Expect little or nothing from meetings like the G20 – or the Obama Administration

Summary:  Two bright lights shine amidst the torrent of bad economic news.  First the G20 meeting.  Second, President-Elect Obama’s new team at the Treasury Department.  I suggest that we avoid disappointment by expecting little from either.  We are far “off the map”, with little in history or economic theory to guide us.  Only time and much work can reveal the path we should take.  Politicians and the public will demand immediate solutions; quacks will provide them.

There is no why here

Few people realize the oddness of recent economic events.  The current hot jargon calls these black swans – Nissam Taleb’s term for a “large-impact, hard-to-predict, and rare event beyond the realm of normal expectations.”  But after months of such events, one after another, some observers have declared that these days all swans are black (see “Black Swans Become Norm, Instead of Exception” by William Pesek at Bloomberg, and Envast Gold’s poem “All Swans are Black“).

The bizarre strangeness of current events suggests that we have moved into the “twilight zone.”  The Twilight Zone is that place where there is no why.  As in Primo Levi’s Survival in Auschwitz:

Driven by thirst I eyed a fine icicle hanging outside the window, within hand’s reach. I opened the window and broke off the icicle but at once a large, heavy guard prowling outside brutally snatched it away from me. ‘Warum?’ I asked him in my poor German. ‘Hier ist kein warum’ (there is is no why here), he replied, pushing me inside with a shove.

This quote is used far out of its original context, but captures the feel of today’s events.  In this strangeness is a key to the situation:  we are “off the map”, outside of the precedents of history and conventional economic theory.

  1. Our situation is largely unlike anything previously experienced:  a global deflationary event.  This has some similarities to the 1930’s, but the world has changed too much since then for those to tell us much.
  2. It is a paradigm crisis for the dominant paradigm of economics.  This collapse in a sense results from us traveling to the boundaries of Keynesian theory, which does not adequately deal with unsustainably large aggregate debt levels.

Implications

The easy analysis is to blame Ben Bernanke and Hank Paulson for their in adequate or wrong response to the crisis.  This site has many posts doing exactly that.  While justified, there is (as always) another perspective.

Bernanke and Paulson were the A-team, by any objective criteria.  Their failure indicates more than two individuals pushed beyond their limits.  This is a systematic failure, much like the Hoover Administration’s failure — and that of FDR’s Administration (they mitigated the downturn, but only WWII ended it).  The economic paradigm of 1929 was inadequate (Keynes published The General Theory of Employment, Interest, and Money in 1936).  Almost anyone in their chairs might have failed.  Even FDR — as seen in his warnings about inflation during the 1932 election and attempts to balance the budget during 1933-1938.

My conclusions:

  1. Let’s not expect too much from Obama’s new team.
  2. Their only “new” knowledge is that their predecessors’ programs failed.  They bring no magic to the game.
  3. We can expect aggressive use of fiscal and monetary policy.  What else can they do?
  4. I doubt these will do more than slow the decline and mitigate the damage.

I discuss this in more detail at “The new President will need new solutions for the economic crisis.”

The G-20 conference, and the many conferences to follow

Expectations were high for last month’s IMF and G-7 conferences.  Ditto for this weekend’s G-20 conference.  The Economist explains the reason for the excitement, and the inevitable disappointment (”After the Fall“, 13 November 2008 — bold emphasis added).

THE leaders arriving in Washington, DC, for this weekend’s economic summit are being presumptuous. If they want what they are calling Bretton Woods 2 to live up to the original, which took place in New Hampshire overshadowed by war and the Depression, it will have to establish a new economic order for the capitalist world. In 1944 that meant creating the IMF, the World Bank and a body to oversee world trade. Imagine Hank Paulson, America’s treasury secretary, as John Maynard Keynes; or picture Gordon Brown, Britain’s prime minister, as Winston Churchill (as Mr Brown himself secretly may), and you get a sense of the task ahead.

