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Guided by an invisible hand

The bank meltdown marks a turning point in our thinking about how the world works writes the Nobel L

Make no mistake: we are witnessing the biggest crisis since the Great Depression. In some ways it is worse than the Great Depression, because the latter did not involve these very complicated instruments - the derivatives that Warren Buffett has referred to as financial weapons of mass destruction; and we did not have anything close to the magnitude of today's cross-border finance.

The events of these weeks will be to market fundamentalism what the fall of the Berlin Wall was to communism. Last month in the United States almost 160,000 jobs were shed - making more than three-quarters of a million this year. My guess is that things will get considerably worse. I have been predicting this for some time, and so far, unfortunately, I have been right.

There are several reasons for my pessimism. The extreme credit crunch is a result of the banks having lost a lot of capital. And there is still uncertainty about the value of the toxic mortgages and other complex products on their balance sheets. The US economy has been fuelled by a consumption binge. With average savings at zero, many people borrowed to live beyond their means. When you cut off that credit you reduce consumption. This, in turn, will dampen the US economy, which helps keep the global economy growing. The American consumer has not only sustained the US economy, he has sustained the global economy. The richest country in the world has been living beyond its means and telling the rest of the world it should be thankful because America fuelled global economic growth.

There are further reasons for my pessimism about short-term economic prospects, in America and Europe. In the second quarter of this year, growth in the US would have been negative were it not for the growth in exports. But with the slowdown in Europe and problems in Asia it is difficult to see how we can maintain net export growth. The strengthening of the dollar - due not to greater confidence in the US but to reduced confidence in Europe - will make matters worse. The fall of energy prices will help a little, but not enough.

Treasury Secretary Hank Paulson has now come up with a new bailout scheme. The original plan - buying up the thousands of "troubled assets" (read: bad loans and complex products based on them that Wall Street created) - was badly designed and rife with problems. How would they have been priced? Call in the same Wall Street experts who got us into the mess and mispriced risk before? It is a heads I win, tails you lose situation.

The worry is that the taxpayer will be left holding the short end of the stick.

The British approach, which Paulson seems to be following, is far better, involving capital injections into banks, with preferred shares to protect against losses and warrants to share in some of the upside potential. This is the approach that I - along with most US economists and people with good street sense, like George Soros - had been saying America should adopt.

Ironically, though Paulson wouldn't listen to us, he seems to have listened to Gordon Brown.

Many of the problems our economy faces today are the result of the use of misguided models. Unfortunately, too many took the overly simplistic models of courses in the principles of economics (which typically assume perfect information) and assumed they could use them as a basis for economic policy. Many central banks use the notion of inflation targeting - that they should focus exclusively on inflation, raising interest rates when inflation increases. But I would argue that central banks have a broader responsibility; they are supposed to ensure the stability of a country's economy. While monetary authorities in the US and elsewhere focused on price stability, they allowed the financial system to undertake risks that put the whole economy in jeopardy.

This crisis is a turning point, not only in the economy, but in our thinking about economics. Adam Smith, the father of modern economists, argued that the pursuit of self-interest (profit-making by competitive firms) would lead, as if by an invisible hand, to general well-being. But for over a quarter of a century, we have known that Smith's conclusions do not hold when there is imperfect information - and all markets, especially financial markets, are characterised by information imperfections. The reason the invisible hand often seems invisible is that it is not there. The pursuit of self-interest by Enron and WorldCom did not lead to societal well-being; and the pursuit of self-interest by those in the financial industry has brought our economy to the brink of the abyss.

No modern economy can function well without the government playing an important role. Even free marketeers are now turning to the government. But would it not have been better to have taken action to prevent this meltdown? This is a new kind of public-private partnership - the financial sector walked off with the profits, the public was left with the losses. We need a new balance between market and government.

Professor Joseph E Stiglitz is chair of the Brooks World Poverty Institute at the University of Manchester and a 2001 Nobel prizewinner

This article first appeared in the 20 October 2008 issue of the New Statesman, My year with Obama

MILES COLE
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The Brexit plague

With the sacking of Michael Gove, the leaders of the Leave campaign are being destroyed.

