Tuesday, 19 July 2011
Okay, then, what should we do?
So one of the main reactions to my doom-laden post yesterday was: okay then, mister-smart-academic, what shall we do about the economic crisis? It's all very well warning about what's wrong and what might be about to hit us, with the wisdom of the historian (such as it is). But we need solutions - things to do and say that might help.
So here goes. It's a one-two-three, really, and if it sounds simple, that's because we're now fairly close to the precipice and we need simplicity.
One. A deal is needed on Greek debt, right now. Today's absurb posturing by Germany's Chancellor, Angela Merkel (above), is not helpful. German banks have recklessly exposed themselves to great risks in Greece, and they as much as the Greeks need the aid. To pretend anything else is just crazy. What's the point of aiming to win another German federal election if you've presided over the break-up of Germans' cherished dreams of post-war economic and monetary union? Europe and the Euro need a way to roll over Greek debts, by voluntary agreement with the banks, right now - by the weekend, if possible. European interest rates on borrowing are going up everywhere - in Spain, Italy and Ireland. If they keep going up those states will default and leave the Euro. The currency will have failed. It's that simple.
Two. Congress needs to sort itself out. Time is still running out for an agreement between all parties in Washington to agree to raise the United States' arbitrary and absurd debt ceiling. It needn't be like this. Wiser heads, for instance Republicans in the Senate, have been calling for a budget compromise for some weeks now. But the extended game of chicken now being indulged in by everyone - President, Congressional Democrats, Tea Party absolutists - might still run us all over. Don't cut a deal in the next two weeks? The United States is in debt default. That might not be quite as bad as it sounds, but it's bad enough. A deal that swaps some tax rises for more spending cuts (roughly in a one for two ratio) might do it. Sure, lots of Republicans in the House might vote against. But wiser members should consider this: if the financial system goes down in flames, they, and not the President, will get the blame.
Three. Enough with the austerity, already. Individual national finance ministers need to rid themselves of 'oldthink' - the idea that they have to balance the national books, at all costs, and quickly. Chancellors such as George Osborne should listen to the growing clamour for a Plan B - cutting VAT, slowing spending cuts, announcing a National Insurance holiday, anything - before all of us racing to the bottom drags us all not only onto the pavement, but down into the gutter. National economies such as that of the UK - still one of the top six in the world - have an enormous contribution to make to world growth and financial stability. If we can't get together to convoy our way out of recession, to drag ourselves out of the hole that the financial irresponsibility of the few has thrown us in, chugging out of recession or depression gets that much harder.
In fact, overall, this three-step guide could be summed up as John Maynard Keynes outlined it all those years agao in the 1920s, and actually in the way that world leaders reacted to the financial crisis of 2008: just print money. Borrow. Smile and look confident. Dig a big hole and fill it full of money, just to employ people, if you have to. In the long run, there'll be inflation. But in the long run, of course we are all dead.
The alternative? An economic ice age that'll make the recessions of 1975-76, 1980-81 and 1991-92 look like jelly and ice cream.
If you need an economic historian to tell you this, of course, you really are in trouble. Over the next two weeks members of Congress, the Board of the European Central Bank, European Union Finance Ministers and heads of government have your job, your pension, and your fate, in their hands. That thought does not inspire confidence.
We'll probably swerve round the worst of the brick wall. In particular, billionaire financier George Soros has said again today that he thinks politicians in Washington will cut a deal in the end. He thinks they're just grandstanding, and should and will keep borrowing, both for the world's - and their country's - own good.
You'd better hope he's right.