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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

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"Overnight, my school emptied": the story of a European border checkpoint

At a busy checkpoint between Turkey and Bulgaria near the Greek frontier, a long history of displacement and exile emerges.

“Bye-bye, komshu,” said the taxi driver. The Turkish word for “neighbour” is used throughout the Balkans.

We had reached the vici­nity of the Kapikule/Kapitan Andreevo checkpoint and he could go no further. We had driven past the mile-long queue of lorries waiting to be processed into the ­European Union. Some drivers waited for days and had come prepared: fold-up stools and portable stoves lined the road. I wondered what the sealed bulks of the lorries contained, and how much of it was fully known to their drivers.

A week earlier, I had crossed the other way – into Turkey – and witnessed a distressing bust by Bulgarian police of young Kurdish stowaways. The lorry driver seemed genuinely shocked, and he was in trouble. Lone women crossing this border in rented cars were regarded with suspicion, too: a Rom­anian woman had recently been caught with hard drugs inside the seats. In another recent incident, a smuggler had accelerated through customs and run over a border cop standing in his way. The smuggler was now in jail, the cop in a coma.

“Hello, arkadash,” said the new taxi driver as he loaded up my bag. Arkadash is Turkish for “mate”, also widely used in the Balkans. This driver had two cars: one with Turkish number plates, for domestic use, and another with Bulgarian plates, for border
purposes. We drove into customs. Slowly.

I was leaving behind the ­mosque-studded border town of Edirne and would soon reach the factory-filled border town of Svilengrad. Ruined factories, that is. For centuries, before the wounded leviathan of the planned economy collapsed, Svilengrad had produced silk. Today, it produced nothing. It was a transaction terminal for the pleasure-seeking populace of the three border nations: Turkey, Greece and Bulgaria. Here were casinos called “Pasha”, “Ali Baba” and “Saray” that promised “shows, prizes and many more surprises”. On the outskirts of town, in a former border army building, was a refugee camp that promised nothing.

The twin border cities of Svilengrad and Edirne sat in the fertile plains of Thrace where a section of the Roman Via Diagonalis passed and where everything grew: vines, sunflowers, cotton, wheat, and what early travellers described as the best watermelons in the Levant. Now the Greeks came across the border to both cities, to get what they needed, cheaply – including haircuts in Bulgaria and fake Levi’s jeans in Turkey. The checkpoint with Greece was just a few miles to the west, and from the last sleepy Greek town, Kastanies, across the swollen waters of the Evros-Maritsa River, you could see Edirne sprawled like a concubine in the haze of the Thracian plains.

The three border rivers (Arda, Tundja, Evros-Maritsa) flooded almost every year: if a dam upstream in Bulgaria opened a sluice, both Turkey and Greece would be flooded. Indeed, this border has seen many spillovers and upheavals over the years, including the catastrophic “exchange of populations” after the Balkan Wars of 1912-13, when borders were redrawn and many in Bulgaria, Greece and Turkey found themselves in alien territory overnight. They had to run for their lives across the new lines.

The road under the wheels became bumpy, a sign that we had crossed into Bulgaria. Ahead of us in the haze rose the communist-era apartment buildings of Svilengrad. In my youth, this area – like all towns, rivers and mountains that fell within 30 kilometres of the national border – was a militarised zone.

The border was a taboo subject. Hidden by Balkan peaks and electrified by Soviet technology, it was everywhere, like the state. The border was that which never slept. It was near the Black Sea beaches where, in my childhood, we went for holidays along with the East Germans, Poles and Czechoslovaks – some of whom went swimming towards Turkey, or made a run for the land border and got shot by Bulgarian guards. It was near the mountain villages where we went to pick berries and climb fir trees from which you could see Greece.

“Do you go to Greece?” I asked Ibrahim, the taxi driver. He had once been a schoolteacher.

“What would I do in Greece?” he replied, smiling. “I don’t speak Greek. This is my patch, here, Turkey and Bulgaria.”

Ibrahim was an ethnic Turk but his family had lived in Bulgaria for many generations. Bulgaria’s ethnic Turks account for roughly 10 per cent of the population, a natural effect of the long cosmopolitan centuries of these once Ottoman lands. But in the summer of 1989, just months before the fall of the Berlin Wall, Ibrahim and another 340,000 Bulgarian Turks passed through this checkpoint with all their worldly possessions. It was the largest exodus in Europe since the Second World War – but in peacetime.

They had been left with little choice in communist Bulgaria, where assimilation campaigns had been waged against them and other Muslims at frequent intervals during the Cold War. The last such campaign forced ethnic Turks with Muslim names to change them to Christian (Slavic) ones. In some parts of the country, even the names of the dead were changed in registries and on gravestones – an act of violence that strikes me as especially cruel.

This self-wounding campaign by the communist state was a diversionary tactic: despotic regimes need enemies. Ethnic minorities are easy prey. Those who resisted were told by the state to clear off to Turkey, and Bulgarian officials opened this checkpoint. Until then it had been closed to all Bulgarian citizens and was used only by Western travellers to Turkey or Turkish Gastarbeiter to Germany.

Ibrahim had been a young teacher in a town at the foot of the Balkan Mountains. “But what is a teacher without kids? Overnight, my school emptied,” he said.

Ibrahim decided to follow, although he spoke no Turkish. He departed alone, leaving behind his mother and sister, who couldn’t face a life of exile and took the new names instead. For the first few years, he lived in a leaking tent in a huge refugee camp in Edirne – where he saw some of his former pupils. He attended evening Turkish classes and eventually found his feet.

Many of those who had crossed the border that summer returned to Bulgaria after the collapse of the communist regime in 1990, reclaimed (or bought back) their houses, and started again. But many remained in Turkey and made new lives for themselves. Families were split down the middle. Today, entire neighbourhoods of Edirne and Istanbul are populated by Bulgarian Turks; one nation’s loss became the other nation’s gain. Then there were those, like Ibrahim, who continued to live a split life.

“Because my memories are all here, you see,” he said, without malice. “My mother, my sister, the old neighbours. But my wife, my kids, my business, are there.” He gestured back towards Turkey.

How do you feel, I asked him, when you see the refugees today? He shook his head. “It’s your pride that goes, you see. Back home, you were a person. With a history, with a future. When you become a forced exile . . .” He trailed off. “The life of an exile is worse than war.”

We arrived at the hotel in Svilengrad where I had booked a room. Ibrahim took out my bag and placed it on the pavement. “Bye-bye, arkadash,” he said; and standing by my bag, I watched him drive down the broken road back to the border.

Today, the Kapikule/Kapitan Andreevo checkpoint is said to be the world’s busiest land crossing. But back in 1989 Ibrahim had crossed this checkpoint alone, on foot. I will always think of him like this: a young teacher with a suitcase, walking through no-man’s-land, into the unknown.

Kapka Kassabova’s “Border: a Journey to the Edge of Europe” is published by Granta Books 

This article first appeared in the 09 March 2017 issue of the New Statesman, The return of al-Qaeda