Among those who will look back on 2008 with some embarrasment are the economic pundits who failed to see what was coming; pieces are already appearing in the media asking why the economic turmoil of the past year came as such a surprise.
That most stimulating of columnists, Anatole Kaletsky in the Times, offers a review of the events of the past year which offers, as well as a mea culpa for not forseeing what happened, some intriguing thoughts about what happened and why. He offers one very simple explanation:
Almost all predictions for 2008 turned out to be wrong because economics ultimately is driven by unpredictable human behaviour, not by fixed scientific laws – and this is especially true in a crisis. The biggest surprise this year lay not in economic events but in the reactions of financiers, businessmen, regulators and politicians.
Difficult to argue with any of this – but the explanation that he goes on to give can be read as a devastating indictment of the self-deception and hubris of those who live by the market.
Kaletsky points to three fundamental causes that led to the meltdown in September, when things really started to collapse:
The first big accident was the surge in oil and food prices in spring and early summer. This actually did more harm than the original credit crunch to consumer and business confidence and, therefore, to the prospects for economic recovery. We now know that this surge in commodity prices was a purely speculative phenomenon, unrelated to any real shortages of supply. But because of the quasi-religious faith that “the market is always right”, politicians and regulators refused to intervene directly in the oil market to curb speculation, leaving consumers and businesses severely weakened when the Lehman crisis hit.
This is a theme that Kaletsky has discussed before. Movements in oil prices in particular had nothing to do with fundamentals. We have in the past year seen a roller-coaster ride in oil prices which has left the argument that the market accurately reflects the realities of supply and demand in complete tatters. As with so much that has happened in the past year, the movement in oil prices is the entirely predictable outcome of speculation.
The second accident was the series of regulatory blunders that climaxed with the Lehman fiasco but began several years earlier with the adoption of “mark to market” accounting and the perverse incentives created by “market-based” capital requirements determined by private rating agencies’ potentially corrupt judgments. These blunders, all of them ultimately motivated by the fundamentalist credo that “the market is always right”, continued throughout the credit crunch. Instead of quickly implementing a government-led Plan B to end the credit crunch, as I had expected, politicians kept waiting for implausible market solutions and refused to intervene until it was almost too late.
Difficult to argue with this one, except that the regulatory blunders have been going on for a very long time. Much of what has happened in the Anglo-Saxon economies can be directly attributed to lax regulation. Indeed, one of the sillier comic turns of recent months has been George Osborne’s repeated calls for bankers and hedge-fund managers who have broken the law to be prosecuted. It’s an obvious cop-out; regulation is so lax that irresponsible speculation has been by and large untroubled by legal sanction. Osborne knows that focussing on criminality is as good a way as any of keeping his chums – the people who, inter alia, finance the Tory Party – off the hook. Politicians in the English-speaking world in particular have been so mesmerised by the language and ideologoy of the market that Plan B was never on the cards.
The third and perhaps most damaging misjudgment has been to subsume macroeconomic management into political morality. As a result of moralistic witch-hunts against debt and consumption, pragmatic Keynesian solutions to the credit crunch have been thwarted by an unholy alliance of ideological monetarists who believe that the market is always right and ideological Marxists who believe that it is always wrong. Even worse, consumers and businesses have started to see recession as a moral retribution for past excesses, rather than a technical problem that macro-economic policy could – and should – readily resolve.
This point needs sofurther exploration. I for one am at a loss to find the ideological Marxists who have influenced policy-makers in this way; and where are these moralistic witch-hunts? The response of policy-makers has surely been exactly the opposite; fiscal stimulus packages in Britain, massive state handouts to failed bankers in Britain and the United States. The problem with Kaletsky’s analyisis here is the implication that we can get away without considering the role of debt and consumption in creating this crisis – especially since his criticisof free-market fundamentalists earlier in the piece seem to argue that it is the very ease with which ideologically-driven policy-makers have accepted the ideology of debt and consumption that got us in this mess in the first place.
The implication is surely clear here. We need to rediscover economic regulation, put a cap on greed and consumption, and reconsider what- and whom – economics is for. This implication seems to flow clearly from Kaletsky’s argument, and it is a huge pity (a failure of nerve, one might almost argue) that he shies away from this conclusion in the end.