Liaquat’s essential point is that the economic catastrophe of the Great Depression happened because people made the wrong decisions — either because of a misreading of the dynamics of the economy or because of lack of “intellectual will” or because of ego and incompetence.

This point resonates today. With the benefit of hindsight the current financial crisis can be traced back to specific cases of policy misjudgement. Alan Greenspan kept US interest rates down because he was concerned about demand deflation.  He thought that low inflation was because of falling consumption and a faltering economy.  He failed to recognise that it was in fact because of the surge in productivity and the availability of low cost goods and services from emerging markets and in particular India and China. He did not appreciate fully the impact of the forces of technology, liberalisation and globalisation. The result of Greenspan’s easy credit and finance policy was, however, ‘irrational’ borrowings and the onset of the real estate bubble.  Again with the benefit of hindsight it is now widely acknowledged that Paulson made a huge mistake by allowing Lehman Brothers to go belly up.  The consequent loss of confidence and trust amongst and within the banking fraternity choked the arteries of  international credit and brought  the global financial system to the brink of total collapse.

One should always be wary of moving from the particular to the general.  But  Liaquat’s message brings into sharp relief the disproportionate and enduring consequences of policy misjudgements. The leaders that will head for Copenhagen towards the end of this year to forge a post-Kyoto response to the dangers of global warming should take heed.

... contd.