The 2012 Olympics have proven a welcome diversion from the real world economic crisis that engulfs us. We celebrate the athletic prowess and mental strength of individuals and teams, that test and challenge themselves and have the determination to keep going to the very end. We work together across world states, in competition but nevertheless together.
After this break, we will need to face the reality once again, and seek to find a way out of the economic crisis. We can learn from the Olympics- with their birthplace in Athens, one of the cities at the heart of the meltdown - that single minded determination to win that gold, but this time not for team GB or team China but for the wider World. We can learn from the Olympic Committee who succeeded in organising this complex international event.
I've been reading the Stiglitz Report (2010) to try and understand the causes as well as the solutions to this financial and worryingly realistic economic crisis - it's well worth reading if you haven't already done so.
The report blames the current crisis not only on poor macroeconomic policy and microeconomic policy, but also dogma in terms of economic theory with seemingly blinkered beliefs in the free market and general liberalisation. This resulted in inadequate regulation, which in turn allowed asset bubbles to develop especially in the property sector. It meant high levels of risk taking through banks which were too big to fail, and the resultant instability we know too well.
In combination, with neoliberal economic policy involving lower taxation on higher earners and deepening inequality, we also ended up with a problem of weak aggregate demand. The rich spend less of their income than the poor, and this means less consumption to drive the real economy in the absence of easy credit for lower income groups. Not that as a Green I am in favour of out of hand consumerism, but we clearly need to take on board the impacts of changes in income distribution.
And when the financial crisis began, there was a quick downward spiral as the policy response and that of the banks was to stop spending and lending in many countries, exacerbating the downturn. Banks became more cautious about lending once they had their fingers burnt. Governments chose not to spend as much as they should, seeking to free ride on the expenditure of others.
So what is the way out of this mess? For the longer term, we need to recognise the importance of good regulation, which needs to be fluid and responsive, and reduce the risks of regulatory capture. We could for example ensure that the financial services sector pay for the regulators, and regulator salaries could be linked to salaries in the financial services sector. International regulation is also needed considering the interdependent global system that now operates.
But its not only about regulation but about restructuring including the separation of vulnerable sectors and diversification rather than the vertically integrated banks we now have. Through restructuring, we can ensure that regulation is appropriate to the risks of different parts of the sector.
The report also emphasises the reform of international institutions so they have greater developing country representation. They need to lend without imposing conditions that requires public expenditure to be slashed, often pushing countries into a cycle of decline.
A new global institution, not the IMF nor World Bank, is proposed.
It recommends reconsidering capital markets liberalisation, questioning the extent to which we can allow free currency flows across borders. The risks of instability are too high. Is this the real issue for countries like Greece, rather than simply being in the Euro?
It opens up the issue of having a new reserve currency because of the instability caused by reliance on the dollar. Countries use dollars as a reserve currency as a result lending to the US at low rates but also pushing up the exchange rate increasing the US current account deficit. The value of their assets are as a result affected by US domestic policy. Countries also hold high levels of reserves to avoid having to rely on the IMF, once again weakening aggregate demand and lending cheaply to the US. Stiglitz puts the argument once again for an international reserve currency - this is not new as it goes back at least as far as the immediate postwar era and the recommendations of JM Keynes.
Of course we also need rescue packages, and the report emphasises the importance of countries acting together: at present individually governments are not taking sufficient action because only some of the expenditure feeds back to their country, so they are inclined to limit their stimulus. As a local councillor, I see this problem even on a local level as councils refuse to take action such as adopting a living wage, and it appears to be because many of the beneficiaries to live outside the area and to by cynical, are not voters. The report also points out that type of stimulus we use can have distributional impacts. So for example quantitative easing which involves buying bonds from existing bondholders tends to favour banks hat hold these bonds. It recommends parliamentary approval for the mechanisms used. Finally, Stiglitz does not overlook the need to safeguard our natural capital, and recommends that the rescue packages are a green stimulus.
And a thought to leave you with: the NYC museum has a banking exhibition at the moment, and interesting to hear abut bank failures of 1937 also caused by excessive risk taking and asset bubbles. We seem to be replicating this 75 years later despite the steps taken at the time to address the highly integrated banks and the limited banks left on wAll Street after mergers and takeovers. So to address this problem, we need real determination to get there this time. Let's take some inspiration this time from the steely determination of our long distance runners, and see things through to the very end.
