Interesting times for the world. Or a Chinese curse at least

What we tend to forget about economics, is that it takes a long time for changes to work their way through. A long time, that is, relative to political careers.

Ronald Reagan, enthusiastically supported and followed by Maggie Thatcher, began to dismantle economic regulation in the 1980s. The process culminated in the repeal of the US regulations (the Glass-Steagall Act) that prevented any individual bank providing both retail functions, such as current accounts or personal loans, as well as much riskier investment services, in 1999. The repeal was initiated by Republicans, but backed by President Clinton, so no party is blameless in this sorry episode.

That means that over nearly twenty years, the structure of regulation that had been set up in the wake of the great crash of 1929, and which had prevented any bank failures in the States for half a century, was deliberately dismantled. Because the process took so long, a lot of people could claim credit for the prosperity apparently generated as a result: Reagan, Bush, Clinton and little Bush in the US, Thatcher, Major and Blair in the UK.

These leaders seemed sound managers of their own nations’ and the world’s economy. But that’s because the eventual consequences of the deregulation were only incubating below the surface. Apparent success was being furthered by a wild drive for increasingly risky financial gambling, building up a mountain of unreal value which had, eventually, to collapse.

In 2008 it did. As a result, in Britain blame for the failure tends to be assigned to Gordon Brown, Prime Minister at the time; in the US, although the crisis began to break at the tail end of the Dubya Bush presidency, Obama was in office as it spiralled out of control, and he had to take the steps needed to restore stability. For which he can then be blamed or praised, depending on taste.

It feels to me as though we’re about to see a similar phenomenon. For over twenty years now, the West has been watching the Chinese economic miracle with amazement. At times when our economies have struggled to grow by 2 or 3%, China has seen growth of nearer 10%, year after year after year. Some economists warned that the rate was too high, and could not be sustained in the long run. Indeed, a time of reckoning would come, when this house of cards too would fall.

If you keep saying that for several years, and the growth just keeps happening, eventually you sound like the boy who cried wolf. A belief becomes established that the good times will continue indefinitely, and that those claiming otherwise are merely doom sayers.

Sadly, the reality is simply that it just takes economic phenomena that long to become manifest. In recent times, we’ve seen increasing signs of weakness in the Chinese economy. There has been a steady decline in growth so that, though still high by Western standards, it has now fallen to around the 7% level (though some suspect that the true figure is lower: facts aren’t always easy to come by in China). The trend is firmly downwards.

Economic Growth in China: the International Monetary Fund view

In the last few months, there have been interest rate adjustments, share suspensions and now, for two days in succession, devaluations of the currency (the first of them trumpeted as a “one-off” measure).

It’s beginning to feel as though the wheels may be coming off the bus, as some economists were warning years ago. Once again, we have been lulled into false security by the fact that such processes take so long. Once they start to unravel, they can slide fast and be acutely painful for a long time – look at Greece.

The comparison with Greece is an interesting one. Because the Greek economy is a sideshow, in the global scale of things. China, on the other hand, is the world’s second economy. If it gets into trouble, Greece is going to look like a gentle dip in the smooth running of the international financial system. It’s encouraging that voices are already being raised in the US to protect its economy against the possible effects of a Chinese downturn. They need to be heeded.

As far as I can tell, it’s an urban myth that “may you live in interesting times” is a Chinese curse. It does, however, look as though we may be about to enter some interesting times. And the cause may well be a curse from China.

Tears before bedtime, when a big bang spoiled the party

Fascinating to get into a debate about the finer points of economic theory at any time, especially as my knowledge of the field is strictly limited: I try to make up in enthusiasm and conviction for what I lack in actual expertise. But then, arguing from strongly held belief without much knowledge puts me in august company, including most religious leaders down the ages.

What added spice to my most recent foray into the field was that it was conducted on Twitter. Debating the economic history of the last 80 years in 140-character bites is, frankly, challenging. Though no doubt my opponents would argue that my views don’t warrant much more.