Brexit: the career killer. Boris Johnson: humiliated and felled, even if he ended up with foreign secretary as a consolation prize. Michael Gove: tainted by his ruthlessness against Johnson and also by his late acceptance of conventional wisdom (that Johnson is talented but unreliable) and finally sacked. Nigel Farage: resigned. Andrea Leadsom: brutally and almost instantly exposed as out of her depth and sent to the ministerial wasteland that is Defra.

With Theresa May in No 10, ­experience and competence have been restored. For that reason, there is room in May’s ­cabinet for some of Brexit’s fallen leaders. For the time being, however, the Remain ­campaign’s repeated warnings that Brexit would be bad for jobs have already proved prescient in one respect. The referendum has destroyed the prospects of Leave’s top brass. The Brexit crown won’t stay on anyone’s head for more than a few days.

We once imagined, ironically, that the Brexit movement would be vulnerable to cynical exploitation by careerist politicians who were keen to make a name for themselves. They would climb aboard the Brexit bus, take an easy ride, and get off higher up the mountain. Quite the reverse. Politicians have not ridden to power on the back of Brexit; Brexit has ridden to power on the back of them, breaking them in the process.

Like a superbug, Brexit inhabits its host spokesmen and women before choking the life out of them. The illness takes a horrible course, first imbuing the victim with great energy and enthusiasm, as though the ailment was in fact a cheering tonic. Then, at the peak of Brexit bounce, when the victim’s mood seems most adulatory, despair and withdrawal set in.

To adapt the celebrated lines spoken by Anthony Blanche in Brideshead Revisited, does Brexit, politically speaking, spot and kill everyone it touches?

At the outset, I must make an important distinction between the perfectly legitimate and finely balanced argument about whether Britain should be outside the European Union – the Brexit debate that might have been – and the one that actually happened, with its £350m a week for new hospitals and the exploitation (or wilful blindness) of the emotive power of anti-immigration. The first debate, the proper one, might well have allowed the finest Brexit minds to shine. The second (that is: real events) has left them vulnerable, floundering amid tectonic shifts in the political landscape that they helped to initiate.

What about Andrea Leadsom, the darling of Brexit’s hard core? Here the career-killing superbug showed the speed with which it operates. Have no truck with the fantasy that Leadsom was brought down by an establishment plot, the “black ops” imagined by Iain Duncan Smith. Leadsom, despite being a very inexperienced politician, applied for immediate promotion to the office of prime minister. She initially made great use of two cards – her “business experience” and her maternal instincts – but it turned out that both were liabilities once the serious campaign for high office began.

There is no need to revisit how several aspects of Leadsom’s CV unravelled. Her supporters put out the word that she was a high-flying banker who had “managed billions”. In effect, Leadsom’s team suggested she was Cristiano Ronaldo, while the evidence suggests she worked for Real Madrid’s PR team. Important work and all that, but not quite the same thing.

Her interview with Rachel Sylvester in the Times on 9 July exposed some of the problems not just with the candidate, but also with Brexit catchphrases. The interview showed the difference between believing that “the old way of doing politics” is too cynical and polished, and assuming that being incompetent in handling the ­media is a virtue.

Without saying anything interesting as a trade-off, Leadsom made several huge blunders. She offended people without children, perhaps entirely unintentionally, by implying that being a mother made her the superior candidate, with “a tangible stake” in the future. Then she offended feminists – and many non-feminists as well – by stating that she isn’t a feminist because she isn’t “anti-men”. Third, she blithely assumed that the EU would not impose any tariffs on a post-Brexit Britain. Finally, in furiously demanding that the Times retract the article and release the tape of the interview, she unwittingly exposed one last blunder: that she herself (or an aide) had not recorded the interview, though speaking on the record to a journalist from a leading newspaper.

The fiasco contributed to Leadsom withdrawing from the two-woman leadership contest, before her current career suffered a calamitous fate – never mind the reading of jobs she held previously. Brexit, having first apparently been the making of Leadsom, quickly struck her down, too.

