When policymakers ignored the alarm bells

November 07, 2011 03:39 pm | Updated 03:39 pm IST - Chennai

Chennai: 04/11/2011: The Hindu: Business Line: Book Value Column:
Title: Lost Decades, the making of America's Debt Crisis and the Long Recovery.
Author: Menzie D. Chin and Jeffry A. Frieden.

Chennai: 04/11/2011: The Hindu: Business Line: Book Value Column: Title: Lost Decades, the making of America's Debt Crisis and the Long Recovery. Author: Menzie D. Chin and Jeffry A. Frieden.

An ominous observation in ‘Lost Decades: The making of America’s debt crisis and the long recovery’ by Menzie D. Chinn and Jeffry A. Frieden (www.wwnorton.com) is that the losses of the past decade will be felt for most of the current one. Trillions of taxpayer dollars will be spent repairing the damage to the US financial system, the authors note. They rue that the country is giving up the equivalent of years of economic activity, with factories and millions of workers idle. “The cost in lost output of the downturn and slow recovery is calculated at $4 trillion, about $50,000 for the average family of four. Current estimates are that it will take at least until 2014 before the economy is back where it would have been without the collapse that began in 2007.”

Looking back, the authors find that over the past hundred years and more the world has experienced scores of financial crises that were strikingly similar to the current US debt crisis. They remind how governments from Argentina to Zambia, from Thailand to Mexico, from Russia to Ireland have made the same easy choice to encourage indebted expansions, and have then allowed their economies to collapse into debt-ridden crises. “In historical and comparative perspective, the American crisis is only unusual in its size; the country’s government policies exhibited the same pathological proclivities that have produced a procession of lost decades.”

Yet, in the authors’ view, there was nothing inevitable about the loss of the last decade. They reason that the loss was due to decisions made by governments, decisions that were too little motivated by concern for the public interest and too much motivated by political expediency. Conceding that certainly citizens could have been more vigilant, bankers more conscientious, and regulators more watchful, the authors see, however, the root of all the evil that befell the country in the irresponsible policies of the government, policies that encouraged a foreign borrowing binge and consumption boom, policies that allowed financial institutions to take inordinate risks with an implicit government guarantee, policies that gambled with taxpayer money.

Job of politicians

Importantly, the book underlines that it is unreasonable to expect average citizens to understand international macroeconomic relations, or the intricacies of fiscal and monetary policy, or financial regulation. And that it is the job of politicians and their appointees to guard against economic excess and financial distress, drawing on the advice of experts who understand the complexities of a modern economy.

The grim tale narrated in the book is about how the policymakers did not listen to the warnings sounded by the experts and academic authorities. As alarm bells about the future rang, the policymakers ignored them and justified inaction by pointing to the happy present, the authors recount. “This is hardly rare, and is understandable: voters do not normally reward politicians for slowing growth or restraining the economy. Nonetheless, it is the job of policymakers to make difficult choices, informed by knowledge and understanding that the average citizen does not have.”

It can be sombre to read in a chapter titled “The World’s Turn” that the US, by far the largest international debtor the world has ever seen, holds the rest of the world at its mercy. “Investors, financial institutions, pension funds, central banks, and sovereign wealth funds all over the world are owed huge amounts by the American government. Chances are that to some extent Americans will inflate and depreciate away at least part of its debt.” Quite aptly is cited John Maynard Keynes for the famous remark, “If you owe your bank manager a thousand pounds, you are at his mercy. If you owe him a million pounds, he is at your mercy.”

Instructive read for every finance professional who aspires to be a part of any solution to the global economic crisis rather than be instrumental in aggravating the same.



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