Following on from this, is another theme that came out of that seminar with media/City luminaries I went to the other day. One point that Anthony Hilton mentioned was the “global imbalance” issue. This is all about how the West, which is in net terms, up to its eyes in debt, has been living high on the hog thanks to oodles of surplus savings generated by countries such as China and Japan. In looking to figure out how to play the “global financial crisis blame game”, one argument goes like this: China, with its cheap exports, kept cheap by its artificially low and fixed exchange rate, earned huge amounts of money by selling this stuff to the West; in turn, the Chinese needed to reinvest the proceeds – there would be no point earning money you cannot spend – and they reinvested those proceeds in things like US government securities. As a result, long-term bond yields in the US fell, which enabled Mr and Mrs Westerner to renegotiate their long-term mortgages, release equity from their homes, and spend even more of their inflated wealth on – yes you guessed it – Chinese consumer goods. Result: a whacking great housing and consumer spending boom that inevitably crashed.
This argument sounds quite convincing. If it is true, then it also suggests that, contrary to what some of the critics of the Fed or other central banks might say, that there is not much that someone like Alan Greenspan could have actually done to curb domestic US monetary growth if there were such enormous inflows of hot money coming into the country’s debt markets from abroad. Well up to a point, Lord Copper. Much depends, I think, on what proportion of monetary growth in the West was driven by Asian inflows, and what was basically driven by domestic factors. I haven’t seen a lot of commentary on this.
If you buy the “Asian connection” argument, a problem, it seems to me, is that it would not have been realistic, for various reasons, for the US to have tried to curb these supposedly dangerous inflows of Asian money by protectionist measures such as capital controls or exchange controls. If one believes that capital and trade flows are good things, then imposing such controls would and could cause more damage than it solved. Exposure to capital flows has, in many ways, driven beneficial economic change.
But the argument about Asian money does suggest that had the Fed, etc, raised rates to curb inflationary pressures, all that would have achieved would have been to suck in even more Asian money from investors seeking a higher yield. But presumably, with higher rates, it would have curbed, and did eventually curb, US consumer spending, and hence dent the demand for Chinese and other non-US goods. China is now starting to feel the effects of the global slowdown rather sharply.
Even so, the “global imbalance” argument highlights the fact that in a world of fiat money without capital controls, it is now very hard for state central banks, even those with powers as wide as the Fed or the European Central Bank, to set interest rates effectively. Of course, the idea of a central bank setting rates for a complex economy is itself a version of state central planning. Globalisation has exposed its limitations.
One of the things I really want to ask Kevin Dowd at his Libertarian Alliance Chris R. Tame memorial lecture next week is how this sort of issue can be addressed. The “Asian dimension” to our current predicament could be the proverbial big gorilla in the living room. Or maybe it is just a small and rather distracting rodent.
Great piece. One of the things I, as a relatively leftist visitor to this site, find irritating in many discussions is how the crisis is down to the Credit Reinvestment Act, or government interventionism, or any other bugbear of the right. And for balance I find claims that it was due to evil business, or greed, or any obsession of the left.
The fact is that most if not all of those things contributed, as did this ‘global imbalance’ issue, and half a dozen other things that nobody is talking about. I’d *love* for it to just be one thing, because then we could just stop doing that and things would work out, but amazingly real life isn’t that simple.
Ack, forgot to finish the first paragraph – I meant to say that leftist slogans are equally annoying.
Paul, I greatly appreciate comments like yours. It makes doing this sort of thing worthwhile. There is a real danger at the moment that in reaction to the left’s attempt to create pantomime villains out of say, Royal Bank of Scotland’s ex CEO, the right will pin all the blame on Alan Greenspan/whoever. That is why we need to drill down to look at the underlying forces at work. (That is not to say, of course, that Goodwin or Greenspan don’t deserve some criticism).
But then again, as a visitor to this site, you probably know by now that right/left is not really a very good descriptor of philosophical/economic views anyway.
