Tuesday, 27 September 2011

From fixed bayonets to hand-to-hand fighting


Okay, okay, so I said I'd be away for only a week. It's been two, but who's counting? The hour-by-hour demands of the start of term have delayed my return, and to be honest there's not really been a moment to consider anything we usually ponder here - universities, economics, the history of public policy.

Sure, there are glimmers of hope. President Obama has been preaching his jobs message on a pre-campaign tour. European stock markets have risen on the hope that, at long, long last, the continent's politicians might cook up something - anything - that looks like a plan.

But overall, we need much, much more. We need a complete change of direction. For every step the developed world takes towards 'rectitude' - balanced budgets and debt repayment - is yet another riskier blocked dropped the giant and wobbling jenga-like brick tower that is the world economy.

For consider the history. Did this approach work in 1929-31, as the USA and then central Europe teetered on the brink of recession? Did it work in 1961-76, as the UK staggered under the weight of sterling holders' policy expectations and tried to avoid devaluation after devaluation? Did it work in 198-81, as a new breed of neo-liberal central bankers tried to 'squeeze inflation out of the system'? Did it help to avoid Britain's humiliating exit from the European Exchange Rate Mechanism in 1992? Did it allow Argentina to escape from a low-growth, high-debt trap between 1999 and 2002?

No. No, no, no, no, no and no. So that's a straight run of failures then.

Ben Bernanke (above), chairman of the US Federal Reserve, apparenty once spoke privately of 'going in with bayonets'.

The bayonets didn't work - partly because politicians had taken care to blunt them before the monetary authorities could rush over the top. They seem determined to hold to their terrifyingly self-destructive course whatever the facts before them.

Now it's time to throw the weapons aside and begin the hand-to-hand struggle. Cut taxes - especially on consumption. Print money. Hand it out as cash if you have to - for instance to small businesses via new state investment banks. Go slow on the deficit reduction. Agree and then build up vast inter-governmental funds to scare the markets off further speculation. Organise soft defaults and write-downs for Greece, and maybe Ireland, Portugal and Italy as well.

Above all, lead - look, sound and act confident. It's what Roosevelt did in the 1930s, with his fireside chats (starting with one on, er, 'the banking crisis'), and it never did him much harm. Governments are not helpless before the storm, just as they weren't in 1931-1932 and 2007-2008. If David Cameron's recent letter to the Eurozone's leaders recently had any virtue, it was here - in a clarion call for some action, right now if possible. Tomorrow might be too late.

Otherwise, we're all headed down the economic drain.

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