[OPE] Ironies and paradoxes galore

In his Bundesbank speech on January 13, 2004, Alan Greenspan, stated with an almost lyrical enthusiasm:

"Globalization has altered the economic frameworks of both developed and developing nations in ways that are difficult to fully comprehend. Nonetheless, the largely unregulated global markets do clear, and, with rare exceptions, appear to move effortlessly from one state of equilibrium to another. It is as though an international version of Adam Smith's "invisible hand" is at work."

Well there were no doubt many hands at work, invisible to economists who can see only "consumers, investors and factors of production", but the effortless equilibrium Mr Greenspan talked about now seems more of a challenge. For instance, the Financial Times reports (The Short View: Currencies and the crisis, by John Authers, October 27 2008):
:
"Normally every exchange rate move has a winner and a loser, but this upheaval seems different. Countries that wanted their currencies to be strong see them weakening; those who wanted a weak currency have seen a strengthening. All trade grows more difficult." http://www.ft.com/cms/s/0/6cb30f56-a45b-11dd-8104-000077b07658.html

I think that this is precisely the kind of thing that makes Martin Wolf's "Keynesian policies" and Jeffrey Sachs's six point plan much more difficult to realise. Just when more cooperation is needed, economic competition increases in intensity. What is the "fundamental value" of the Euro for example, and how could you defend it in the longer term? How can you make large long-term investments with so much market volatility, and given that, on average, a stock is held only for about one year nowadays by shareholders?

There is an air of mystery about Greenspan's 2004 remark that the changes of globalisation are "difficult to fully comprehend". Thus, a sort of faith or ideology about the benificence and efficiency of markets substitutes for real knowledge of the situation - an ideology which, Dr Greenspan retrospectively admitted, has its pitfalls. The Bank of England indeed stated in its latest Financial Stability Report that the fragile state of banking worldwide is a reflection of the fact that neither regulators nor banks themselves understood fully the "potent interconnections between firms in the global financial system". http://www.ft.com/cms/s/0/a34c01fe-a46e-11dd-8104-000077b07658.html Sort of like, "wir haben dass nicht gewusst". There is a grain of truth in that, insofar as you simply don't know when the limit of credit expansion has been reached, until you get serious default shocks, and because deregulation made credit provision uncontrollable in aggregate.

The global currency markets alone nowadays turn over something like $3 trillion per day, and a lot of that is pure speculation. Looks to me like there's ultimately only one way out, at least if you are serious about Keynesian policies: fairly intense, coordinated state intervention and protectionism of various kinds. As I've mentioned before, the pendulum in bourgeois opinion swings to and fro between protectionism and free trade, according to bargaining power. But obviously that does not sit very easily with Mr Wolf's tax-reducing free market idea. I don't know hardly anybody who is not in favour of less tax - I've been penalised myself often enough by the tax system for entrepreneurial activity - except Marxists who ignore this income flow, but it is all a question of how that is done, and what effects it really has, and for whom.

In a recent piece, Mr Wolf actually raises the spectre of revolution:

Yet the idea that a quick recession would purge the world of past excesses is ludicrous. The danger is, instead, of a slump, as a mountain of private debt - in the US, equal to three times GDP - topples over into mass bankruptcy. The downward spiral would begin with further decay of financial systems and proceed via pervasive mistrust, the vanishing of credit, closure of vast numbers of businesses, soaring unemployment, tumbling commodity prices, cascading declines in asset prices and soaring repossessions. Globalisation would spread the catastrophe everywhere. Many of the victims would be innocent of past excesses, while many of the most guilty would retain their ill-gotten gains. This would be a recipe not for a revival of 19th-century laisser faire, but for xenophobia, nationalism and revolution. As it is, such outcomes are conceivable. Choosing to risk such an outcome would be like deciding to let a city burn in order to punish someone who smoked in bed. Risking huge damage now in the hope of lowering moral hazard later is mad. http://www.ft.com/cms/s/0/6e23cdc8-a517-11dd-b4f5-000077b07658.html

The thought there is that globalisation would transform into its dialectical opposite, disuniting rather than uniting the world, turning on itself. I quite agree that we shouldn't "let a city burn in order to punish someone who smoked in bed", but many social impacts of the financial fracas are hardly avoidable: more unemployed, intensifying competition, more social conflicts, more health problems, more people becoming disintegrated from society. What we need is a society which prevents that from happening. That's a worthy cause, surely.

J.

Il n'est pas de sauveurs suprêmes
Ni Dieu, ni César, ni tribun
Producteurs, sauvons-nous nous-mêmes
Décrétons le salut commun
Pour que le voleur rende gorge
Pour tirer l'esprit du cachot
Soufflons nous-mêmes notre forge
Battons le fer quand il est chaud

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Received on Wed Oct 29 18:21:13 2008