It’s perhaps a sign of my libertarian leanings that I don’t see what Fred Goodwin did wrong (regarding his pension, that is). I do think his compensation board should be placed in stocks in the market square though – not sure if that’s the leftist in me talking 🙂
And you’re correct, left/right is an oversimplification, but I’ve never been good at 11-dimensional analysis!
Paul, if you feel like expanding at all, I am curious what is it that you think makes you a “leftist”?
Alisa – I find it’s common to believe that libertarians (and economic conservatives generally) advocate as they do because they’re greedy, selfish, and don’t care about other people less fortunate or capable than themselves. I’m sure that for some this is actually the case, but for a great many (the ones I admire) they think that severely limiting government is actually the best way to help the poor, sick, etc.
I respect that viewpoint, and believe it has a lot of merit. I also think its inevitable that under such a system some people will fall through the cracks. I believe, therefore, that there is a role for government to provide a safety net (or as I like to think of it a lumpy safety mattress – you can’t fall through the holes, but you wouldn’t want to spend long sleeping there either).
Now I recognize absolutely that some people will fall through the cracks of a government system just as they would through a free market ‘system’. The reason I think I’m a leftist, then (at last!) is because I believe that even though the end result might be the same, it’s better to try and fail than to not true and still fail.
And that, I am afraid, is what holds me off from being on “the left”. Such a formulation reminds me of Samuel Johnson’s comment on getting married a second time: the triumph of hope over experience.
After decades of failed statist policies, it is hard in my view to sustain the view any longer than one can, as a matter of good faith, support more government controls over our lives. The track record of government performance is just too crushingly bad.
If we are to keep trying to better the lives of ourselves, friends and fellow citizens, statism is a dead end.
Johnathan – I don’t for a moment support more government controls over our lives. In fact I can’t readily think of a single area of our lives that I think the government should have the amount of control it does now, let alone more. Don’t forget that I didn’t claim to be a leftist, I just claimed that compared to the average visitor here I’m relatively leftist.
Could we be bending over backwards at the edge of a cliff hoping to avoid offending the oncoming horde of Socialists? Perhaps the Socialist vs Free Market war that has been going on since the 1900s is now being waged by wealthy and determined Green proponents. For instance consumption and population growth is especially offensive to this movement. This makes the capitalist system intolerable. This anti-capitalist movement is not acting out in the open.So the battle between Dems ad Repubs is like shadow boxing.We are waging the wrong war at the wrong place.
Yes Greenspan kept the interest rate too low for too long.Yes the low interest provoked investors to make riskier investments. Yes the Chinese made money that they chose to invest in stronger dollar tools.Yes the congressional business committee chairmen took advantage of the easy money situation. Yes poor people were led to buy unaffordable loans.Yes the economic crisis appears to have been inevitable.Yes the voters went for change.Yes,logically, the Fed are in the best position to advise us. Yes Obama is spending a lot of money in order to do something, anything.Even if the shadow boxers are jabbing us with each move.The shadow boxers are beating us because they have a plan and we don’t. We are expecting our government to stop the fall and start growing the economy again. That is not our government’s plan. They are planninf to change our fundamental way of life. Why else would they put a weakling like Geitner in charge of the war and then not even fill the the support positions necessary to do the job? Could it be a smart strong fed would be a threat to their plan to let our economy bottom out? After all the only buisness growing is the .gov business. The only people making money is the Federal Reserve.
So is intervention by the government indicated? Not this administration. Neither the Dems nor the Repubs want to fix this mess. They just want to insure they each get their share of the booty.
Thank you for your tolerance. Sorry for my ignorance on blogging. I just wanted to read you and share me.
Paul, what Jonathan said, plus:
Have you considered the possibility that in a free market system far fewer people would fall through the cracks?
I have tried to maintain a certain kind of hopeful attitude over these last several years, believing that, even if things looked pretty bad, cooler, wiser heads would prevail, and a return to the turmoil of the 1960’s and ’70’s was unlikely.
I was wrong.
It now appears that we in the west, and the US in particular, have embarked on a program of political, economic, and cultural suicide. I can think of no other description for the probable accumulated effects of the policies and programs now being enacted.
I realized the severity of my developing evaluation of the situation the other day while in conversation with my high schooler.
