For decades, macroeconomic management in western economies was carried out through the competing and complementary efforts of business practitioners (mostly ex-bankers) and economists. The final arbitrages were made by elected politicians.
This balance of influences served us well. “New” ideas were thoroughly debated between theoreticians and practitioners, with the most toxic ones being filtered out. This didn’t prevent preeminent economists like Paul Volcker or bankers like Robert Rubin from making key positive contributions to the economy.
But then came the financial crisis of 2008 and the ensuing Great Recession, and the banker specie became extinct, figuratively speaking. (Investment) bankers[1] had been playing with fire, resorting to dizzying debt leverage, funding huge quantities of dodgy mortgage loans with overnight funding, betting on derivatives without properly hedging themselves, and the list goes on.
In truth, bankers were not the only ones responsible for the crisis, but they were the richest, they were politically tone deaf and they were the ones standing among the ruins. Politicians were equally despised, but since they couldn't be fired, knew how to quickly blame somebody else, and fake compassion by writing new regulations and imposing huge fines on bank shareholders to atone for the sins of bank executives, they survived.
The economists were neither rich nor elected, and they had two hands (“on the one hand…on the other hand..”). And so the new era of the homo economicus began.
Unchecked, unchallenged, economists rose to the status of doers, saviors, and seers. They were empowered to carry out real life experiments on a massive scale and test their theories in the real world.
The last act of the banker/economist tandem (Paulson/Bernanke)
of opening the liquidity spigot and forcing a massive recapitalization of the
banking sector was appropriate at the time.
But subsequent and continuing experiments in printing
huge amounts of money, forcing interest rates down to zero and even below, and in
having central banks buy hundreds of billions of shaky sovereign and
corporate bonds have hardly been conducive to inspiring confidence.
Under such altered financial states, home owners may see their
equity go up (because of rock bottom capitalization rates), but they also see
their investment income collapse to a trickle.
Not likely to encourage splurging.
Working people, if they pay attention, worry that their
pension plans are way behind in building up the kind of retirement assets they
will need later in life. In all, some
five trillion dollars in public and private US pension plans are affected. It is even worse in Europe.
While governments have taken tens of trillions in new
debt, they expect their national currencies to weaken just enough to
facilitate exports but not enough to trigger capital flight. Good luck with that. And whose currency is appreciating to soak
all these exports?
The current economists’ bold plans remind me of the
Collor Plan in Brazil, back in the early 1990s.
One of its key measures to crush inflation was to drastically reduce
demand by freezing financial assets. All
of a sudden, households couldn’t touch their investment accounts, could only
withdraw US$600 from their savings accounts and up to 20% of their interest-bearing
checking accounts! That monetary freeze
was to last six months! And ultimately the
frozen money would only have limited use.
Debasing the currency, targeting private savings,
encouraging excessive risk taking may help balancing some equations on paper, but
they destroy confidence, and without confidence there is no economic growth.
In fairness to economists, bickering politicians had left
monetary policy as the avenue of last resort. But the adepts of the Dismal
Science didn’t need much encouragement.
And now these sorcerer’s apprentices must undo their
clever constructs, like Disney eponymous character. I may be wrong, but the reign of the economists
is unlikely to challenge that of the dinosaurs.
[1] By and large, the most egregious excesses
were committed b investment bankers, but some commercial bankers joined the
fray.
