amazon_link id=”0691145180″ target=”_blank” ]The Economics of Enough [/amazon_link]was recently published in both Italy and China (as well as in English in paperback), and I’ve been struck (again) by how differently people read the same book. This is true of individuals but also of national cultures.

[amazon_image id=”0691145180″ link=”true” target=”_blank” size=”medium” ]The Economics of Enough: How to Run the Economy as If the Future Matters[/amazon_image]

When I spoke about the book last weekend at the book festival Pordenonelegge, my Italian interviewer Emanuele Bompan was most interested in the political economy questions: how can politics become more able to address long-term problems? what is the role of technocrats? how can western welfare states handle their second demographic transition, to ageing and shrinking populations? By contrast, the review in the Shanghai Daily questions my argument that economic growth and sustainability can and have to be combined, and concludes:

“This essentially flawed conception prevents her from identifying the true malaise of capitalism. To sum up, her proposal about how to bring about a better balance between the present and the future is seriously limited by her assessment of the Western way of life, to which she is so attached.”

Many of us of a certain age were strongly influenced by John Berger’s classic [amazon_link id=”014103579X” target=”_blank” ]Ways of Seeing[/amazon_link]. There are Ways of Reading, too.

[amazon_image id=”014103579X” link=”true” target=”_blank” size=”medium” ]Ways of Seeing (Penguin Modern Classics)[/amazon_image]

Deficits, fiscal and democratic

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There’s an interesting new research summary on VoxEU by Caroline van Rijckeghem and Beatrice Weder di Mauro, Learning from past crises: Into the safety zone, which looks at the history of sovereign defaults. The conclusion is that political system and default are related – parliamentary democracies don’t and dictatorships do. However, the causality between politics and economics is not simple, and growth is essential to prevent political polarisation. So what at first glance appeared an optimistic conclusion turns out to be a rather pessimistic one.

“Growing discontent as the result of austerity may be the most important factor yet in influencing the probability of default. …[O]ur research shows that in democracies budget deficits smaller than 4.4% are sufficient historically to avoid default on external sovereign debt at times when international liquidity is plentiful. The latter condition is fulfilled in today’s world. But the former is not. In fact many developed economies have current deficits well above 4.4%. In particular the UK, US, and Japan have deficits above 8% and among periphery countries in the Eurozone Greece and Ireland and Spain are above 7%. Based on this criterion, these countries are in a zone of vulnerability.”

The authors go on to say the Eurozone is a special case, historically, so one cannot apply this evidence from the past mechanically. It might be possible to bring down deficits gradually, without adding to austerity measures. They write:

“[T]he solution suggested by the German Council of Economic Experts, the European Debt Redemption Pact, has the advantage that it represents a transparent and credible long-term commitment device. It aims at reducing debt slowly to 60% over 20 years, thereby protecting growth and requires collateral, earmarking of revenues and European control. In turn, the joint and several guarantee for all participants for interim debts over 60%, signals a long-term political and economic commitment from the stronger Eurozone countries to maintaining the integrity of the Eurozone. Together, this would constitute a grand bargain.”

This column put me in mind of Ben Friedman’s marvellous 2005 book, [amazon_link id=”1400095719″ target=”_blank” ]The Moral Consequences of Economic Growth[/amazon_link], in which he makes a powerful – and it now seems clear, prescient – case for growth on exactly this kind of political economy ground. He writes:

“The value of a rising standard of living lies not just in the concrete improvements it brings to how individuals live but in how it shapes the social, political and ultimately moral character of a people.”

[amazon_image id=”1400095719″ link=”true” target=”_blank” size=”medium” ]The Moral Consequences of Economic Growth[/amazon_image]

Finance fact and finance fiction

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I had a delightful weekend at the Pordenonelegge book festival, speaking about the new Italian edition of [amazon_link id=”0691145180″ target=”_blank” ]The Economics of Enough[/amazon_link]. The life of an author is indeed tough.

Reading in Pordenone

As my reading matter, I took a book (recommended by Brett Christophers, whose Banking Across Boundaries is out next year) that might be tough to get through in everyday life. It’s [amazon_link id=”0226675335″ target=”_blank” ]Genres of the Credit Economy: Mediating Value in 18th and 19th century Britain[/amazon_link] by Mary Poovey. The author is an English and Humanities professor at NYU, so this isn’t a natural title for me to have picked up. But, a bit over half way through, I’m finding it fascinating.

[amazon_image id=”0226675335″ link=”true” target=”_blank” size=”medium” ]Genres of the Credit Economy: Mediating Value in Eighteenth- and Nineteenth-Century Britain[/amazon_image]

The book traces the creation of a distinction between writing about value that became money – bills of exchange and bank notes – writing about value that became formal, ‘expert’ economic writing, and writing about value that became literary writing. What we now understand to be totally distinct genres were created so by the development of the credit-based economy in 18th and 19th century Britain and the sociological evolution of the economics profession on the one hand and literary writers on the other. A split between ‘factual’ writing about monetary or market value based on the forms of writing about natural science and ‘fictional’ writing about non-market value in literary fiction and poetry now seems natural and inevitable, but it was not always so. Once one sees this, it becomes immediately obvious that some ‘factual’ forms of writing about markets are entirely ‘fictional’. Without even going to the metaphorical character of many economic models, this statement obviously applies to the multi-hundred pages long prospectuses issued for complex securities in the run up to the Crisis (and for that matter still being issued). Nobody could possibly have read and understood these. Not that this mattered – they might as well have been tales of unicorns and dragons, containing less insight about value and values than, say, my next read, which will be [amazon_link id=”1849904936″ target=”_blank” ]Parade’s End[/amazon_link].

[amazon_image id=”1849904936″ link=”true” target=”_blank” size=”medium” ]Parade’s End[/amazon_image]

Meanwhile I’ll write a full review of Prof Poovey’s book when I’ve finished tit.