Thu, Mar 05, 2009 page9

• We need yesterday’s heroes

  Major world economic bodies, which had taken a back seat during recent decades of obeisance to the wisdom of financial markets, need to come to the forefront as part of any constructive solution to the present crisis

  • By Bill Keegan / THE GUARDIAN
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  John Maynard Keynes was no socialist. He had seen Soviet communism at work first hand and, unlike some of his contemporaries, drew the right conclusions. In common with Joseph Schumpeter — one of his many intellectual sparring partners — Keynes wished to save capitalism from itself. Schumpeter was a greater believer than Keynes in the so-called “creative destruction” of capitalism but, interestingly, more gloomy about its future.

  For decades after World War II, what were loosely termed “Keynesian” economic policies reigned supreme. These involved reasonably enlightened attempts to tame the excesses of the business cycle (to mitigate the harmful effects of boom and bust, not necessarily to eliminate them) and a serious effort at international cooperation, always under the aegis of the strongest economy by far: the US.

  It was never the golden age it is sometimes painted as being, but it certainly had a lot of silver linings. Even when Keynesianism ran into trouble in the 1970s — could it cure inflation? Was it even the cause of inflation? — there were others, including neo-liberal and monetarists, who believed they knew the answers.

  

  But the present world economic crisis has come as a shock. Even those who predicted that it would all end in tears did not appreciate how many buckets would be needed for those tears.

  GLOOM

  Now, before I embarked on this column, my eldest son Harry rang me to say he was fed up with reading about all the gloom and wanted something constructive. I like to think that this was not a personal attack, but I am conscious that in trying to tell it as it is, I am open to such accusations. But let me also tell you that I have received several extremely gloomy letters recently from people I respect, reminding me that a return to full employment after the Great Depression was not brought about by a conversion to full-blooded Keynesian policies but by World War II.

  But the war also brought us the welfare state and the 1944 Bretton Woods conference, leading to the IMF, the World Bank, the General Agreement on Tariffs and Trade (now the WTO) and a body to implement the Marshall Plan for the reconstruction of Europe. This body evolved into the Organization for Economic Cooperation and Development.

  Such institutions have taken a back seat during the recent decades of obeisance to the wisdom of financial markets, but they will have to come to the forefront as part of any constructive solution to the present crisis.

  And it is no good trying to underplay this crisis. As European Central Bank (ECB) President Jean-Claude Trichet recently said: “The idea was very, very consistently projected that the IMF would not have to help emerging countries any more” because financial markets would take care of any crisis. Now, he added, this had been proved “totally false.”

  The world has now woken up to the fact that financial markets are very adept at causing crises, or at least contributing to them. Between January last year and January this year the exports of Japan — that quintessential exporting country — fell by 46 percent. The cause was partly the impact on Japan’s competitiveness of an absurd overvaluation of the yen by the financial markets and partly the worldwide collapse in the demand for traded goods.

  Just to ram home how serious the collapse has been, former US Federal Reserve chairman Paul Volcker (recently recalled to help with the US economic recovery plan), was reported to be suggesting that the global economy might now be deteriorating at an even faster rate than during the Great Depression.

  TROUBLE

  At times like this, virtue, alas, may not be its own reward. Both Japan and Germany, nations whose economies are widely admired, are in at least as much trouble, if not more, than those profligate Anglo-Saxons the US and the UK. As German ambassador Eckhard Lubkemeier said last week, Germany’s exporters are in trouble because “apart from France, the US and Britain are our main clients.”

  He was speaking at the launch of David Marsh’s new book The Euro: The Politics of the New Global Currency, and what an occasion it was. Marsh has achieved the seemingly impossible feat of making what the Brits tend to regard as a boring topic, best avoided, into a great story. What is more, it manages to be balanced, examining all the topical, as well as historical, issues, such as, will the eurozone survive? And will certain economies within it be forced out?

  A distinguished guest was Karl Otto Pohl, who, as president of the Bundesbank, was against European monetary union but ensured that, if it was to go ahead, the ECB should be modeled on Germany’s central bank. In the book, Pohl is quoted as saying that, at a lunch at the Bundesbank, former British prime minister Margaret Thatcher “asked in her high voice: ‘What do you mean by monetary union?’ Then she started to give the answers herself and dominated the conversation for the rest of the meal.”

  But back to reality. The US is introducing a huge fiscal package. So is the UK. So are many other countries. These should have a good Keynesian effect. What worries me is at what level of low world demand they are being applied. Such issues, as well as the banking crisis and the need to revive those institutions set up after World War II, will be tackled, we hope, at the London meeting of the G20 on April 2.

  As I have said before, we can do without the kind of failure of leadership experienced at the London Economic Conference of 1933.
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