As we talked about college and potential careers, I found myself warning him very starkly that his generation was now facing the period in their lives similar to my parents confrontation with the depression and WW2, and my generations’ involvement with Vietnam and the economic turmoil of the “stagflation” ’70’s.
We are in the midst of the kind of multiple crises that will largely define and charaterize the current generation now coming of age. The period which they will refer to over and over again in their later lives as having burned certain images and ideas into their minds, both consciously and unconsciously.
Shannon Love at Chicagoboyz has been writing lately about the “China problem” also, but from a somewhat different perspective. I would be interested in his take on the points you have made in this post. His take was that we are handcuffing ourselves in our emerging energy/industrial policies, especially in regards to China.
It appears to me, however, that the problem is significantly larger and more pervasive than that. We are on the brink of rejecting many of the social/cultural/economic ideas that have resulted in the creation of the most powerful nation in history, and replacing them with ideas that have repeatedly undermined and destroyed the societies that have adopted them.
As Taggert says to Hedley Lamarr, “I am depressed.”
Alisa – absolutely, I’m sure that’s at least possible, and thar’s one reason why I believe the government should shrink radically. Nonetheless, some will still fall through, and and at that point I fall back on the idea that we need to try to help.
Right, but then there is another argument: even in such an extreme emergency situation where people are actually falling through the cracks, not only the government is incapable of making things better, it is in fact bound to make them worse, not only for the few unfortunate, but for the rest of us. And this is more than a mere possibility, but something for which there exists rather strong empirical evidence.
Oh, and Paul, I hope it doesn’t sound as if I am trying to pick on you or something, it’s just that you seem like someone who can be useful to check my thinking against his:-)
veryretired
Yes – what you say is true. We are trees in the storm – we will either whether it or crack.
Paul.
Community Reinvestment Act (and so on) – well such stuff did not help.
However, Ludwig Von Mises’ “Theory of Money and Credit” explaining how the expansion of the money supply (as governments and banks seek to expand lending beyond real savings) leads to a boom bust cycle – came out in 1912.
And David Hume (and so many others) were also writing about this matter long before Carter Administration – perhaps my rightwing brothers and sisters should take note.
As for bust – any effort to “help” at a time of a bust (to “maintain demand” or whatever) has terrible consequences.
In short the actions of Warren Harding in 1921 were correct – and the actions of Herbert “The Forgotten Progressive” Hoover after 1929 were wrong.
As for the actions being taken now – as veryretired has pointed out, they cut off all hope of real recovery.
We face terrible times.
On China :
Now there is a question.
As the stats are so hard to get (and just plain unreliable) it impossible to know what is the real state of the Chinese situation.
There may be a credit money bubble – or there may not .
I just do not know.
It is much worse than Alan Greenspan with his “we will save money by not publishing M3 statistics” (as Ron Paul noted at the time – if you think saving money was his motive I have a nice bridge to sell you), I have no idea what the monetary situation is in China.
Re China: Austrian economist Bob Murphy on his Free Advice blog comments on and quotes from a recent article in which former Australian Prime Minister criticised Geithner’s role in the IMF during the Asian crisis of the late 1990s. “Keating argued, Geithner’s misjudgment had done terminal damage to the credibility of the IMF, with seismic geoeconomic consequences: “The IMF is the gun that can’t shoot straight. They’ve been making a mess of things for the last 20-odd years, and the greatest mess they made was in east Asia in 1997-98, so much so that no east Asian state will put its head in the IMF noose.”
China, in particular, drew hard conclusions from the IMF’s mishandling of the Asian crisis. It decided that it would never allow itself to be dependent on the IMF, or the US, or the West generally, for its international solvency. Instead, it would build the biggest war chest the world had ever seen.
Keating continued: “This has all been noted inside the State Council of China and by the Politburo. And it’s one of the reasons, perhaps the principal reason, why convertibility of the renminbi remains off the agenda for China, and it’s why through a series of exchange-rate interventions each day that they’ve built these massive reserves….”