She deserves some sympathy. Her leadership campaign can be seen as the logical culmination of the political pressures on Brexiteers as they seek to turn serious. The political challenges are doubly difficult. First, there is the negotiation with Brussels, with rather a lot promised to the British public and nothing less than the survival of the EU at stake. Second, in office, any Brexiteer would have to level with the movement’s supporters.

***

The Leave campaign, evidently, rested on a delicate set of alliances, including as it did sovereignty-focused intellectuals, rural Conservative voters and the disenfranchised “left-behinds”. To say these groups voted for different things does not do justice to the problem.

It is worth recalling that Boris Johnson’s Telegraph column in the aftermath of Leave’s referendum victory, which caused him so many difficulties with hardcore Brexiteers, had also been read, adapted and signed off by Michael Gove. In other words, two experienced columnist-politicians, both of them media-savvy and intellectually gifted, found the challenge of converting Brexit the movement into Brexit the reality beyond their combined and considerable rhetorical gifts. During the campaign, Johnson’s popularity and Gove’s intellectual confidence powered the Brexit movement. Then Gove abruptly ended Johnson’s leadership hopes, thereby ending his own.

At a stroke, the argument – popular among Brexiteers – that the new prime minister had to be a Leaver pointed no longer to a leading politician, but instead to the inexperienced Leadsom. Within days of its electoral triumph, the Brexit movement found itself in a leadership vacuum of remarkable proportions.

Having finished off the politicians possessed of a track record, Brexit anointed someone without a recognisable political past. The flight to neophilia says a great deal: which experienced politician would fancy squaring that circle? In retrospect, Leadsom’s Mary Poppins approach – it’s fine, absolutely fine, let’s be positive – was the logical conclusion of an unplayable hand. Sometimes rational logic has nowhere to go. Airy aspirations are all that remain.

As the author of a book called Luck, I am the first to admit that events take on a momentum of their own. Things could have been different. It was not inevitable that Gove would consult his conscience and conclude that he could not, in good faith, be Johnson’s kingmaker. Alternatively, if Gove’s conscience had hurried along a little quicker on its journey of discovery – whether this led to backing Johnson, or aban­doning him – then there could have been a recognised heavyweight Brexit candidate for prime minister.

But laughing off Brexit’s leadership deficit with a shrug in the direction of rogue circumstance leaves out too much. Its post-referendum leadership tumults are the rational consequence of fault lines running through the Leave campaign.

It is one thing for a Tory gentleman Brexiteer, taking a psychological canter over to the wrong side of the tracks, to conclude that Britain is two countries and that the poor are having a tough time, thanks to globalisation and the “establishment”. But what is his prescription for the social problems of Boston? Extra evensong? An added dollop of deference, spread evenly across the parish? Free community copies of Edmund Burke?

That the Brexit movement benefited from anti-immigrant sentiment and then conceded that immigration is unlikely to be reduced any time soon – if at all – was only one example of a recurrent theme of Brexit: capitalising from something that lots of people don’t like without having a solution on hand. An anti-establishment movement can gloss over policy; a government cannot.

Leadsom’s campaign raised the question of whether the Brexit movement is in fact governable. Or, as any potential Leave leader gets close to the real corridors of power, does the movement’s anti-establishment rhetoric undermine its own latest figurehead? After all, it is a lot easier to rail against the Westminster elite when you’re not imminently approaching the top of it.

The case needs to be addressed that the Brexit career carnage has been caused by an intransigent Remain establishment. Having won, some of my Leave friends say, we are ready to compromise; it’s you lot who are the problem.

That sentiment has not been shared by the Brexit movement’s most recognised faces. Indeed, Leadsom’s candidacy presented a new test of character to Brexiteers. Would they rally around the steely experience of Theresa May – a credible prime minister – or cling to whichever Leaver was left standing? It is one thing to divide a party and destroy your prime minister, on the grounds that leaving the EU is more important than loyalty or party politics. But would Brexiteers endorse Leadsom over May, hence cementing the perception – often present, though previously unverifiable – that the question of Europe, among some sections of the Tory party, takes precedence over every aspect of political logic? Boris Johnson and Iain Duncan Smith had no hesitation in giving an early answer: Leadsom.