After this break, we will need to face the reality once again, and seek to find a way out of the economic crisis. We can learn from the Olympics- with their birthplace in Athens, one of the cities at the heart of the meltdown - that single minded determination to win that gold, but this time not for team GB or team China but for the wider World. We can learn from the Olympic Committee who succeeded in organising this complex international event.
I've been reading the Stiglitz Report (2010) to try and understand the causes as well as the solutions to this financial and worryingly realistic economic crisis - it's well worth reading if you haven't already done so.
The report blames the current crisis not only on poor macroeconomic policy and microeconomic policy, but also dogma in terms of economic theory with seemingly blinkered beliefs in the free market and general liberalisation. This resulted in inadequate regulation, which in turn allowed asset bubbles to develop especially in the property sector. It meant high levels of risk taking through banks which were too big to fail, and the resultant instability we know too well.
In combination, with neoliberal economic policy involving lower taxation on higher earners and deepening inequality, we also ended up with a problem of weak aggregate demand. The rich spend less of their income than the poor, and this means less consumption to drive the real economy in the absence of easy credit for lower income groups. Not that as a Green I am in favour of out of hand consumerism, but we clearly need to take on board the impacts of changes in income distribution.
And when the financial crisis began, there was a quick downward spiral as the policy response and that of the banks was to stop spending and lending in many countries, exacerbating the downturn. Banks became more cautious about lending once they had their fingers burnt. Governments chose not to spend as much as they should, seeking to free ride on the expenditure of others.
So what is the way out of this mess? For the longer term, we need to recognise the importance of good regulation, which needs to be fluid and responsive, and reduce the risks of regulatory capture. We could for example ensure that the financial services sector pay for the regulators, and regulator salaries could be linked to salaries in the financial services sector. International regulation is also needed considering the interdependent global system that now operates.
But its not only about regulation but about restructuring including the separation of vulnerable sectors and diversification rather than the vertically integrated banks we now have. Through restructuring, we can ensure that regulation is appropriate to the risks of different parts of the sector.
The report also emphasises the reform of international institutions so they have greater developing country representation. They need to lend without imposing conditions that requires public expenditure to be slashed, often pushing countries into a cycle of decline.
A new global institution, not the IMF nor World Bank, is proposed.
It recommends reconsidering capital markets liberalisation, questioning the extent to which we can allow free currency flows across borders. The risks of instability are too high. Is this the real issue for countries like Greece, rather than simply being in the Euro?
It opens up the issue of having a new reserve currency because of the instability caused by reliance on the dollar. Countries use dollars as a reserve currency as a result lending to the US at low rates but also pushing up the exchange rate increasing the US current account deficit. The value of their assets are as a result affected by US domestic policy. Countries also hold high levels of reserves to avoid having to rely on the IMF, once again weakening aggregate demand and lending cheaply to the US. Stiglitz puts the argument once again for an international reserve currency - this is not new as it goes back at least as far as the immediate postwar era and the recommendations of JM Keynes.
Of course we also need rescue packages, and the report emphasises the importance of countries acting together: at present individually governments are not taking sufficient action because only some of the expenditure feeds back to their country, so they are inclined to limit their stimulus. As a local councillor, I see this problem even on a local level as councils refuse to take action such as adopting a living wage, and it appears to be because many of the beneficiaries to live outside the area and to by cynical, are not voters. The report also points out that type of stimulus we use can have distributional impacts. So for example quantitative easing which involves buying bonds from existing bondholders tends to favour banks hat hold these bonds. It recommends parliamentary approval for the mechanisms used. Finally, Stiglitz does not overlook the need to safeguard our natural capital, and recommends that the rescue packages are a green stimulus.
And a thought to leave you with: the NYC museum has a banking exhibition at the moment, and interesting to hear abut bank failures of 1937 also caused by excessive risk taking and asset bubbles. We seem to be replicating this 75 years later despite the steps taken at the time to address the highly integrated banks and the limited banks left on wAll Street after mergers and takeovers. So to address this problem, we need real determination to get there this time. Let's take some inspiration this time from the steely determination of our long distance runners, and see things through to the very end.
