Presentation on theme: "Understanding the economic crisis of 2007-2009: The role of ideology in explaining its causes and our prospects for the future."— Presentation transcript:
Understanding the economic crisis of 2007-2009: The role of ideology in explaining its causes and our prospects for the future
Greed is good “Since childhood you have been hiding the guilty secret that you feel no desire to be moral.... Accept the fact that the achievement of your happiness is the only moral purpose of your life” – Ayn Rand, Atlas Shrugged. “Creative individuals of undeviating purpose and rationality achieve joy and fulfilment. Parasites who persistently avoid either purpose or reason perish as they should” – Alan Greenspan, letter defending Ayn Rand to the editor of the New York Times, November 1957.
Policy consequences of the greed-is- good, rational self-interest ideology Markets work more-or-less perfectly most of the time But occasionally they go haywire When this happens the central bank: Floods the market with cash Slashes interest rates (if necessary) Quietly retires when conditions return to normal
Financial crises under Greenspan’s watch 1987 stock market crash Early 1990’s recession 1997 Asian crisis 1998 collapse of LTCM 2000 collapse of the great dot.com bubble Early 2000’s recession
Recession of the early 2000’s The U.S consumer spent the entire world out of a serious recession. Why? Widespread belief that greed-is-good works. Apart from occasional temporary upsets (panics, speculative bubbles and minor recessions) we will always have: Full employment A growing economy A world steadily growing in wealth and stability We can be confident of the future, so keep spending
Bernanke 2007 When US banks started to wobble in 2007 Bernanke applied the Greenspan magic: Providing liquidity to the market Cutting, and later slashing interest rates Prediction of almost all the experts (economists/regulators/politicians/business people/journalists): “There will be, at worst, a mild slowdown, and everything will be back to normal by Christmas 2007”
The Greenspan magic fails to work: the experts’ view by mid-2008 “We are facing the gravest financial crisis since the Great Depression” – Alastair Darling, UK Chancellor of the Exchequer
Greenspan 2008 Alan Greenspan, testimony before the House Committee, Washington, October 2008 – “I have found a flaw...I have been very distressed by that fact... Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself especially, are in a state of shocked disbelief”
Chairman – “You found that your view of the world, your ideology, was not working?” Greenspan- “Absolutely precisely. You know, that’s precisely the reason I was shocked, because I have been going for forty years or more with very considerable evidence that it was working exceptionally well”
Why is it different this time? The global banking system was not just temporarily short of liquidity. It was bust. Because of reckless lending over many years the global banking system was insolvent Because of reckless borrowing over many years a large proportion of households were insolvent.
The new approach: learn the lessons from history and do not repeat the mistakes of the Great Depression Banks allowed to fail Interest rates kept too high (“sound money policy”) Obsession with balancing the budget (“sound fiscal policy”)
Just do the opposite Save the banking system at any cost Slash interest rates to, or close to zero and keep them there Borrow or print money and spend it like a drunken sailor Keep doing all these things till the economy gets back to normal
Does greed-is-good work after all? Recently some encouraging figures Many economies now officially out of recession 80% of S&P500 companies beating profit expectations in the last quarter Chinese growth continues strongly Global stock markets more than 50% above their lows of March 2009 Even greater recovery in commodities markets
The pessimistic view The global economy is still too dependent on the US consumer. The US consumer will still be bust when Government stimulus packages run out of money. The official rate of unemployment in the US is over 10% Over one third of US homeowners are in negative equity No improvement in US home repossession figures To get back to “normal” US consumers must go back to borrowing and spending more than they earn
Nine credit cards to each consumer, with an average balance of $5,000 Even if they want to borrow and spend, the banks will no longer lend They changed the accounting rules: banks are reporting “profits” but they are still bust US companies are beating profits expectations only by cutting costs (firing their customers). There is no top line growth The growth in the stock market is just a liquidity driven bubble Prediction: Twenty years of slow to no economic growth. It will take a generation to pay down the trillions of dollars of public and private debts
Japanese Nikkei Stock Market Index The consequences of speculative bubbles happen in slow motion, and are played out over years, or decades.
Two world views Moral nihilism: the greed-is-good, rational self-interest world view The pursuit of one’s own desires is the only moral imperative In other words, there is really no such thing as morality The best society is one where each person rationally pursues their own self-interest without regard to any other objective whatsoever Moral realism: the religious (in the wide sense) world view Critical distinction between moral values (charity, mercy, forgiveness, compassion) and desires There exist objective moral truths, and wisdom consists in knowing what they are Good and bad actions have consequences (the Law of Fate, or Karma, or the Judgement of God) Though people have a right to enjoy the good things of this world, subject to the moral law A society without justice will not survive
The Consciousness Project Lead by the University of Southampton Faculty of Medicine and Southampton General Hospital Including 25 leading teaching hospitals and university medical schools worldwide To critically test the claims of out-of-body experiences reported by patients revived from clinical death There is a already substantial academic literature on survival after death, but it is currently too limited to give conclusive answers