As the old joke has it, I’ve predicted five of the last two financial crises. But this time I’m not the only person getting alarmed about the current volatility in financial markets. Plenty of “serious”, congenitally bullish commentators are getting anxious too.
One thing everyone seems to agree on is that the current crisis – if that’s what it is – looks a bit different. We are in the proverbial uncharted waters, it seems. Does history offer a guide in such circumstances?
A number of big lessons emerged from the Great Depression, even if they have generally been studiously ignored by subsequent generations. One of the biggest was that we should never leave the financial sector to its own devices. Poorly regulated banks helped trigger the 1929 stockmarket crash by lending to speculators. The subsequent collapse of many badly run financial institutions intensified the subsequent crisis.
In the aftermath of the Great Depression, John Maynard Keynes, among others, argued that the financial sector was so important that it needed to be closely monitored and regulated. For a while it was. But the winding back of the Glass-Steagall Act in the US opened the door for a new generation of financial actors to dream up innovations from which they and the institutions they represented directly benefited, generally at the expense of the rest of us.
The so-called global financial crisis of 2008 was the all-too-predictable result of letting poorly regulated banks get too big and powerful. They still are, and they are still influencing American politics in ways that make effective monitoring of the banks difficult. Little wonder Bernie Sanders has found an eager and receptive audience for his brand of politics.
One lesson we thought had been learned from the “mistakes” of the 1930s was that at times of crisis, we need to keep pumping money into the economy to maintain demand. Sounds like a good idea, apart from the fact that it doesn’t seem to work anymore. Perhaps quantitative easing has saved us from this crisis even sooner, but it doesn’t seem capable of fixing underlying structural problems – or not in the way it has been applied, at least.
Rather than being used to directly stimulate employment and demand through much-needed investment in infrastructure, much of the money from quantitative easing in the US seems to have ended up in the stockmarkets, pushing up valuations to improbable levels, even before the recent collapse in oil and resource prices.
The other significant feature of this massive economic experiment that was undertaken by the Federal Reserve was that it was predicated primarily on one country’s perceived “national interest”, not on what might be good for the international system as a whole.
This is another big lesson from the Depression that seems to have been lost. In one of the most influential explanations of the depth and duration of the Depression, Charles Kindleberger argued that the absence of a leader or “hegemon” willing to play a role as a lender (and market) of last resort to maintain an open economic system was decisive. The US has become evermore economically introverted, politically dysfunctional, and unable or unwilling to play this sort of role.
Things don’t look much better for the aspiring hegemon either. China is the current epicentre of many of the world’s economic worries and uncertainties. Paradoxically, China’s elites did apply Keynesian orthodoxy during the global financial crisis and it seemed to work admirably, leaving China – and most of its neighbours – seemingly unscathed.
Now, however, the hangover of debt, redundant infrastructure and surplus real estate “weighs like a nightmare on the brains of the living”, as Karl Marx might have put it.
Perhaps China’s leaders should brush up on their Marx and his predictions about the inevitability of capitalist crises and our collectively inability to manage them. Surveying the global economy today and the increasingly ineffectual efforts of political and economic elites across the world, it looks like Marx may have been on to something.
Perhaps there really are limits to what can be done to stimulate economic development, or there are within national economic frameworks, at least.
The other paradox of our times is that for all the endless blather about globalisation, politics remains remorselessly national – and so do economic policies. There’s plenty of room for economic stimulation and development around the world, and lots of useful work to be done.
In the unlikely event that the “international community” can actually get it together to rebuild Syria, for example, this would be a major and encouraging step forward for humanity and a useful tonic for international economic activity.
Such efforts are potentially important, and not just for altruistic reasons. After all, the Depression also demonstrated the cost of not maintaining a stable and productive economic order.
The rise of extremism, even in places such as the US, is a salutary reminder of the link between politics and economics, and just how vulnerable we remain to the possibility of collective madness in troubled times. Donald Trump may not be Adolf Hitler, but he’s not Franklin D. Roosevelt either.