WASHINGTON—The governments, institutions, and personalities who should be providing guidance in the aftermath of the financial and economic debacle of 2007–08 are still recommending the very policies that got us here in the first place. The G-20 summit in Toronto exposed this truth quite poignantly.
Before and during the sessions, President Obama urged nations to postpone fiscal tightening and debt reduction for fear of stifling the weak recovery. His assurances that the participants were in “violent agreement” on their final communique about reducing deficits in half by 2013 and stabilizing debt ratios by 2016 actually concealed more violence than agreement. Canada’s Stephen Harper, Germany’s Angela Merkel and, yes, even France’s Nicolas Sarkozy argued for fiscal retrenching. But given opposition from the United States and Japan, and ambiguity on the part of emerging powers such as Brazil, the compromise was a toothless statement of good wishes.
Respected financial publications that should be offering moral clarity now that government debt amounts to 92 percent of the size of the economy in France and 83 percent in Britain, and that the U.S. budget deficit is at near-record levels, are instead warning against monetary and fiscal restraint. Martin Wolf of the Financial Times thinks “it is right for central banks to keep printing.” Clive Crook of the same publication writes that it is fair to call “Germany a bad global citizen for tightening fiscal policy despite its external surplus and unstressed borrowing capacity.” Forbes, a supposedly pro-market publication, published an article railing against the austerity measures announced by George Osborne, the British chancellor of the exchequer, who wants to slash the budgets of various government departments by 25 percent. Financier George Soros, commenting on Bloomberg, calls the spending-reduction measures in some European countries “a disaster.”
The case these normally authoritative voices make is essentially this—that the recovery continues to depend on government stimulus, and that in order to redress the balance between surplus nations such as Germany or China and deficit nations such as the United States or, say, Spain, the former need to be made to save less and spend more.
If this advice, which blames the prudent for the conduct of the imprudent, were postulated only by the usual suspects—i.e., Nobel laureate Paul Krugman and company, it would be bad enough. But coming from the world’s superpower, the business community’s most influential gurus and outlets that call themselves conservative, one thing is clear: The world is a crazier place than one feared.
Deficits, debt, and loose money are what caused the bubble. They also caused the Hitchcockian movie in which Europe has been living for the past few months. Making policy decisions necessary to create the environment for a sustained recovery and avoid future bubbles is tough enough when any remotely responsible measure is met with the national howling we have seen against pension-fund reform in France or spending cuts in Greece and Spain. Making them when international leaders and respected observers seem to have lost it requires truly titanic efforts.
Thank God, some have kept their heads. As soon as the G-20 coven ended, the Bank for International Settlements (BIS), the Switzerland-based central bank of central banks, spoke out in its annual report against keeping loose monetary and fiscal policies. It maintains that the artificially low interest rates are distorting investment decisions and leading market participants to take excessive risk. An austerity program would build trust, shore up the financial system and provide low long-term borrowing costs to the benefit of sound investments.
Profligate fiscal and monetary policies, the BIS argues, could replicate the easy money environment that led to the present crisis by encouraging financial institutions to engage in too much short-term borrowing and long-term lending, a gap that would result in a credit crunch at the first sign of scarce liquidity. More essentially, the current policies will delay confronting the demographic challenge facing the welfare state in rapidly aging countries and restructuring inefficient industries kept on life support by access to easy money.
You know something really is rotten when the BIS, which in the last couple of years cheered the measures it now debunks, starts to warn of impending disasters if governments maintain the course.