'a word on financial failure' - episode 1: A new hope?

Paul has made it quite clear that if I do not make a post soon, there will be tears and shouting and name-calling and general crankiness. Truth is, I've wanted to post, but there has been many essays to write for university, and there has been no time left for poorly-worded, half-baked expositions on obscure topics. But for both the readers of A WORD ON FAILURE - Do not fear, I am back and I am opinionated. At least,I am back until it is time to study law.

I write this post with a certain trepidation that upon reading it people will realise that although I am three years into an economics degree, I am about as competent at economics as Robert Mugabe is at fostering democracy in Zimbabwe. And I also realise that I am posting about things that for the most part happened a couple of weeks ago (reflecting the fact I havent had time to see what I could plagarise from various newspapers for a while). But a friend has been bugging me for weeks to tell him what I thought of the financial crisis, the bailout, and the general sense of epic fail that is gripping the world economy. And to be honest, its a pretty scary thing. Hearing the rhetoric that we could be headed for another Great Depression, or that the entire concept of 'finance' as an industry, a business, an ideology, a whatever is ripe for collapse isn't the sort of thing you expect, or want to hear in your lifetime. I guess having lived through a long sustained period of global economic growth, the temptation is to feel that 'sweet, the world leader's have figured out how economics works and capitalism is going to make sure that my tasty peice of success pie is going to grow bigger and bigger'. No one wants to hear that there might not be any pie for you at all anymore.

My thoughts about the financial crisis fall into three, largely unrelated areas.Because I dont want to subject you kids to the longest post in the history of blogging, I'm going to sorta pull a Paul, and break it into two parts. Today's post will focus on how the crisis has been exacerbated by world leaders forgetting that in crisises we expect them to ooze confidence, and lead - not look like they have actually run out of ideas and wish that someone else could be the president, just for today. My next post will outline the poor standard of discussion relating to economic issues in modern democratic politics and how viewing economic issues through a lens of political idealogy rather than economic pragmatism added to this financial mess.I'd also quite like to outline the massive and understated role played by central banks in a country's democratic politics. Sound Exciting? Dont worry, Ill be back to ripping into McCain-Failin08 soon, promise.

Firstly, lets talk about pessimism. Of course, one would expect pessimism from certain sectors of society. For the media, headlines like 'Nightmare on Wall St.' are every aspiring PUNdit's (c wat i did thar) wet dream, even if they do offer the image of zombie stockbrokers eating each others brains. We can legitimately expect that Joe Public will be quite pessimistic about the whole thing, due to the collapse of the complex, distant and elitist world of high-finance, ordinary people are now rightly worried about their jobs, their homes and their families. But what is unusual in this crisis, and a cause for concern is the pessimism emanating from the desks of world leaders.

Economic activity and performance is driven as much by people's perceptions and expectations as anything else. If people are optimistic, they will buy things and invest in things, which will lead to other people having money to also buy and invest in things, which means more jobs, more money, jobs, money .... yey, economic growth. If people think the economic apocalypse is upon us, they will not buy things - which means that there is less money for other people to buy things, which equals less jobs, less investment and more sad faces. So...obviously, the idea is to keep ordinary consumers like you and me being as optimistic for as long as possible, so we keep buying and keep the economy strong. Because once we think (or know) the economy is about as solid as the Black Caps batting line-up, then the economic situation gets much, much worse.

Just for the record, I didnt come up with this idea. John Maynard Keynes did, and while I know this logic seems Colbertian in its application (if you tell people something is good, then it IS good). but I think it makes sense, and has been proven to work. (If not convinced, you can read about by following this nice link here and here.) Nixon responded to economic downturn in the 1970's by saying 'well, if I had money I'd be putting it in shares right now'. This is largely credited with helping to stablise and revive the economy.

I can appreciate that 'lying to people' isnt a good political look, and being to support an economy that experts say is tanking can be seen to invite electoral disaster with opponents able to potray you as out of touch, out of ideas and a key architech of the problems in the first place. And in the case of George Dubya, after eight years of presiding over the complete and total failure of his Administrations neoconservative ideologies, if he were to give a Nixonian endorsement of the economy, we would probably see the Dow plunge to zero overnight and the sight of hundreds of thousands of stockbrokers committing a lemming-like group suicide.

But if lying to people is politically risky, it is sometimes economically necessary. And besides, what is always economically and politically disastrous is to have your leadership fail when the people who elect you depend on it most. In this financial crisis, the leadership on the issue has reminded me of a possum in the headlights of a large SUV. Leaders the world over have stressed the severity and the generally apocalyptic nature of the crisis, but have been less good at showcasing that they have a plan for economic renewal, or worse - that they even really understand the full extent of whats going on. Perhaps its exceptionally bad-timing that the full force of this financial hurricane should hit as a number of fading governments in the western world come up for re-election. It gives a hungry opposition a vast number of political points in tagging the encumbent government to the economic disaster, and forces the government to focus their energies on defending their record and their economic plans rather than proposing new solutions.

Nowhere has leadership failed more, and being more damagingly pessimistic that in the Bush Administration. Bush gave a key speech on September 24 to outline a prescription for economic recovery. John Stewart, in a victory for infinite LOLz, was able to show his rhetoric on the Iraq war and the economic clusterfuck were depressingly similar. This is a man who clearly can't wait to get back to his ranch in Crawford and pretend the whole last eight years never happened. I guess being told most of the world hates your guts on a daily basis must hurt your feelings after a while. Henry Paulson and Ben Bernanke, two very capable, very intelligent men, have given the impression of being two scared and confused little economists trying anything and everything that will work in case it sticks. Bear Sterns was considered too important to fail, but saving it didnt stop the bleeding. Lehman brothers was allowed to fail, in the hope that appealing to capitalist 'take bad risks, take the hit' idealogy, would allow the market to correct itself. It allowed the market to grade itself an F, and fall in a drunken heap on the floor. People got scared of the continuing market upheaval, and became increasingly pessimistic. The Keynesian 'animal spirits' had define the marketplace were the spirits of sloths and slugs.

The final ace-in-the-hole, the $700 billion dollar 'bailout' plan, offered a very good plan of what to do, in buying up all the bad 'securities'. But Paulson and Bernanke did not to a very good job of explaining how this plan would fix the economy, and why people should be optimistic. Indeed, their rhetoric seemed to be 'fuck, we gotta do something or we are all doomed lol'.

Economic busts cannot be truly righted until people feel their money in safe and institutions and thats its ok to go outside and spend some money again. That requires politicians to retain faith in their economic system, hope like hell the fundamentals of the economy are strong, and that the storm can be weathered. In America, we saw the exact opposite - a financial system pilloried by everyone from both inside and outside, and the result has been chaos.

Still, the bailout was a good, economically pragmatic idea. Its failure to pass the first time round was an unmitigated disaster. It also shows evidence of the problems democracies face in discussing and planning economic policy. But cos I really want to get back to studying contract law, a discussion of that will have to wait till next time.

Alex.