***

As I write this, I can hear in my head the counterarguments to my case, so indulge me a brief autobiographical aside as I address them one by one. Am I writing through the prism of bitterness? Are these the laments of a Remainer who can’t accept we lost? Far from it. There was always a legitimate case that the EU is a failing institution and that Britain would be better served by making arrangements outside the EU earlier rather than later. I wouldn’t make the case myself, but I can see the logic.

The idea that Brexit would inexorably lead to long-term economic catastrophe ­always felt far-fetched; I recoiled at the ­convenient precision of George Osborne’s prediction that households would be £4,300 worse off after Brexit. I am fortunate, though I, for  one, voted Remain, that some of the most intelligent people I know argued for Leave – and none of them is remotely interested in immigration.

A tribal liberal? Again, not so. My temperament is sceptical, pragmatic and anti-utopian: conservative, you might say.

Stuck inside a metropolitan bubble? The Leave movement made much of Remain’s elitism, its failure to understand – or even acknowledge – the rest of Britain, especially the rest of England. By chance, I spent 13 years working in an antique travelling circus. We toured the nation, plying our trade in unflashy cities and county towns, rustling up whatever small crowds we could, chatting to punters after the final curtain, trying to keep a faltering show on the road. That is to say, I was a county cricketer.

Aigburth, Southend, Maidstone, Colwyn Bay, Chesterfield, Colchester, Haslingden, Malvern, Swansea, Portsmouth, Scarborough, Cheltenham, Blackpool – these places were my life for more than a decade. I am no stranger to England’s northern cities, still less to the Tory shires. They made me.

So it is with some perspective that I have watched the Brexit career plague sweep through its leadership ranks. After initial shock and disbelief, I began to discern a kind of inevitability. Single-issue movements, which circumnavigate the compromise and consensus-building that is hard-wired into conventional politics, are structurally ill-equipped to adapt to serious government. It is housebuilding without the foundations.

The Brexit career carnage should prove a salutary warning. “We need a whole new political class,” Brexiteers have often said lightly. The crucial words are missed out – a new “and better” political class. Indeed, last week the possibility loomed of a Leadsom-Farron-Corbyn triple whammy.

I’ve always believed that politics should be porous to the “civilian” world rather than a closed guild of insiders. I’m all for opening political conversation to fresh voices; not everyone has to study PPE at Oxford. Yet we can now see that change does not automatically bring renewal; outsiders do not always know best, and a base level of competence is a prerequisite. As proof, look again at Leadsom’s outraged reaction to the Times printing what she had said. There is, you might say, a place for expertise. Promising a new politics is easy; high office is difficult.

Hence the last word belongs to an unlikely hero of political analysis. Andy Murray, having won Wimbledon, demonstrated an emotional intelligence equal to his deft touch on the court. Moments after sobbing into his towel, the release point after two weeks’ pressure and control, the Scot thanked David Cameron for watching the match. Some applauded, others jeered. Murray, in an instant, sensed he had to diffuse the awkwardness. “I think playing a Wimbledon final’s tough – I certainly wouldn’t like being prime minister: it’s an impossible job.”

People who think Britain has much to be proud about – that we live in one of the most civilised and well-governed countries in the world – might consider that logic: it might be an impossible job but it’s a successful country. The people doing those ­impossible jobs have contributed to that success. Unless moderates celebrate the track record achieved by compromise, expertise and sound judgement, unless competence finds a more confident voice, then movements such as Brexit will be just the beginning.

Ed Smith is a contributing writer for the New Statesman

Ed Smith is a journalist and author, most recently of Luck. He is a former professional cricketer and played for both Middlesex and England.

This article first appeared in the 14 July 2016 issue of the New Statesman, The Brexit PM