I am in Kuala Lumpur, Malaysia at the superbly organised World Capital Markets Symposium, sponsored by Malaysia’s Securities Commission. (The level of professionalism of staff organising this event is a joy for participants, and puts many other conferences I have attended in Washington and London, to shame.)
We heard this morning from, amongst other very distinguished guests, Prof. Nouriel Roubini, and later today I will be sharing a panel with him. (Will post my notes for that panel on this blog after the session.)
I am a great admirer of Prof Roubini’s, and have been since in 1997/8 when I discovered his invaluable website for tracking the Asian financial crisis. Thanks to his generosity in posting every available paper/briefing written on the crisis, I, and all his readers, were much better equipped than we would otherwise have been in understanding its nature of that crisis. But although his analysis this morning was pretty sound (and is reflected in his new book) there are areas of disagreement between us, which are pretty fundamental.
First, his concern about deficits in the Anglo-American economies. He said in passing, that the US was right to be concerned, otherwise it too would face the problems faced by Greece. That is not fair. In fact it is wrong – for many, many reasons – to compare the US to Greece. Greece has much higher debt levels, but above all, she lacks the policy autonomy to deal with her crisis – control over monetary policy and over the value of her currency. The United States does not lack those policy tools.
But he is wrong for a more fundamental reason. As he rightly pointed out, the risk of a deeper recession in western economies is exacerbated by both ‘private de-leveraging’ (i.e. the private sector winding down its debt, saving and refraining from consumption); but also by ‘public sector de-leveraging’ – i.e. government doing the same. Synchronised austerity.
In other words, and to re-use a brutal analogy, the private sector is cutting off one leg of the economy – private demand – and now the public sector proposes to cut off the other. To argue that this economic amputation is necessary – to avoid the crisis that Greece faces – is to argue that disabling the economy at a time when financial sector weakness, protectionism and sovereign debt crises (think Ireland, Portugal, Greece and Spain) – threaten the global economy – is as necessary as being unable to walk.
It is not. Public finances – in Greece, Portugal, Ireland, Spain, the UK and the United States – will recover when the economy recovers. Only then. And they will do so as sure as night follows day. (If you don’t believe me, then please read our paper: ‘The economic consequences of Mr. Osborne’ – available here. )
So it is rational then, to ensure that the economy recovers. And as the private sector’s ‘disablement’ is largely a function of the failure of the finance system (remember the line of causality of this crisis – contrary to what many argue – was from the finance sector, whose implosion was first transmitted to the private sector – and then the public sector. It was not, as many argue, the other way around!) – so it is important to revive that sector.
It is important for politicians and regulators worldwide tore-engineer and transform the broken financial system, to make it functional. Instead they are tinkering with it. Given these circumstances, it is absolutely vital to a) apply pressure on politicians and regulators to deal with the original cause of the crisis and b) that the only sector that can stimulate life into the economy does so – in a sustainable way.
So public spending is vital to recovery. Say this after me and drown out the flawed micro-economic nonsense that flows out of so many official institutions. Public spending pays for itself. We need to spend to clear the deficit.
Synchronised austerity across the western world threatens massive economic failure – that will hurt China as well as the economies in her hinterland. Across the western world synchronised austerity threatens first: the banking system, which despite much bravado over profits and new forms of securitisation (Investec, the South African bank, are proposing to securitise about $250 million of sub-standard mortgages) are still facing a funding gap, or ‘cliff’. (In the UK that cliff, according to the Bank of England latest inflation report, is equal to about £25 billion a month, and as of now, these banks are only able to raise about £12 billion a month.)
As a result the banks are not lending. Companies are hoarding cash, and the households and individuals are saving, paying down their debts. In these circumstances, governments have to step in.
And Professor Roubini owes it to his reputation to be arguing that case.
(PS I will deal with the other areas of disagreement in a later blog.)