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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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From wars to power ballads: the geopolitics of Eurovision

As the prospect of Brexit looms, the Eurovision song contest can tell us a lot about our place in Europe.

On the night of 14 May, a 92-year-old woman will be sitting somewhere in the Globe arena in Stockholm, amid glitter cannon and hopeful singers dressed in gauze. Her name is Lys Assia, and she was the winner of the first Eurovision Song Contest, held in the Swiss resort of Lugano in 1956. She will be attending this competition as its guest of honour.

In the past few years, “Lys’s List” – the 20 songs Assia believes have a chance of claiming the (cashless) prize and bringing the contest to their country next time – has become a tradition. Perhaps surprisingly, her 2016 selection is led by Malta, the tiny archipelago with a population of 414,000. Less surprisingly, it does not include the UK, a country of 64 million people.

Britain’s relationship with Eurovision is more tortured than anything involving this many sequins has a right to be – halfway between a superiority and an inferiority complex. Our attitude towards the music produced by the rest of the continent
was summed up by the New Yorker’s Anthony Lane in 2010, when he wrote that European pop “‘was all created by the great God of dreck, and Eurovision is his temple”. The problem is this: if the song contest really is just a camp parade of mediocre warbling, interspersed with yokels in twee national costume . . . why can’t we trounce the lot of them?

Even worse for a nation swollen with a maudlin sense of decline, Britain used to do far better. We have won five times in all, trailing behind only Sweden, Luxembourg and France (six) and Ireland (seven). Before 1999, we finished outside the top ten only twice; what screwed us over was the rule change that year which stopped countries having to sing in their national language. (Side note: the 1974 winner, “Waterloo”, which launched Abba’s career, sounds amazing in the original Swedish. It begins: “Jo, jo, vid Waterloo Napoleon fick ge sig . . .”) In all, songs in English have now won 26 times, but Britain hasn’t had a winner since 1997, when it sent Katrina and the Waves, whose earlier hit “Walking on Sunshine” has surely flogged a thousand high-fibre breakfast cereals in its time. We have, however, come last three times since then.

In the year of a Brexit referendum, the parallels between Eurovision and the European Union are too obvious to avoid. Both started small – six nations signed the Treaty of Rome in 1957, and the song contest had seven competitors in 1956. (Britain was not a founder of either, joining the European Community in 1973 and missing the first Eurovision by filing its papers too late.) Both are now bigger than originally envisaged: 52 countries have competed in Eurovision at least once, and today the EU counts 28 members. In the mid-2000s, both expanded east, provoking the same fears about identity and a shift in power. Both have struggled to negotiate where Russia ends and Europe begins. Oh, and both have Byzantine voting procedures, the European Parliament favouring the proportional d’Hondt system, and Eurovision choosing from this year to record the votes of juries and the public separately, rather than combining them before dishing out the points.

Yet there is one big difference. Eurovision has far greater popular appeal. Although only 6.6 million Britons watched last year’s final in Vienna, compared to the 16.5 million who voted in the European Parliament elections in 2014, the winners of the former often have more name recognition. Abba, Céline Dion (drafted in by Switzerland from Canada in 1988 to sing in French), Lordi, Conchita Wurst, Bucks Fizz . . . versus Jean-Claude Juncker, Jeroen Dijsselbloem and Jacques Delors. No contest.

So when did Britain, which once sent Cliff Richard and Sandie Shaw to Eurovision, fall out of love with the contest? And when did the contest fall out of love with Britain? The temptation is to follow the line advanced by the long-term Eurovision commentator Terry Wogan and claim that it’s all political. Countries support their neighbours – Scandinavia and the former Soviet states in particular – and diasporan voters support their home countries. After the former X Factor contestant Andy Abraham, the “singing binman”, came last in 2008, Sir Tel declared that it was “no longer a music contest”. Russia had received maximum points from Estonia, Latvia, Lithuania, Ukraine, Belarus and Armenia (can you spot a theme?) while the UK received just 14 points in total. “Western European participants have to decide whether they want to take part from here on in because their prospects are poor,” Wogan said.

There are many academics who study Eurovision – oh come on, don’t tell me you’re surprised – and they take issue with Sir Terry’s analysis. In an essay titled “‘It’s Just Not Funny Any More’: Terry Wogan, Melancholy Britain and the Eurovision Song Contest” the Canadian critic Karen Fricker attributes Sir Terry’s grumpiness to ­“feelings of unprocessed anger, frustration and loss about the country’s changing relationship to Europe and the rest of the world”.

To Fricker, Wogan’s “increasingly paranoid tales of political voting conspiracies” were unsubstantiated: statistical analyses suggest that neighbour voting, though it undoubtedly exists, does not influence the final choice. Russia’s triumph in 2008 was the result of a “focused, well-researched, and well-funded campaign on the part of Russian political and broadcasting elites to master the codes of Eurovision ­success”, rather than frightened satellite states awarding douze points in the hope of not having their gas supply cut off. If we took the competition more seriously, we would do better. (Insiders are fond of pointing out that Britain’s record of bumping along the bottom of the table was alleviated in 2009 when we entered a song by Andrew Lloyd Webber, a writer with undoubted commercial appeal.) In other words: send for Adele!

The Irish journalist Julian Vignoles, who sat on Eurovision’s ruling body, the Reference Group, agrees. Since televoting began, Germany has given high points to Turkey, and Spain to Romania – reflecting diasporan populations “voting home”. But he points out that some neighbour voting springs from a shared language and culture: a big pop star in Serbia will be known in other parts of the former Yugoslavia.

