Beyond the Crisis: The Future of the Global Economy
An Economic Forum
Let me outline four different possible explanations one can give and I will just leave it to the audience to reflect on, on these four possible explanations for why we’ve had this extraordinary run of bubbles and busts over the last number of decades.
The first one, which when Mike described as sort of the Left Wing liberal answer, is that it has—it has basically been driven by reckless lending, lack of regulation, and greed. And the in effect, the entire boom since the early Reagan years in 1982 was basically driven by this escalating leverage that in effect was more fake than real and that it has basically come to an end. It worked while it did but it was basically the fault of the lenders and all kinds of agency problems associated with them.
There’s a second type of political answer, which is the Right Wing or conservative answer, which is that it basically was the fault of the borrowers, that they were recklessly borrowing all these money and it was people who were too greedy and buying houses and going on credit, and that it was sort of the product of a narcissistic and selfish generation that was shortsighted and not thinking about the future. Under that sort of a narrative, you might trace things back to say 1968 and say that was the year that everything went downhill in the US and the hippies took over or something along those lines.
Now I think it is of course the case that these two explanations are not inconsistent and it is possible that there were problems with both the lenders and the borrowers and that in some sense, there was something deeper about the whole political system which failed to proactively deal with these things. And just as speaking on my own context, it was obvious that there was an insane housing bubble three years ago and you could talk about it, you could scream about it. You could go on CNBC and tell people. “There was a housing bubble. They should not buy houses.” And it was like shouting into a hurricane. Nobody was willing to listen. And there is something about the nature of these things that is extraordinarily procyclical in a bad way in terms of our political system where when everything’s going well, the regulations get loosened. When things are going badly, they get tightened. So that in effect, the political process had the effect not of dampening these bubbles and booms but actually exacerbating them tremendously, and I think that is going to be one of the real serious challenges we’d face in the years ahead.
In the technology context for example, in the late ‘90s which there were obviously tremendous abuses, we dealt with the abuses with Sarbanes-Oxley and there have been basically no more tech IPO’s or virtually no tech IPO’s in six years. So we had an excessive boom, the regulators did nothing, and then we had an excessive bust and we had an overreaction. And again, you can blame it on special interest groups that are serving the lenders. You can blame it on the desire of the borrowers to keep the easy money going, but when basically both of them end, you have to wonder how this can better be handled.
I think one of the challenges that is happening on a global scale is the inability of our political system to proactively deal with these bubbles, is calling into question the very concept of democratic capitalism. And I think one of the challenges in the next four to five years is that sort of a more authoritarian version of capitalism of the sort that one sees in China will get a lot more appeal because the argument will be that it is able to resist the appeal of people and special interest groups and sort of act on behalf of the whole society. And I think the challenge for the next president is going to be to somehow rehabilitate the good name of democratic capitalism, and it would be quite a big challenge. I certainly hope that whoever becomes president will succeed at that.
Let me however outline a fourth possible explanation for why so many of these bubbles have turned into busts, and this is probably my own personal hobbyhorse in this, which is that there’s not been enough real growth in the economy. And that in some sense, the reason so many of these booms didn’t work was that the whole economy was not growing. And this is not a question about finance or politics or regulations, or at least not centrally about those, but about science and technology and the rate in which science and technology are progressing.
And I think sort of one, while there’s incredible hype surrounding tech companies and scientific innovation, the reality has simply not lived up to the hype for a very long time. And the anecdote I would site is if we were seating in this room in 1968 and talking about what was the future of the US going to look like in 40 years, you know, we would’ve predicted vacation trips to the moon, spaceships on Mars, massive increases in productivity. Servan-Schreiber, the European writer wrote that the American Challenge 1967 said that by the year 2000, the average person in the US would be working 7 hours a day, 4 days a week and have 13 weeks a year of paid vacation time which was a reflection of the incredible growth in productivity that was set to take place by accelerating technology and science, and everything has gone the other way. There’s not been enough progress, and I think the long-term challenge that I would submit is that we somehow need to get that restarted and it’s not easy. It’s broken down for a lot of very complicated reasons but I think that in some sense, that’s the kind of thing that needs to be very much restarted.
Last thought on this is if one had to look at the whole series of bubbles, the one that I think was the central one, perhaps not just in time but also in importance was the tech bubble of the late ‘90s. In some sense, when that one turned out to go wrong, it meant that none of them would’ve work because if there was not going to be exponential progress in technology, nothing else made sense. And you could leverage up in housing, but eventually housing prices would go down if there was no real growth in the society taking place. And the same I think is true of finance and to a lesser extent of the emerging market story. So I think I would encourage us to very seriously rethink why there’s been so little progress and how that can be accelerated, and I think this is certainly one of the great things that a big thing as an emphasis for doing.
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