Murphy adds, “Anyway, even though I came out strongly against the “global savings glut” explanation for the housing boom, in some conversations with Bill Barnett and Tom Woods, I came around to the position that the Bank of China’s actions could have exacerbated Greenspan’s ridiculous interest rates in the early to mid-2000s.”
Read the whole thing.
Free-marketer Karl Dillinger aka The Market Ticker had a few interesting things to say about China, too, a while back. (Type China into the search box).
Alisa – Don’t worry, I don’t feel picked on, in fact I come here to be challenged because it’s done politely and intelligently, which is a rare commodity on some other sites.
I’d be interested in seeing the strong empirical evidence you mention. I agree that the more government tries to do, the less ably it seems to do it (and logically that should be no surprise). But in general what I’ve seen historically is that the further away from a mixed economy we get, the more likely we are to have people starving to death. While I’m not sure Communism has ever truly existed on a large scale, that which passes for it causes people to starve. Similarly when government provided few guarantees more people starved (I refer you to large swathes of British history, for example).
There are certainly many other factors that have caused such problems (on both sides) in the past that no longer apply to the same extent today; the invention of germ theory is a good one. But just as my principle objection to communism isn’t philosophical but practical (even if you think it’s a nice destination, and I don’t, you can’t get there from here), I object to libertarianism not because I wouldn’t like to live there, but because it depends on too many things all coming together, and too much human nature changing, to actually happen.
Marc, thanks very much for those links. Much appreciated.
Indeed, bookmarked.
Paul:
You don’t have to go too far, just mere 70 years back.
You have a point there, in fact, that is also a concern of mine. The good thing is though that it is not an “all or nothing” proposition. Even if we never achieve a totally libertarian society, the closer we get to it, the better we all are. In short, the more freedom, the better we all are. The less freedom, the worse. Government “safety net” means less freedom – worse for everyone.
Alisa – I’m not sure 70 years back is a great example; we were at the beginning of a terrible war, and war is about as statist as nations get.
I’m dubious of the claim that the closer we get to libertarianism the better we all are. First, it depends on the idea that things will balance out (e.g. that the provision govt. no longer makes for the poor will be balanced by cheaper medicines plus more charity). That might be true, but I don’t see the evidence for it.
Second, it assumes a linear relationship that I don’t have faith in. I can easily imagine that 5% government intervention and 95% libertarianism is better, worse, or about the same as 100% libertarianism, even while I believe that 55% libertarianism is 10% better than 50% libertarianism. That’s a lot of percentages, sorry! The point is that at the margins what we see as linear relationships often break down, becoming more of an S curve.
Paul, I never claimed a linear relationship in a wider context of wealth distribution. The only linear relationship is between individual liberty and individual level of production (i.e. freer individuals produce more and better), and the overall level of production (more freer individuals, more and better overall production). Back to the non-linear wealth distribution: the price of medicine may not drop (unlikely, but let’s assume), and charity levels may not rise (ditto). Still, even poorer individuals, by being freer, will have better opportunities to produce more and better, and thus profit more.
Alisa – I was inexpertly trying to make a point not about linearity, but about the expectation of improvement. If we cut government at the moment I’m pretty sure that would improve our overall lot. But if you cut it from 10% of the economy to 9% I don’t know if that would have any significant impact, just as if you increase it from 89% to 90% I don’t know it would make things much worse (things at that point effectively being as bad as they could be).
Anyway, back to the substance. I’m sure medicine prices would drop (though I don’t think it’s a given), and I think charity levels would rise (ditto). My concern is that those don’t rise sufficiently to balance the reduction in benefit from the state. In fact we can be pretty sure it won’t balance, the question is whether it will at least make up for the loss.
