James Crabtree
The new August issue of Prospect
Against a backdrop of grim economic news, rising government debt, dreadful public spending projections and general hand ringing over fiscal probity, Prospect’s August cover story asks a simple question: is Britain bust? James Buchan begins his journey to find the answer in the office of Robert Stheeman, the head of Britain’s debt management office, the previously unknown body which sells the UK’s IOUs.
Stheeman is a busy man, having been asked to sell in this year more than three times as much debt than the year before, all to fund a huge gab in the Government’s finances. But, as Buchan explains, the cause of all this recent borrowing is not the banking crisis itself:
The bonds required to fund the banks taken into state administration, a mere £37bn, were issued last autumn. No, Stheeman’s headache comes from spending by government departments (without accompanying tax rises) over the last nine years and is to be traced in the policies and misfortune of a single man, Prime Minister Gordon Brown.
Buchan notes that “there have been anxious moments in recent months” especially as “Stheeman also suffered a bad quarter of an hour on 21st May when the rating agency Standard & Poor’s lowered its assessment on British sovereign debt from ’stable’ to ‘negative. But, as he goes on to argue, the culpability of the political class for over spending is actually nothing new. Leading figures of the Scottish enlightenment like Smith and Hume worried (without good reason) that their country was soon to sink below the budget line, as did many other leading intellectual lights during the 19th and 20th century. Are the concerns in this crunch any more likely to turn out badly? Read the piece here, and find out.
Tom Streithorst
Greenspan: one of the rentier class
According to Alan Greenspan in Friday’s Financial Times, the biggest threat to the world economy is a resurgence of inflation. That’s right. While the rest of us worry about ever-increasing unemployment, shrinking global GDP, declining trade, collapsing demand, Greenspan tells us the real nightmare is none of these, but instead the potential prospect of inflation—even though this year it will probably be under 2 per cent.
This should not surprise us. Throughout his career, it has been the interests of the financial sector that have most concerned the former Fed Chairman. And it is the rentier class that suffers most from inflation.
Indeed, it is a sign of their dominance that the rest of us, for whom inflation can actually be beneficial, have been conditioned to fear it. If you lend money, like banks and financiers, inflation means you are being paid in depreciated cash. But if you borrow money, as do most households and entrepreneurs, inflation is a subsidy that stimulates investment and demand. Inflation penalises lenders and benefits borrowers—and most of us, by the way, are net borrowers.
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James Crabtree
To discover what comes next, says Geoff Mulgan in this month’s cover story, “After Capitalism”, maybe we should look upwards? Mulgan explains how skylines have long provided a simple test of what a society values: “a few centuries ago the greatest buildings in the world’s cities were forts, churches and temples; then for a time they became palaces. Briefly in the 19th century civic buildings, railway stations and museums overshadowed them. And then in the late 20th century everywhere they were banks.”
In what is one of the most fascinating big picture commentaries on the current crisis published in the UK, Mulgan then goes through the causes of the current moment. More importantly, he shows how the seemingly permanent edificie of contemporary market capitalism in its longer context, and asks what might come beyond it. Only a few decades ago this quesion, he points out, was common—with everything from managerialism and communism both mooted as realistic successors. Now we’ve got out of the habit of predicting such big changes; something Mulgan wants us to re-learn. And in an eclectic range of indicators—from worker cooperatives to urban greening projects—he thinks some of that future, in which markets will be tamed. might already be with us. And looking up to the skyline? As Mulgan concludes: it might be “great leisure palaces and sports stadiums; universities and art galleries; water towers and hanging gardens; or perhaps biotech empires?” As ever, let us know your own opinions below.
James Crabtree
Economic man: fallen from laurels to funeral wreaths…
This edition continues Prospect’s ongoing dissection of the causes and consequences of the financial meltdown. In addition to Geoff Mulgan’s cover story, “After Capitalism,” we have two big pieces on economics: one from Anatole Kaletsky on the failure of economic models (not to mention the economic modellers who built them) and another from Gerry Holtham on what the G20 must do next.
