So far Team Obama seems to be hitting most of the right notes, despite a crashingly poor debut by US Treasury secretary Tim Geithner, says Robert Barbera, US-based senior vice-president at ITG and an economics department fellow at Johns Hopkins University. But while he thinks the US economy is stabilising, he is pessimistic about meaningful GDP growth.
Barbera is in Asia promoting a new book, "The Cost of Capitalism: Understanding Market Mayhem and Stabilizing Our Economic Future". He studied under Hyman Minsky, who is famous for arguing that economic and financial instability is the norm, and who was in turn a pupil of Joseph Schumpeter, the founder of the so-called Vienna school who is best known for his ideas of 'creative destruction'.
Minsky has come back in vogue, having argued that financial speculation and leverage leads to imposing debt burdens that lead to sudden cashflow problems. The moment in the credit cycle when this becomes suddenly apparent is known as a 'Minsky moment' (the term was actually coined by a fund manager in 1998).
Barbera is keen to highlight the difference between Schumpeter's creative destruction versus the deflationary destruction arising from a Minsky moment. An example of the former would be Wal-Mart sending thousands of mom-and-pop retailers into bankruptcy. It's painful, but it's an acceptable price of progress, because there's a genuine upside for the economy.
This is a far cry from the systemic collapse of the banking system, which has only led to the destruction of capital. Nonetheless, Barbera says that bubbles and excesses are intrinsic to capitalism (hence the title of his book) that should be tackled by monetary authorities. Otherwise it leads to Minsky moments, like the collapse of Lehman Brothers.
When it comes to figuring out what to do next, Barbera goes back to monetary policy. As a student of Minsky, he believes monetary policy lies at the heart of the crisis -- not a lack of financial regulation. He suggests we play a counterfactual game: what if the entire crisis, culminating with the bankruptcy of Lehman Brothers, had taken place when the global overnight interest rates were 7-9%, rather than 0.5-2.5%?
In that case, the policy response would have been easy to determine: cut rates. But interest rates had been too low, leaving central banks with little choice but to engage in, first, quantitative easing, and second, unorthodox measures that are intended to compensate for the lack of traditional policy tools.
Barbera argues quantitative easing is just making things worse because it penalises savers and risks making risk-asset prices look more attractive than they really are. Tarp, Talf, PPIP and the other alphabet-soup measures being rolled out by Washington and London express the fact that governments must explicitly do things to try to get borrowing costs down -- things that should ideally be done implicitly through monetary policy.
He therefore is critical of the Fed under Alan Greenspan for refusing to pop bubbles in real estate and stocks.
On the other hand, he doesn't believe Greenspan deserves a lot of the blame being heaped on him. Barbera says, in real terms, Greenspan was in fact trying to raise interest rates, but to no avail, because of the huge glut of savings in Asia and continental Europe, which were used mainly to buy US Treasuries. "The rest of the world's central banks' reserves overwhelmed US monetary policymakers," he argues.
Barbera says the Obama administration has so far not fallen off the tightrope when it comes to dealing with the banks and attempts to reflate their balance sheets. Although a pupil of Schumpeter, he doesn't think 'creative destruction' on Main Street applies to Wall Street -- unless the goal is a replay of the Great Depression.
On the other hand, outright nationalisation would be a mistake. Left-wing critics of the administration say the Public/Private Investment Partnership only serves to put the taxpayer on the hook, and therefore the government should do to the banks what it's just done to Chrysler.
But Barbera argues this would put bank debt "in play", and punishing creditors is more likely to create new Minsky moments than help the banks solve their problems. "Nationalising banks doesn't save taxpayers' money, it just puts the government in charge, which is a lose/lose scenario," he says.
So far so good: "I'm enthused by policy efforts to stabilise the banks," he says. But he doesn't think this means 'green shoots' are taking hold. Unemployment is getting worse, and other markets are in no position to provide a toehold for growth; if anything, Japan and Europe are in an even worse situation, because their over-reliance on exports and savings has led to economic collapse.
"We've taken a few steps back from the abyss but I don't see an imminent recovery," Barbera says. For example, rising stock markets are usually a lead indicator of economic activity. The S&P 500 this week finally achieved a positive return year-to-date, which should suggest economic growth in three-to-six months' time. But other corollaries of growth, such as commodity prices, are still on a downward trend.
"Don't confuse this downward spiral and the rising number of bankruptcies with Schumpeteran magic," Barbera warns. What the global economy continues to suffer is a deflationary spiral -- not a bout of creative destruction, which stems from dynamic innovation. Until US housing prices are acknowledged to have hit bottom, we're still feeling the effects of a Minsky moment. |