The Bretton Woodsmen of 2008 are grabbing the credit before they have earned it – rather as all those subprime householders did. More than two years of gruelling technical work laid the ground for the wartime conference of officials and finance ministers (prime ministers and presidents had other things to deal with). By contrast, the leaders gathering this weekend from the G20, a mix of industrial and emerging countries, plus the European Union, have cobbled together an agenda in a few frenetic weeks. They will doubtless produce no shortage of promises. Just what these are worth will depend on sweat and summits yet to come.

The summit is sure to stir up a debate about the institutions that oversee the international economy. By convening the G20 rather than the closed, rich club of the G7, the old order has in effect acknowledged that the rest of the world has become too important to bar from the room. But what new order should take its place? Answering that question has been a parlour game for economists since long before the crisis. By encouraging them to dust off their pet ideas, the summit will at the very least create a bull market in new schemes for global economic governance.

Because everyone agrees that something big needs fixing and that the world expects action, calling the summit Bretton Woods 2 could yet come to be seen as a rallying cry for reform. And yet there are lots of reasons to see it as vainglory. The agenda is vague and sprawling. With so many of the world’s political leaders sitting around the table, it will be hard to escape platitudes and hypocrisy. There may be disagreements-especially where sovereignty or competitiveness is threatened. And most of all, the recent international financial collaboration is fraught with in-fighting and complexity.

Bretton Woods’ epochal results were built on

  1. Four decades of searing events, war followed by inflation followed by depression followed by war,
  2. decades of profound theoretical work in economics, along with the data from the Depression, and
  3. a unique historical moment of absolute hegemony, America leading the Allies to total victory in WWII – along with the devastation of every other major nation.

Bretton Woods closed an era of massive, rapid, and painful change.  Agreement for a new era was not easy even then, but possible.  None of these preconditions exist today.

A historical note

Are we ready for reform, to give up the vices which have brought us to this point and adopt often unpleasant new ways?  This is a common situation in history.  Titus Livius (aka Livy) wrote about such a time in the Preface to his History of Rome:

The subjects to which I would ask each of my readers to devote his earnest attention are these – the life and morals of the community; the men and the qualities by which through domestic policy and foreign war dominion was won and extended. Then as the standard of morality gradually lowers, let him follow the decay of the national character, observing how at first it slowly sinks, then slips downward more and more rapidly, and finally begins to plunge into headlong ruin, until he reaches these days, in which we can bear neither our vices nor their remedies.

Afterword

If you are new to this site, please glance at the archives below.  You may find answers to your questions in these.

Please share your comments by posting below.  Per the FM site’s Comment Policy, please make them brief (250 words max), civil, and relevant to this post.  Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

For more information from the FM site

To read other articles about these things, see the FM reference page on the right side menu bar.  Of esp relevance to this topic:

Posts discussing some solutions:

  1. A happy ending to the current economic recession, 12 February 2008 – The political actions which might end this downturn, and their long-term implications.
  2. Slow steps to nationalizing the US financial sector, 7 April 2008 — How this will change our society.
  3. Slowly a few voices are raised about the pending theft of taxpayer money, 21 September 2008
  4. How should we respond to the crisis?, 24 September 2008
  5. A solution to our financial crisis, 25 September 2008
  6. A quick guide to the “Emergency Economic Stabilization Act of 2008″, 29 September 2008
  7. The Paulson Plan will buy assets cheap, just as all good cons offer easy money to the marks, 30 September 2008
  8. The last opportunity for effective action before disaster strikes, 3 October 2008
  9. Prof Roubini prescribes first aid for America’s economy, 4 October 2008
  10. Effective treatment for this crisis will come with “The Master Settlement of 2009″, 5 October 2008
  11. Dr. Bush, stabilize the economy – stat!, 7 October 2008
  12. The new President will need new solutions for the economic crisis, 9 October 2008
  13. Results from the IMF meeting – just thin gruel, 12 October 2008
  14. The G-7 meeting was the last chance for action before the global recession, 12 October 2008
  15. A brief note about our financial system: Intermediation, disintermediation, and soon re-intermediation, 16 October 2008
  16. New recommendations to solve our financial crisis (and I admit that I was wrong), 23 October 2008
  17. A look ahead to the end of this financial crisis, 30 October 2008
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Originally published at Fabius Maximus and reproduced here with the author’s permission.