Kaletsky’s piece picks over two economic theories in particular—theories which, although seemingly discredited, still hold great sway over our business schools and investment banks. These are the rational expectations theory, and the efficient markets hypothesis. These theories may not have gone unchallenged in the past in Ivy League seminar rooms and central bank boardrooms, but they formed important building blocks in the theoretical understanding of the global economy which lead to policy mistakes contributing to the current crisis. Equally importantly, they were taught in all graduate level macroeconomics classes. Kaletsky charts their influence, and lays the blame for the crisis squarely on the shoulders of academic economists who promoted them. In response, only an economist’s reformation will do.
But what of the future? In our lead Opinion pice this month, Gerry Holtham isn’t much cheerier on the economic understanding of the current moment leading up to the G20. The problem? No one has yet grasped the type of global coordinated fiscal stimulus needed to put the world economy back on its feet. Uncomfortably, this mean certain countries—especially those prudent nations not as at risk of having their currency sink (i.e. not Britain)—shouldering much more of the burden of reflation. Equally, it means a much greater effort to reform the IMF, with less power for Europe and the US, reflecting their relatively smaller role in the current international set-up. How to mark this change? Holtham thinks moving the IMF itself would help. If the EU would act as its largest member, it could, within the rules, claim its HQ. Bratislava, he thinks, would work nicely.
Leo Hornak
Legrain: The Smoot-Hawley tariff failed to create jobs.
Last month’s provocative piece by Ha-Joon Chang on the need for increased economic protectionism to help overcome the recession has received a scathing response from Philippe Legrain, a contributing editor to Prospect and author of Open World: The Truth about Globalisation . In a web exclusive on our main site, Legrain claims that greater protectionism would only serve to reduce people’s purchasing power, and would result in higher import taxes and therefore less demand for our imports:
“Higher taxes and lower exports as a cure for the global recession? This is the economics of the madhouse.
Instead, Legrain argues that the key to easing the global crisis is to boost global demand, and calling for “coordinated government action combining large fiscal stimulus packages, unconventional monetary policy measures, and the nationalisation and restructuring of zombie banks that are dragging the economy down with them…This would boost employment, especially if combined with cuts in payroll taxes and increased help for workers to retrain and find new jobs.”
Will greater protectionism really brings us closer to depression era economics? Or is Chang right in his assertion that that “free trade has never worked very well, but is going to malfunction even more in coming years”? Let us know what you think.
James Crabtree
Oh, right, so this is how it happened
The clever people at Flowing Data give us 27 visualisations of the financial crisis. This is oddly reminiscent of the post I put up here just a few weeks back from the great, and extremely clever, Jeff Frankel. Thing is, while a real mind on matters of international macroeconomics—and, it must be said, an entertainingly caustic critic of Bush-era fiscal profligacy—Frankel can’t draw for toffee. These guys, on the other hand, can.
Alexander Fiske-Harrison
Déjà vu
I was made very nervous last weekend by the following conclusion to a column in the Sunday Times:
One person whose views I respect is Clive Harrison who runs Fiske & Co, the stockbroker. Harrison has spent no less than 47 years in the stock market. In a letter to clients and friends just before Christmas he warned that the market’s reaction to the present problems was still relatively modest in the context of past crises and almost certainly had further to go. “My instinct tells me that in the spring, at perhaps 1,000 points below today, we will have the turn,” he wrote. In other words, equity investors are still too complacent. Maybe not what people wanted to hear, but it is probably a realistic assessment.
It’s not just the severity of the forecast from a stockbroker who predicted recent events with singular prescience, it’s the fact that what was effectively a Christmas card from a private man (who also happens to be my father) to his clients is now being quoted in the national press. The one rule I learnt during my time in the markets is that bad news travels fastest and furthest when it’s true. Here is the full text of his analysis which has already been circulated far wider than its intended audience. Read more »
James Crabtree
Jeffrey Frankel, an economist at Harvard, has an excellent weblog. He also has a knack for the one-liners, as evidenced by the fact that Paul Krugman just confessed to borrowing one of his quotes, which then ended up as a quote-of-the-year. And now, to top if off, Frankel has managed to boil the financial crisis down to one slide. Here it is:
if a picture is worth a couple of trillion dollars
Nice touch in the bottom right hand corner. [Thanks for the tip, Noah!].
James Crabtree
Hello there, Paul. Click the pic for the full strip.
[Hat tip: The Browser, thanks guys.]
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