Opinion On a parallel track

And that parallel is precisely what is most worrisome right now. The global crisis of 2008 keeps coming back — are we therefore going to see a whole lost decade for the world economy? Those who thought (I include myself in this group),that letting Lehman go under was not a bad thing in order to provide signals to dissuade irrational risk-taking,have been proved wrong. It appears that there never is a good time to let a bank go bust. Luckily,other mistakes were not repeated in 2009 and 2010. All other banks (in all countries) were saved. Despite political temptations,we have not witnessed a trade war.

But other parallels do not look good at all. In the early 1930s,by increasing the requirements of liquid reserves for banks,the Fed committed a serious blunder. The current insistence that “banks be better capitalised” is having a similar effect. Rather than raising capital in adverse circumstances,banks are cutting down the sizes of their balance sheets. Ergo,there is less credit available for businesses. Ergo there is less economic activity. Our political leaders do not get it. Certainly the IMF chief does not get it when she talks about “repair” being the first priority. Capital requirements for banks should have been increased during the boom period. Not now,for heaven’s sake! Banks are simply not incentivised to make loans right now. They are responding to the signals as they see them. Exhorting them or keeping interest rates low simply is not working.

The other ominous parallel comes in the form of a question: is the rigidity associated with the desperate attempt to “preserve the euro” becoming the equivalent of the desperate “love for the gold standard” that characterised the thirties? Is the euro the albatross around our necks today just as the gold standard was 80-odd years ago? All we now need is a trade war and the chances of a Great Depression will go up exponentially. While the Doha round of WTO talks are going nowhere,while there are noises from xenophobes in Europe and the US that the renminbi should be revalued and while there are silly American and European visa restrictions that dampen trade in services,all of these put together so far have not added up to a new regime that could strangle global trade. But as politicians clutch at straws in the months ahead,there is always the likelihood that someone somewhere will get tempted. Once the snowballs start hurtling,all bets are off

Markets have been pretty good predictors of future economic activity. Markets right now are very volatile. That probably means that we cannot be sure whether in fact economic activity will pick up and more importantly will stay on an upward trend. The plain fact is that macro-economists just do not know. While MV may still equal PT,it now appears that the mechanism of transmission goes via asset markets and not directly to goods and services. The implications of insights like these are still being worked out — that doubtless is very helpful for all of us!

What we do not need are tea-party theatrics threatening to shut down the US government and renege on its dues. These folks are not conservatives; Alexander Hamilton would have been horrified at attempts to renege on sovereign obligations. In their eagerness to save their rich fellow citizens from 1 or 2 per cent tax raise,the tea-party folks have succeeded in spooking markets and causing 10 to 20 per cent wealth reduction for the same rich! What we do not need are more lectures to bankers — let us just ease off on their capital requirements for now. What we do not need is China-bashing and the increased prospects of a trade war. And what we do not need is Europeans quarreling about their self-inflicted albatross.

Let us hope that in Anno Domini 2021 we can look back and say that in 2011 we avoided a great depression. But right now,it looks like a very close thing indeed.

The writer is a Mumbai-based entrepreneur,jerry.rao@expressindia.com