Tuesday, June 23, 2009

What he said

I mostly agree with Simon Johnson:

There are two views of the global financial crisis and – more importantly – of what comes next.  The first is shared by almost all officials and underpins government thinking in the United States, the remainder of the G7, Western Europe, and beyond.  The second is quite unofficial – no government official has yet been found anywhere near this position.  Yet versions of this unofficial view have a great deal of support and may even be gaining traction over time as events unfold.

The official view is that a rare and unfortunate accident occurred in the fall of 2008.  The heart of the world's financial system, in and around the United States, suddenly became unstable.  Presumably this instability had a cause – and most official statements begin with "the crisis had many causes" – but this is less important than the need for immediate and overwhelming macroeconomic policy action.


The second view, of course, is rather more skeptical regarding whether we are really out of crisis in any meaningful sense.  In this view, the underlying cause of the crisis is much simpler – the economic supersizing of finance in the United States and elsewhere, as manifest particularly in the rise of big banks to positions of extraordinary political and cultural power.

If the size, nature, and clout of finance is the problem, then the official view is nothing close to a solution.  At best, pumping resources into the financial sector delays the day of reckoning and likely increases its costs.  More likely, the Mother of All Bailouts is storing up serious problems for the near-term future.

Finance has become unsustainably large.  Remember, while finance up to a certain level is win-win, producing profits for itself and better allocation of resources for the overall economy, it eventually becomes just like friction in a mechanical system.   When do the benefits outweigh the costs?  Hard to say, but a good guess would be when financial profits are 10% of corporate profits, not 40%.  It's pretty hard to read stories about Goldman already breaking records in bonuses and conclude that anything fundamental has changed.

But then what do you expect when the savers and the investors are so far apart?  Sure, better regulation in the US would help, but what we really desperately need is a fiancial system in CHINA.  How can you have China save money, pass it to the US, pump it through housing and consumer spending back into the Chinese export mafia, and not expect some of it to get lost?  This is the most inefficient and backasswards global financial system I can imagine, so it shouldn't come as a shocker that a lot of the money goes up in smoke.  We can argue over whether Geithner and Obama are doing the right things or doing enough to re-regulate American finance, but it's clear that the bigger elephant in the room is not being addressed, and is in fact un-addressable without bringing China into economic and political modernity in a more sustainable way.  Until we face this problem or until China starts to develop it's own internal mechanisms for mitigaitng it, we should expect the road to be a very bumpy status quo.

No comments: