The stock market seems to have decided that the worst is over. Share prices have rocketed since their lows in early March. The bears are puzzled and discouraged. Whisper it softly, say the bulls, but the odd green shoot is to be seen.
It's a nice thought. But does it really reflect much more than the need to end the psychologically crushing barrage of bad news?
Of course, amid the welter of economic indicators, it is hard to tell exactly where we are in this crisis. But by one important measure we are not at the end of the beginning, let alone the beginning of the end. And that measure is crunchiness. The concept was coined over two decades ago by the journalist Nico Colchester to describe systems "in which small changes have big effects leaving those affected by them in no doubt whether they are up or down, rich or broke, winning or losing, dead or alive."
Crunchiness, he observed, brought wealth. But it was not a permanent state. It came in cycles as "wealth leads to sogginess. Sogginess brings poverty. Poverty creates crunchiness."
There have been few truly crunchy moments in this crisis. The biggie was, of course, the collapse of Lehman Brothers last September. This is now widely decried as a misstep. But everything else about the official response has been—well—distinctly soggy.
In Britain, money has been chucked willy-nilly at banks, without clear conditions being set as to its acceptance. Inadequate returns have been sought for the risks the taxpayer is running. The government shamefacedly admits that its largesse will cost the taxpayer £50bn. The true total is almost certainly higher.
In the US, for all the sound and fury on Capitol Hill, the picture is scarcely more encouraging. There, the administration is offering to lend financial institutions up to 93 per cent of the money to buy up bad banking assets. Yet while the state is shouldering almost all of the risk, it keeps only 50 per cent of the profits if the bet pays off. Wasn't this sort of excessive leverage and asymmetric risk-taking responsible for the mess in the first place?
If sogginess got us into trouble, it is hard to see how it can dig us out too. The evidence suggests that our soggy responses will beggar us further rather than creating the platform for future prosperity. Japan took the soggy course in the 1990s, with banks hiding their losses and governments throwing money at a misfiring economy in wave after wave of futile stimulus packages. Even now its stock market stands at 77 per cent below its 1989 peak.
"A crunchy policy is not necessarily right, only more certain than a soggy one to deliver the results that it deserves," wrote Colchester. And what is clear is that most of the challenges ahead require bags of crunchiness. Britain and America will need to accomplish the largest reduction in government expenditure since the second world war. The financial sector, seen by both countries as the fountainheads of their prosperity, will have to shrink. And their citizens will have to spend less and save more. These are unpleasant remedies, but necessary ones. The real lesson is that we don't need to reinvent capitalism. We just need to make it crunchy again.
We are all emerging markets now
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—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders."
Sound familiar? Think of the way the financial sector jigged the rules in its favour and the manner in which it has been rescued. And it gets worse. Johnson argues that financiers in the US, who created the crisis, are now using their influence to prevent precisely the sorts of reforms that are needed to pull the economy out of its nosedive just like emerging market oligarchs. "The government seems helpless, or unwilling, to stop them," he says. Once this sort of thing gets entrenched, the only thing separating us from Latin America is sun and an annual carnival.
Johnson observes that, with his IMF hat on, he wouldn't advocate stepping in to rescue the US or Britain until they had proven themselves willing to confront the financial oligarchs and shrink their swollen and risk-prone sector. As Britain could conceivably need support at some point, that's a tad worrying. Last year, I argued in Prospect ("A greedy giant out of control," November 2008) that the financial sector was too big and needed to shrink dramatically. The time for shrinkage is now.