Still, I’ve decided that I owe it to myself to take the slightly greater space a blog post affords to summarise my thinking more fully here. You, of course, by no means owe it to me to read on; however, if you do, I promise I’ll put in one or two funny bits before the end.

My potted history of the world economy over the last eighty years

There was a pretty ghastly depression in the 1930s. One of the worst ever.

A major step forward was taken when the US turfed the ghastly Republicans out. The incumbent was Herbert Hoover who gave his name to a dam. He was certainly a spectacular blockage to any kind of forward movement.

Alongside Roosevelt’s New Deal, a number of measures were put in place to ensure that no similar financial collapse would ever happen again. In particular, the Glass-Steagall Act included provisions to prevent the same organisation being involved in both investment banking and retail banking.

That makes sense since investment banking can lead to huge gains, but at the risk of massive losses. If only the money of wealthy individuals is involved, fine; if it’s the savings of millions of modest individuals, and the firms they rely on for a living, it’s not so smart.

Now fast forward to the 1980s. The ghastly Republicans led by Ronald Reagan are back in office in the US, supported with poodle-like loyalty by Maggie Thatcher in Britain.

They listen to bankers, outstandingly qualified to brief them on economics, notably by virtue of having bankrolled their electoral successes. The bankers want a bit less constraint. Reagan and Thatcher confer. There’s been no great financial crisis since the Glass-Steagall Act, so what is it protecting us from? We might as well do away with all that red tape.

As they sowed, so we are reaping. And weeping too.

At this point I’m reminded of a story told me by an intensive care physician. He was treating a man close to death from malaria. The patient went hunting each year Burkina Faso.

‘Don’t you take malaria tablets?’ my friend asked.

‘Well, I did for ten years, but I never got malaria so I thought I didn’t need them.’

Reagan repealed the relevant bits of Glass-Steagall. Thatcher brought in the ‘Big Bang’ in the city.

Released from their bonds, the bankers leaped exultantly into action. For twenty years they made fortunes and they paid themselves huge sums. What a great time they all had! As the guy I was arguing with on Twitter pointed out, ‘Big Bang was good for Britain.’ Measured by spiralling house prices, the number of Porsches on the streets and the amount of champagne consumed, that’s how it felt.

The nay sayers were, of course, saying ‘nay’. Even Alan Greenspan, then Chairman of the US Federal Reserve, warned against ‘irrational exuberance.’ But everything kept going well, year after year. And people don’t tend to think much further than a year or two. Few, apart from some of the better economists, realised that we needed to be reasoning in decades.

As it happens, two decades were all it took. The exuberance ended in 2008 when the present financial crisis blew up in our faces. The worst, surprise, surprise, since that of the 1930s. The smarter economists said it would end in tears, and here we were, crying.

How did I get into this argument? Because I criticised the present British government for trying to blame today’s banking scandals on the previous, Labour administration.

‘The recent scandals took place while Labour was in power,’ I was told. Which is true. But we mustn’t forget that it was Republicans and Tories who unleashed the bankers to wreak their worst on the whole of society.

The criticism that Labour deserves is that in office they did too little to re-establish effective regulation. It was hard, though. After ten or more years of huge apparent prosperity following the Big Bang, there was a powerful consensus that this was the way to build a stable, thriving economy. Labour wasn’t immune from that generalised belief.

Here’s an extract from a speech making clear how deeply ingrained that thinking was:

The Left advocated more intervention and government ownership. Those on the Right argued for monetary discipline and free enterprise.

Over the last 15 years governments across the world have put into practice the principles of free enterprise and monetary discipline.

The result?

A vast increase in global wealth.

The world economy more stable than for a generation.

The speaker ended by haughtily declaring ‘the debate is now settled’.

Who was the speaker? The then leader of the Conservative opposition, David Cameron. When did he make this speech? In September 2007. A year later, the crash burst on us.

And two and a half years later, God help us all, he became Prime Minister.