Will Robinson
Who would argue with the map?
In a perfect world, the trouble over Falklands oil would be resolved in an amicable, bipartisan fashion. Hillary Clinton appeared to hold that view during her recent visit to Buenos Aires, when she endorsed American-led talks on the issue. But for many in Britain her words were far too pro-Argentine; not least because she referred to the islands as las Malvinas. The motivation behind her words, however, was little more than pragmatism, and those who value our “special relationship” need not be perturbed. Far from slighting her country’s staunchest ally, the secretary of state was throwing a sorely-needed bone to a friend who could prove very helpful in furthering the anti-terrorism, anti-drugs agenda in South America.
Her remarks might have made more sense to British observers had they been reported prefaced with the disingenuous praise she heaped on President Kirchner for her handling of the economic crisis. The former First Lady deliberately didn’t mention the $6.5bn of foreign currency reserves that have recently been earmarked for the repayment of Argentina’s overseas debt, a policy that has galvanised popular opposition in Buenos Aires. A formidable trio of powers also opposes it: the former head of the Central Bank, a supreme court judge, and the leaders of the parliamentary opposition, all of whom view the allocation, bludgeoned through by presidential decree, to be illegal and poor policy besides.
Read more »
Tom Streithorst
Barack Obama spent most of 2009 bailing out banks and placating bankers. But last week, after the embarrassing Massachusetts defeat which saw the Democrats lose their crucial 60-seat senate majority, he finally responded to populist rage and proposed a range of radical policies long advocated by the 82-year-old former Federal Reserve Chairman, Paul Volcker. With Volcker by his side (and top economic Larry Summers and Tim Geithner relegated to the back of the room) Obama announced what he termed the “Volcker rule”: a move to restrict banks’ speculative (and high risk) trading. It is by no means a return to Glass-Steagall—an act introduced in the 1930s in order to restrict speculation—but it is a step in that direction. And, predictably, bankers (used to treasury secretary Geithner’s mollycoddling) reacted with fury.
Volcker, the architect of the right-wing 1980s transformation of our financial world, may now actually be the most leftist economic adviser in Obama’s administration. Let us take a jaunt back to the 1970s, to recollect what Volcker accomplished then. It was a tough decade for business: high inflation, stagnating stock markets, powerful unions, corporations held in scorn. During those years, workers saw their real wages go up, while the holders of wealth took a big hit. With real interest rates negative, putting money into the bank made it evaporate. Bonds lost money, as did shares. Business Week magazine told investors that equities were dead. Inflation became self-perpetuating as workers habitually demanded wage hikes greater than the cost of living. The future seemed anywhere but business. In those days, everybody wanted to be a working-class hero, and even the children of the wealthy dressed down, avoided any bling. Capitalism wasn’t cool. The highest paid executive on Wall Street made $500,000; experienced analysts made $30,000.
Almost single-handedly, Volcker changed all of that. His goal was simple: eradicate inflationary expectations from the economy. His tool: brutally high interest rates. Macroeconomists have long known the trade-off between inflation and unemployment, that raising interest rates would goose unemployment and so lower inflation. The difference was that Volcker was courageous enough to raise rates until the economy screamed. In the 1980s this manufactured the largest recession of the postwar era but, in the process, eradicated inflation for a generation. During that time, Volcker (and his transatlantic counterpart, Margaret Thatcher) also crushed the unions, caused a bull market in shares, and made capitalism hip. In short, Volcker transformed our world.
Unlike Thatcher, or Alan Greenspan (who succeeded him as Fed chairman in 1987), Volcker was no ideologue. Nor was he ever seduced by Wall Street. A spartan man of simple tastes, money didn’t motivate him. Even after he retired, he remained that old fashioned paragon: the dedicated public servant. The world changed all around him, but his understanding of it stayed the same.
Atypically for a man of his power and influence, he continued to be an independent thinker, unswayed by conventional wisdom. In 2004, when the housing bubble was still in its sprightly adolescence, Volcker predicted a financial crisis within the next five years. In 2005, when most economists and central bankers were patting themselves on the back for having engineered the “great moderation,” he wrote: “Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot.”
Volcker, more than most, recognised the danger of debt-fuelled consumption, and saw that its unravelling would probably come through financial crisis. Perhaps that is why, in January 2008, when most pundits gave Hillary Clinton the Democratic nomination, Paul Volcker endorsed Barack Obama, lending the freshman senator much needed gravitas.
After Obama won the election, Volcker was naturally touted as a possible treasury secretary. His advanced age may have worked against him and he was given a largely ineffectual post as an economic adviser. Larry Summers and Tim Geithner, more moderate and more committed to the existing structure on Wall Street, dominated Obama’s economic thinking. Volcker seemed iced out, only occasionally meeting with the president. But as the economy remains weak (even while Goldman Sachs books record profits), a populist backlash is threatening to overwhelm both Geithner and perhaps even Summers. And so Obama has taken the big man off the bench.
