Some money quotes from the FT.
We are watching a bonfire of the old orthodoxies as well as of the vanities. This week Barack Obama promised to spend hundreds of billions of taxpayers’ dollars to prop up the sinking US economy. Gordon Brown’s British government announced it would soak the rich to pay for an economic rescue package.
And already people are leaving the UK as a result.
Everywhere you look, Keynes’s demand management is replacing Adam Smith’s invisible hand; printing money, a mortal sin under the fracturing Washington consensus, is the new prudence.
Things could move still faster in the months ahead. With their myriad rescue schemes and loan guarantees, the US and British governments have nationalised their respective banking systems in all but name. The banks pretend they are still answerable to their shareholders, but it is a charade. They survive only with the explicit financial guarantee of the state.
Still, the markets remain frozen, starving business of the oxygen of credit. Unless things change soon, the politicians will have little choice but to take direct control, and quite possibly, ownership, of the banks. Nationalisation could be the first act of an Obama presidency. That at least would put some substance into all those loose analogies with FDR.
Equity ownership in banks was always a charade imho. Giving them free-reign to print money is another mistake. The amount of leverage and risk a society can absorb is a matter of legislation. Too little of it and you are under-efficient as you are not investing in your future. Too much of it and you choke on your own bad debt vomit. Boom-Bust may be an intrisic and emergent feature of free markets but not one that has to be this violent in its swings. The amount of monetary leverage was legislated back in the days, we will probably end up seeing an updated version of that. BTW, this is what people ask for when they long for a gold based system: a commodity based cap on leverage and monetary policy. Legislation feels more flexible a solution. I want to trust the political system.
The risk is that the recalibration will go too far: that innovators and entrepreneurs will be put in the stocks with investment bankers; and that fettered markers at home will be accompanied by protectionism abroad. Lest we forget, for all its manifest flaws, a liberal trading system has delivered hundreds of millions of people from abject poverty.
The market has lost its magic, but we do not know whether Mr Obama can properly rehabilitate government. So the shape of a new settlement is far from clear. What is certain is that things cannot be as they were.