Giuseppe di Lampedusa
In times of economic crisis all sorts of things get turned upside down: Keynesians become Monetarists while Monetarists become Keynesians. At the same time politicians and their most senior hired hands start listening to economists (for a while at least) whom they used to ignore. In such times di Lampedusa’s insight is a valuable guide to what is really going on.
Here are some examples:
- Central banks create vast sums of new money through ‘quantitative easing’, even though their monetarist credo indicates that such activity will lead to unacceptable levels of inflation. But that doesn’t matter because the inflation is manifested in terms of asset prices, rather than (politically unacceptable) prices of goods and services.
- After decades of privatisation (much of it by stealth through selling off parcels of publicly owned land) and repeated proclamations to the effect that the dead hand of state ownership is inimical to sound commercial functioning, the UK government has splashed out £400 million to buy a stake in a bankrupt satellite rival to the EU Galileo system.
- The USA government’s response to Covid-19 has been to enact a ‘stimulus package’ equivalent to 10% of GDP – intervention that dwarfs the Troubled Assets Relief Program’s $700 billion response to the 2008 financial crisis.
- The 2008 United Kingdom bank rescue package (in simple terms, part-nationalisation through share purchases) cost £500 billion. Shares acquired by the government have subsequently been sold off at a substantial loss.
Numerous other examples abound. What is to be made of this wholesale loss of economic religion: the absence of faith in ‘markets’ to solve all problems in a self-regulating system; the reversal of doctrinaire arguments as to the ineffectiveness of public ownership; the abrupt abandonment of all conventional wisdom on the importance of ‘sound finance’ and the perils of excessive government spending and debt? It is clear that everything has, indeed, changed – but as di Lampedusa’s words indicate, they have only done so in order that everything remains the same. Banks that had become ‘too big to fail’ (only because a failure of regulation allowed them to lend too much and invest massively in assets the true value of which they did not understand) have been ‘rescued’ so that they (and the individuals who run them) can continue much as before. Markets are powerless to remedy existential threats like the 2008 banking liquidity crisis and Covid-19, so governments and central banks must step in to keep economies functioning as closely as possible to the way they did before these threats emerged. Indeed, everything needs to change, so everything can stay the same.
The danger in all of this is that piecemeal, reactive responses to existential threats fail to address underlying causes: poor (or non-existent) financial regulation and inadequate investment in both preventive and remedial healthcare. The sticking plaster holding operations might even make things worse by creating unsustainable asset bubbles.
However, one thing is certain, the abandonment of economic religion that enables everything to change gives us the strongest of clues as to the validity of a financial theology that has become entrenched in the past four decades. The real danger is that this theology does not return if stability is restored, and that things do not change rather than getting much better.