我们的双底衰退未来

We are at a moment when the range of uncertainties facing the global economy is unusually wide. We have just passed through the worst financial crisis since World War II. The only relevant comparisons are with the Japanese real-estate bubble, which burst in 1991 (and from which Japan has not recovered), and the Great Depression of the 1930’s – except that this crisis has been quantitatively much larger and qualitatively different.

Unlike the Japanese experience, this crisis involved the entire world, rather than being confined to a single country. And, unlike the Great Depression, this time the financial system was put on artificial life-support, rather than being allowed to collapse.

In fact, the magnitude of the problem today is even greater than during the Great Depression. In 1929, total credit outstanding in the United States was 160% of GDP, and it rose to 250% by 1932. In 2008, we started at 365% – and this calculation leaves out the pervasive use of derivatives, which was absent in the 1930’s.

Despite this, artificial life-support has worked. Barely a year after the bankruptcy of Lehman Brothers, financial markets have stabilized, stock markets have rebounded, and the economy is showing signs of recovery. People want to return to business as usual – and to think of the Crash of 2008 as a bad dream.

Unfortunately, the recovery is liable to run out of steam, and may even be followed by a second economic downturn, though I am not sure whether it will occur in 2010 or 2011.

My views are far from unique, but they are at variance with the prevailing mood. The longer the turnaround lasts, the more people will believe that it will continue. But in my judgment, this is characteristic of far-from-equilibrium situations when perceptions tend to lag behind reality.

To complicate matters, the lag works in both directions. Most people have not yet realized that this crisis is different from previous ones – that we are at the end of an era. Others – including me – failed to anticipate the extent of the rebound.

Overall, the international financial authorities have handled this crisis the same way as they handled previous ones: they bailed out failing institutions and applied monetary and fiscal stimulus. But this crisis was much bigger, and the same techniques did not work. The failed rescue of Lehman Brothers was a game-changing event: financial markets actually ceased to function.

This meant that governments had to effectively guarantee that no other institution whose collapse could endanger the system would be allowed to fail. That is when the crisis spread to the periphery of the world economy, because countries on the periphery could not provide equally credible guarantees.

Eastern Europe was the worst hit. Countries at the center used their central banks’ strong balance sheets to pump money into the system and to guarantee the liabilities of commercial banks, while governments engaged in deficit financing to stimulate the economy on an unprecedented scale.

But the growing belief that the global financial system has escaped collapse, and that we are slowly returning to business as usual, is a grave misinterpretation of the current situation. Humpty Dumpty cannot be put together again.

The globalization of financial markets that took place since the 1980’s allowed financial capital to move freely around the world, making it difficult to tax or regulate. This put financial capital in a privileged position: governments had to pay more attention to the requirements of international capital than to the aspirations of their own people. Individual countries found it difficult to offer resistance.

But the global financial system that emerged was fundamentally unstable, because it was built on the false premise that financial markets can be safely left to their own devices. That is why it broke down, and that is why it cannot be put together again.

Global markets need global regulations, but the regulations that are currently in force are rooted in the principle of national sovereignty. There are some international agreements, notably the Basel Accords on minimum capital requirements; and there is also good cooperation among market regulators. But the source of the authority is always the sovereign state.

This means that it is not enough to restart a mechanism that has stalled; we need to create a regulatory mechanism that has never existed. As things stand now, each country’s financial system is being sustained and supported by its own government. But governments are primarily concerned with their own economies. This gives rise to what may be called financial protectionism, which threatens to disrupt and perhaps destroy global financial markets. British regulators will never again rely on the Icelandic authorities, and Eastern European countries will be reluctant to remain dependent on foreign-owned banks.

So regulations must become international in scope. Otherwise, global financial markets will be destroyed by regulatory arbitrage. Businesses would move to countries where the regulatory climate is the most benign, exposing other countries to risks that they cannot afford to run.

Globalization was successful because it forced countries to remove regulations; but the process does not work in reverse. It will be difficult to get countries to agree on uniform regulations. Different countries have different interests, which drive them towards different solutions.

This can be seen in Europe, where the European Union’s member states cannot agree among themselves on a uniform set of financial rules. How, then, can the rest of the world?

In the 1930’s, trade protectionism made a bad situation worse. In today’s global economy, the rise of financial protectionism constitutes a greater danger.