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2009.05.25
The Crisis and How to Deal with It
I have an interesting and thought provoking
article to recommend to you today. It is actually a few excerpts from a
symposium on the economic crisis presented by The New York Review of Books and
PEN World Voices at the Metropolitan Museum of Art on April 30. The participants
were former senator Bill Bradley, Niall Ferguson, Paul Krugman, Nouriel Roubini,
George Soros, and Robin Wells, with Jeff Madrick as moderator. These are
some very heavy thinkers in economics and include some of the people that were
concerned about a financial crisis even before it occurred. Niall
Ferguson, Nouriel Roubini and George Soros actually predicted the crisis before
the fact. The article can be found at http://www.nybooks.com/articles/22756.
I agree with most of the discussion but I object to
the recurring mention of a "savings glut" that some participants seem to believe
led us into this crisis. I do not believe that a savings glut ever
existed or that it even can exist. Talk of a savings glut only makes sense
if you believe that we had reached the ideal level of debt in the world and that
this ideal level of debt must be maintained at all costs. I believe that
the problem is that we had excessive levels of debt. There can be no such
thing as a savings glut since savings = investment. The problem is
that the market made bad investments (actually malinvestments)
due to the erroneous signals given to decision makers through manipulated
interest rates. Interest rates have been manipulated by the central banks
for almost a century in the false belief that a few powerful people can do a
better job at setting the price of money (i.e.. interest rates) than the market
can. I would suggest that most people believe that it is impossible for
the government to set the price for consumer goods in the economy (like shoes
for example) without causing massive disruptions in supply and demand. The
failed experiment of central planning attempted by the USSR and Communist China
as well as other command economies is testament to this. So why is it that
almost nobody questions the ability of central planners to set the most
important price in the economy, the price of money (interest rates). The
errors made by these central banks in the past century (but especially since
1970) have caused us to take on much more debt than we as a society are able to
repay. We built too many large residential dwellings (McMansions) and
created too many toxic financial assets (such as credit default swaps or
CDS). There is no demand for these products, or at least the demand
greatly exceeds supply so their prices are falling. There is no knowable
ideal level of debt. It is up to the market to decide how much debt to
take on and how much to save and invest. These decisions can only be made
in a rational way if the price of money is not manipulated by some academics and
self interested politicians and bank managers but instead left to the market to
determine.
Gerry
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