10 October 2008
A Day Late and a Dollar Short
By Gwynne Dyer
Speaking on Friday, President George W. Bush assured Americans and the world that the medicine was working: the recent $700bn rescue plan for Wall Street would restore order in the markets. “We are a prosperous nation with immense resources and a wide range of tools at our disposal,” he said. “We are using these tools aggressively.”
Well, maybe, but the markets were not convinced. By the end of Friday the markets were down by an average of 7 percent from Tokyo to New York. Over the previous two weeks stocks on Wall Street had fallen by an average of 30 percent, and they are almost 50 percent down on this time last year. A lot of this has been driven by blind panic and herd psychology, of course, but there is certainly a case for saying that not enough is being done, especially in the United States, which is the origin and heart of the crisis.
One striking measure of the shortfall in the United States was the size of the rescue package for British banks that was announced in London on Wednesday. There are only one-fifth as many people in Britain as in the United States, and the British economy is about one-fifth the size of the American. British banks are probably holding proportionately less bad debt than American banks, and certainly not more. But the British rescue package was £500 billion ($875 billion), which is substantially bigger than the Bush administration’s.
In times like these, it is fashionable for despairing brokers and bankers to quote Rudyard Kipling’s poem “If” — or rather, to misquote it: “IF you can keep your head when all about you/Are losing theirs and blaming it on you/You simply don’t understand how bad the situation is.” It is entirely possible that the White House, concerned to downplay the scale of the crisis in the midst of an election campaign, is not frightened ENOUGH.
Consider what John Maynard Keynes wrote in 1931, two years after the Wall Street crash and some distance into the Great Depression that ensued: “The present signs suggest that the bankers of the world are bent on suicide. At every stage they have been unwilling to adopt a sufficiently drastic remedy. And by now matters have been allowed to go so far that it has become extraordinarily difficult to find any way out.”
When he wrote that, Keynes could not know that the Depression would get even worse and last for almost a decade, but he knew that it was already too late for a quick fix. This time around at least the governments are willing to get directly involved in saving the banks and other financial institutions from paying the full cost of their folly, which is why ninety-nine out of a hundred observers will tell you that there will not be another Depression.
They are probably right, but there is a depressingly similar pattern of too little, too late in the actions of governments in the face of this crisis. The rescue packages that are on the table now would have fixed most of the problem if they had been available three months ago. The packages that will probably be on the table in two weeks’ time would save the situation now. But politicians are just as scared of the voters as the bankers were of their shareholders, and so they do nothing big or radical until the last possible moment.
There are still lots of reasons to believe that no replay of the Great Depression is in the offing. Not only are governments now willing to save failing banks, but they do understand (thanks mainly to Keynes) that balancing the budget and cutting spending are the worst things to do when tax revenues start to fall. Running up enormous deficits when the economy is growing, as the Bush administration did, is fiscal lunacy, but deficit spending is the best cure for a shrinking economy.
Other differences from the time of the Great Crash include the fact that there is now international cooperation on financial and economic issues, not the intense national hatreds that led to the beggar-my-neighbour trade barriers and currency devaluations of the 1930s. (World trade halved between 1929 and 1939.)
We are also the beneficiaries of the longest period of sustained growth that the world has ever known (over sixty years of it, by now), not the shell-shocked survivors of the First World War, which destroyed half of the accumulated wealth of the 19th century. And there is a “consumer of last resort” to keep world demand from shrivelling up entirely: China.
So we’re not heading for a repeat of the Great Depression, but every day that passes with lending frozen, prices collapsing and confidence evaporating before this global financial panic bottoms out will cost us a month of painful days on the way back up. Delay has a very high price at the moment.
If the current hesitancy in the United States persists, we may well end up with a Great Recession, worse than anything since the 1970s. Not 25 percent of the population out of work for most of a decade (as it was in the 1930s in the United States, where the pain was worst), but quite possibly 10 percent unemployment for two or three years. Not an attractive prospect.
To shorten to 725 words, omit paragraphs 9 and 10. (“Other…China”)