The logic behind Volcker’s proposal is that, since banks receive an implicit government guarantee, they should not engage in speculative behaviour. If risky bets pay off, the bankers take the money. If they fail, we, the taxpayers, pay the price, creating moral hazard and impelling bankers towards ever riskier behaviour. The “Volcker rule” now has to make its way through congress, where finance industry lobbyists are sure to try and water it down. But considering what he has already achieved over so many years, combined with his wisdom and his charisma, only a fool would underestimate Paul Volcker. He cannot be dismissed as radical or inexperienced. Bankers, watch out.
Fran Abrams
Above: trainee chefs—but will the recession permanently damage young people’s prospects?
The class of 1979 at Marple Hall County High School in Stockport, in my recollection at least, divided neatly into two groups. By and large, those of us whose parents owned their own homes went on into the sixth form; the ones who lived in council housing mostly left to start work. Jobs seemed easy to come by. Nicky, the most academic of the latter bunch, did an electrical apprenticeship. Colin, bright and personable, trained as a chef; Danno as a painter and decorator. As the rest of us took A-levels and went off to college and university, news of our old friends seeped through. Every time I went home another former classmate had hit the dole queue. The last time I saw Nicky, in the mid-1980s, he was sitting in the corner of our local pub, overweight, out of work and, I was told, filling his days with drugs.
I’ve thought about my schoolmates recently as youth unemployment has hit the headlines once more, and the clichéd phrase “a lost generation”—used in the 1980s and briefly in the early 1990s—has been pressed into service again. Nearly 1m 16-24 year olds are now “Neets”: not in education, employment or training. The figure has risen 14 per cent on the same quarter in 2008, leading to concern that a whole cohort of young people will suffer. But the real picture is a complicated one, in which some groups will be hit less hard than others and some may even prosper despite difficult circumstances.
Unemployment is rarely a good thing. Long periods out of work decrease attachment to the labour market; skills go rusty and the jobless are treated with suspicion by employers. But the case for a “lost generation” rests on a theory that unemployment, especially at the start of a working life, has effects that can last for years or even decades—even for those who do find jobs. This “scarring” theory (see box, p58) was first promoted in the early 1980s by American academic David Ellwood. One of its leading proponents is economist David Blanchflower, a former member of the Bank of England’s monetary policy committee, and one of the few experts who predicted this recession. He feels no need to pull his punches: “It does seem like a national crisis and a lost generation… it’s a big problem for society because young unmarried men who are unemployed commit crime. The public’s not going to be really happy with rising property crime; rising street crime. The cost of doing nothing looks very serious.”
Blanchflower published an academic paper in February 2009 using data from the National Child Development Study, which followed a large sample of children born in one week in 1958. His research suggested that while some people who lost jobs as factories and mines closed during the late 1970s and early 1980s recovered, the scars from early spells of being out of work persisted for many, even at the age of 46. Those who had been permanently in employment were more likely to be happy, healthy and satisfied with their work, while those who had spells of unemployment were still earning less than those who hadn’t. Blanchflower says that we could well see the same thing this time, especially given the depth of this recession.
Read more »
Tom Streithorst
Krugman: more popular than Springsteeen
My son says I’m a nerd. Maybe he’s right. When I heard that Paul Krugman, 2008 Nobel prize winner in economics, scourge of the Bush administration, op-ed writer for the New York Times, was giving three lectures at the LSE on our current financial crisis, I was thrilled. Krugman may not be the Cassandra of our economic debacle (that would be either Nouriel Roubini or the long dead Hyman Minsky) but his analysis remains head and shoulders above most academics—who still seem desperate to show that their failure to predict the popping bubble doesn’t prove the bankruptcy of orthodox theory.
I decide to go online the second tickets became available. Of course I don’t manage get to my computer until 12 minutes later and by then, all seats to all three nights are gone. Krugman proves to be a tougher ticket than Bruce Springsteen. I guess I’m not the only economics nerd in London. No worries, I think, I’ll get in on a press pass. I inveigle the editor of American Conservative (which for some reason, despite its right-wing name, seems happy to publish my musings on the perfidy of financiers) to request a press ticket. No go. No press tickets left. Even Prospect, who I tell I’ll blog for free if they get me in has no luck with the LSE press office. Somehow I sweet talk my way onto the reserve list and show up at 5pm, an hour and a half before The Professor is to speak, to try and worm my way in.
Already people are lined up. I ask Mahmud, a retired economics professor if he thought back in 2006 that the bubble would burst. He nods his head. He didn’t know when, of course, but he didn’t think the exuberance that Gordon Brown and Alan Greenspan had staked their reputations on would last forever. “You don’t need Keynes,” he tells me, “just common sense.”
Read more »
JONATHAN_FORD
Have Britain and the US become banana republics?
Lou Jiwei, the head of China’s sovereign wealth fund, raised a chuckle last December when he called on the World Bank to guarantee investments in the US and Europe, just as it does in developing nations, because investing in those places was no longer safe. But was the sage of Beijing so far wide of the mark to lump America et al in with the ropier emerging markets?
Not according to Simon Johnson, former chief economist of the IMF, who argues in an essay in the Atlantic that America (and by extension, Britain) are becoming like the sort of banana republics the agency so often has to wade in and save. Typically, Johnson observes, emerging market countries “are in a desperate economic situation for one simple reason.”
Read more »
Read 1 comments »
