The crisis leaves our leaders without a convenient paradigm

December 4, 2008 at 5:28 pm (Economy)

Yes, yes, I should be doing more on the economic crisis. If I’ve been reticent, one very good reason is that I’m not an economist and, apart from generalities about the system, I don’t have any easy answers. It’s a little comforting, though, that nobody seems to have any easy answers. The political classes of the world appear to be navigating without a compass, having lost their framework but without acquiring an alternative one. You see this in the way that every government seems to have a completely different recipe for dealing with the crisis. The overwhelming impression is that they’re making it up as they go along.

The latest exemplar of this has been the big plan mooted by Barroso, at the behest of Brown and Sarko, for a massive EU-wide stimulus package. This lasted as long as it took Boss Merkel to say to Barroso, “No you don’t”, on the not unreasonable grounds that Brown and Sarko could come up with whatever plans they liked, but they needn’t expect the German taxpayer to foot the bill. Meanwhile, the Bush administration seems to be nationalising everything in sight, which will shock some leftist analysts but not those of us who always knew that the neoconservatives were never conservatives in the first place, least of all fiscal conservatives, but really big government liberals. Meanwhile again, the Chinese government has launched an enormous Keynesian stimulus plan, having obvious not got the memo about the death of Keynesianism. We’ll see in practice, I suppose, how this works out.

The cluelessness is evident across the spectrum. While Brown still claims to hove to Friedmanite orthodoxy, his big idea at the moment seems to be to encourage yet more consumer spending, while pump-priming the construction industry. I can’t see this working, for the very good reason that he’s recycling the essential elements of his voodoo economics over the last dozen years. And yet the Tories lack any credibility – a mere six months ago, Osborne was complaining about the onerous amount of regulation in the financial services industry, while Redwood argued that mortgage lenders shouldn’t be regulated at all. And to this day, Rankin’ Dave Cameron seems to believe that cutting interest rates alone will do the business. None of this is very convincing.

On the more prosaic level, we have Éamon Gilmore rowing back from his plan to thoroughly Blairise Irish Labour. Say what you like about the Sticks, they’re good at sniffing the wind.

It’s at times like this that I do enjoy going back to the Austrian economists, whose big beef – that most politicians are economic illiterates – is demonstrably true, and who do have an endearing tendency to say the unsayable. Their view is that the main cause of the crisis is cheap money, which is true, especially when you bear in mind that for the last few years the Fed has been printing dollars on an enormous scale – we don’t know how many, because Bernanke won’t say. These guys reckon the best thing for the economy would be a short, sharp recession, maybe lasting a year or so, where unsound businesses would be allowed to fail and a lot of the bad debt cleared out of the economy. Trouble is, a politician would need balls of steel to go down that road. The sharp and painful dislocations it would bring – especially in terms of unemployment – would look suicidal for anyone hoping to gain re-election.

On the other hand, the Austrians critique government attempts to provide a soft landing on the grounds that it will just prolong the downturn, especially as the underlying causes are not being addressed. There’s something to that, especially if you look at Gordon Brown’s attempt to reflate the housing bubble. I would actually argue the housing market is still grotesquely overvalued and needs to sink a lot further, but Gordon can’t say that. That would fall foul of the Brits’ attachment to the house price cargo cult, in lieu of an economy that makes stuff.

More and more I notice that the Old Right and the unreconstructed left do overlap, at least in terms of diagnosis. It’s when it comes to the cure, of course, that the divergence comes. I still believe that there is a serious role for intervention, and the main task should be to divert the economy away from the parasitic financial services sector and towards rebuilding a productive economy. That’s why the Germans have much stronger fundamentals.

This would be bad enough for the Brits. For an Irish economy that has close to zero industrial base, a massive overreliance on inward investment and a European Commission hellbent on destroying Irish agriculture… it doesn’t bear thinking about.

Not to mention Robbo and Marty on yet another tour of the States, trying to drum up investment for the North. Lord, they do pick their moment.