The issue you make about opportunity is something else I struggle with. I suspect that greatly reducing the role of government does increase notional freedom, but that doesn’t equate to opportunity. If I replace the requirement to get an education with the opportunity to get a better education (whether that be more rigorous or more appropriate to my ambition) there are plenty of people who will have to skip that opportunity to put food on the table or whatever. Opportunity isn’t inherently a wonderful thing unless you have the opportunity to pursue it 🙂
But that is the actual point of freedom: it’s not that freedom creates more schools, for example (although it probably does, directly or not), it’s that it gives an individual a better opportunity to get to those schools that exist. Of course you are right that there will always be opportunities that will go missing, because someone has to put bread on the table etc. But you forget that in order to free them from that particular obligation or another, someone else has to take it upon themselves. And that “someone else” is never the government, remember, it is other individuals who’s own opportunities get screwed. The bottom line is, life is never going to be perfect for everyone (or anyone, for that matter), but it can be made better, and the only way to do this is to give individuals the freedom to make it so. That is in no way to say that they should do it on their own, mind. In fact, that is close to impossible: we humans are at our best when we cooperate with each other. But the thing to remember is that cooperation only works when it is voluntary – it’s that freedom thing again, no way around it.
Alisa – I’ve clearly not understood your last comment. I’ll raise an additional question, and then you can put me right 🙂
In the UK currently every child has access to free (to them) schooling from 4-18. I doubt it’s possible to have a perfect school, but even by a reasonable measure I’m sure that most of those schools aren’t really great, and that many of the ones that are truly excellent are private* schools. Nevertheless, I think an average education for all and outstanding for some is better than an outstanding one for many, and no education at all for some. Although it’s rarely stated explicitly, the current system trades off what might be the maximal educational gain for the sum of all pupils in return for a lesser total, but a higher floor for each individual.
I can understand not agreeing with that trade off, but it seems a reasonable one to want to make. Do you find it an unreasonable trade off, or do you think it’s a valid but sub-optimal choice?
A sidebar that you’re free to ignore if you’re from the UK: Private schools here are called public schools, because in the early days of organizaed schooling most schools were private, meaning you had to belong to a church or some other organization to join them. Public schools were open to anyone, hence they were public; the only qualification required (assuming you were judged able enough) was money.
I certainly don’t agree with this trade off, and my disagreement is two-fold. One part is utilitarian: I don’t, by any means, equate real education with a formal one. I live in Israel, where we have a typical Western education system, and I honestly think that my 15 yo would be much better off outside it. Obviously, it does not apply to all children, but that is part of the point (i.e. one size never fits all). Now, before you interject, I don’t think that just because some other child might come from poorer and less educated background than mine, he would necessarily benefit more from the same system. I guess another way of saying this, is that if someone is suited for a particular system, he will get there, as long as participation is voluntary. Yes, it will boil down to charity, but why not?
The other part of my disagreement is moral: I think that individuals are ultimately responsible for themselves and their children until they grow up. I stick to this view even if the utilitarian argument doesn’t hold (which I am convinced it does). Again, this does not mean that they shouldn’t ask for help when times are rough, and that others shouldn’t help (and believe me, I’ve been there big time), but everything should be voluntary for things to work well.
To clarify even more (hopefully): even though the trade off seems reasonable, it really is not. For example, I see a real connection between the current financial crisis and the state of the Western education system, K12 included.
It’s an interesting argument, Alisa. There are a great many children who wouldn’t undergo schooling of any sort if it wasn’t compulsory (even free wouldn’t suffice). I’d struggle to believe that more than a handful of those would be best served by having no education, and certainly not to the extent that it would actually happen. The fact that they had the opportunity to a great education (if such opportunities existed) is no recompense to them.
Again, I’m not really leftist on this issue; I don’t care how parents educate their children (though I’m a governor at my local school because I think it does a great job), but I care deeply *that* they are educated, and more than just how to count to a dozen all day (I’ve served my time in a clothing factory!). And I want that to happen even if it means the average person is less well educated than they would be under a voluntary system, because maximizing the total education level does not maximize the total return from education.
It looks like we’d have to agree to disagree, at least for now.
Always happy to do that – I’m not trying to convert anyone. Thanks for pressing me!
Any time:-)
Many thanks to Mark Shaffner.
Follow-up on China. The Market Ticker is also bashing China, but for reasons different from some have been quoted in the press as saying. To my untutored mind, this does not square with the Ticker’s demand that bad debt be “crammed down” and insolvent banks be allowed to go bust: