10 years on we need to get the public on board with how policymakers responded.
As I’ve written before, the GFC was first and foremost an economic problem, and
a moral problem second. During the initial panic, and early in the recovery,
the economic problem must be dealt with first – emergency liquidity, targeted
bailouts, rock bottom interest rates, fiscal stimulus. THEN, once the economy
is on solid-footing again, the moral problem can be addressed – debt reduction,
financial regulation and oversight, and retribution against those responsible
can take place[1].
By and large, addressing the economic problem first is what
the US Federal Reserve and Government did. Consequently, unemployment peaked at
10% and the actual recession was short-lived. But there were subsequent
failures – both economic and moral. The fiscal support was short-lived and
inadequate, so the recovery took much longer than it should have. Furthermore,
financial sector reform – while things like the Dodd-Frank Act were a good
start – arguably didn’t go far enough to prevent a future crisis. And
importantly – and what most public opinion truly despised – virtually no one in
the financial sector was held accountable for the GFC. All the public saw was
bailouts, and bad people getting golden parachutes.
Consequently, despite the absolute necessity of these
emergency measures to stave off a much larger crisis (Depression 2.0), public opinion
now is very unfavourable to doing these things again if the occasion calls for
it.
But we can see what happens if policy is impotent during
such a crisis. The Great Depression was a great example – Central Banks obsessed
with maintaining their exchange rates relative to the Gold Standard, resulting
in higher interest rates, inadequate crisis liquidity and consequently, total financial
system collapse, Depression and widespread deflation, and 25% unemployment in
the US.
And following the GFC, Europe offers another case study of
policy impotence. The European Central Bank was slower to react in monetary
terms, more punitive measures were imposed against the banks, and governments reacted
in the reverse direction in fiscal terms with austerity. Consequently,
prolonged recession and deflation, and mass unemployment ensued, comparable
(even worse) than the Great Depression. One of the only silver linings was
Europe having a much more supportive social safety net this time around
compared to the Great Depression. So the human suffering and hardship could still have been worse.
As I’ve also mentioned before, public opinion matters. It’s not enough to say
that, as long as the right people are in power, they will do the right thing,
regardless of what ‘Joe Public’ thinks. I mean, Ben Bernanke faced scorched-earth
opposition to his crisis measures, but he still undertook them. But this is not
enough. Because if ‘Joe Public’ disapproves this time around, he will vote
accordingly, and during the next crisis we may see completely different types
in power. And that’s what we’ve seen. Following the GFC, a global wave of populism
has swept Europe, the US and even Australia. Brexit and Trump are merely the
most high-profile examples of this. But one of the telling characteristics of
such populism is a distrust of technical expertise – precisely the expertise
that is more likely to make the right decisions even when they are unpopular.
And if another crisis comes along (look out, Australia), and these new
populist powers refuse to provide the necessary (and often unpopular) support
because they find it simply unacceptable to bail out the financial sector
again, we are in trouble.
The public needs to be shown how these tough decisions were
the right ones. Yes, a lot more could have been done to speed up the recovery
(or in the case of Europe, not make things worse), reign in the financial
sector and punish those responsible. But if these new populist powers encounter
another crisis, and insist on addressing the morality issue before the economic
one, they will literally make the situation worse, especially for those they
claim to want to protect. And there will be no guarantee that those responsible
for the crisis in the first place will be caught up in the downward spiral.
Policymakers need to be able to quickly do the right thing without
having to justify it to politicians or the public. But once the dust settles, they
need to convince the public it was the right thing – before the time comes to do
the right thing again.
It’s always tempting to want to teach the bad guys a lesson –
but not at the expense of the rest of us.
Also see Catherine Rampell’s piece, Heaven help us in the next financial crisis.
[1] Technically,
as long as it doesn’t restart a panic and/or jeopardise the subsequent
recovery, regulation, oversight and retribution may begin sooner. But not debt
reduction.
No comments:
Post a Comment