Vignoles also has harsh words for Wogan: “There has been something of a bias against former communist countries and their efforts at popular music by some Western commentators – a kind of ‘Western chauv­inism’,” he writes in his 2015 book, Inside the Eurovision Song Contest. “This, I believe, is partly a taste issue.”

Whatever the truth, by 2009 Wogan had had enough. He vacated the presenter’s chair – now occupied by Graham Norton – and told a conference of Broadcasting Union bigwigs that the contest should not be “an opportunity to show your neighbours how much you love them. It is about picking the best popular song in Europe.”

It isn’t, though, is it? The Eurovision Song Contest is unavoidably political, because it presumes to rule on what counts as a country, and what counts as Europe. Take the inclusion of Israel, which has long baffled casual viewers. It gets a place because it’s a member of the European Broadcasting Union (EBU), which stretches from Iceland to Egypt and as far east as Azerbaijan.

To get into the EBU, a country must be within the European Broadcasting Area, or a member of the Council of Europe, and it must pay its dues. At present, Palestine and Kosovo do not meet the first of these criteria, and Romania falls foul of the second. (It owes the EBU 16 million Swiss francs – £11.4m – and has therefore been cast out of the 2016 competition.) Syria could enter, but understandably feels it has bigger fish to fry. Lebanon almost entered, once, in 2005, but had to withdraw when its national broadcaster refused to transmit the Israeli entry.

Exactly how thorny the issues involved can be was demonstrated on 30 April, when the venue for this year’s competition in Stockholm accidentally published a draft list of banned flags. The Palestinian flag was not allowed in the arena, it declared, alongside that of the Basque Country, the Welsh dragon and Scottish saltire – and nor was the black flag of Islamic State. Rainbow flags, a popular symbol of the LGBT rights movement, are permitted as a symbol of diversity, but only if they are not wielded “as tool to intentionally make a political statement” (in other words, while booing Russia).

Unsurprisingly, grouping together gay rights campaigners, Isis, Scottish nationalists and Basque separatists managed to upset just about everyone. The document was hurriedly unpublished, but the ban on “regional” flags remains. And the one on Isis.

If you think getting worked up about rectangles of cloth sounds awesomely petty, that’s just the beginning. In 2009 Azerbaijan and Armenia decided that the song contest was the perfect forum for their long-running dispute over the contested Nagorno-Karabakh region. During rehearsals, Azerbaijan complained that the introductory “postcard” to Armenia’s song contained footage of a statue in territory it claims as Azeri; the section was duly removed. Armenia was not beaten that easily: on the night of the final, its presenter read out the results from a clipboard adorned with a picture of the statue.

The fight didn’t stop there. It soon turned out that the Azerbaijani broadcaster, Ictimai Televiziya, had also blurred out the number to vote for Armenia from its terrestrial signal. Then in August that year, the ministry of national security in Baku summoned several Azeri citizens who had voted for Armenia to explain themselves. Eurovision threatened to ban Azerbaijan from the contest, but in the end settled for “undisclosed” damages and a rule change designed to ­suggest that countries probably shouldn’t set their secret police on citizens who vote in unpopular ways.

Talking of unpopularity, it’s probably a good time to mention Russia. That vast state has an uneasy relationship with Euro­vision. On the one hand, it clearly wants the prestige of winning (as it did in 2008) and when it hosted the competition in Moscow the following year the Russian government spent a record €35m. (It recouped only €8.9m in ticket sales, sponsorship and payments from the EBU.) Yet in the past decade, Russia has also brought in draconian anti-gay laws and banned Moscow’s Pride march. This has not gone unnoticed among the competition’s many LGBT fans. And make no mistake: Eurovision is pretty gay. One super-fan told me that when he arrived in Ukraine for the 2005 competition, there were “lots of women sitting on their own in the bar; we assumed they were prostitutes. But by the third night, they had realised they wouldn’t make any money, ­because the men were all gay.” Hence the ban on passive-aggressive rainbow flag-waving and the suggestion that last year’s contest in Vienna deployed “anti-booing” technology to drown out any protests.

Russia’s imperialist ambitions also make it unpopular. In 2008, Vladimir Putin’s government backed the creation of breakaway republics in South Ossetia and Abkha­zia, leading to a short war with Georgia. The next year, Georgia was told to amend the lyrics to its Eurovision entry, “We Don’t Wanna Put In”, after organisers saw through the cunning coded message of its chorus: “We don’t wanna put in/ The negative move/It’s killin’ the groove . . . Put in/Don’t wanna put in.”

***

“War is the continuation of politics by other means,” the Prussian general Carl von Clausewitz once wrote. Defenders of the European Union often point to its success in bringing decades of peace to a troubled continent, but perhaps it’s time to acknowledge that the Eurovision Song Contest has become a continuation of war by other means. The organisers of the competition are never going to succeed in making it apolitical, or “about picking the best popular song in Europe”, because an audience of 200 million people is too big an opportunity for any pressure group to pass up.

In 1956, no one could have predicted that the premier arena for political statements about European identity would be a music contest variously won by a bearded drag queen, a Finnish heavy metal group and a temporarily Swiss Céline Dion, but there you go. Still, no matter how much you hate disco or power ballads, they are infinitely preferable to a ground invasion. We should probably just let the Russians win it every year to keep them happy.

As for who will win this year, an insider tells me to look carefully at Australia, which came fifth in 2015 (I know, I know. Not even the EBU’s definition of Europe stretches that far; it was invited as a “special guest”). I like the idea of Australia taking the prize, for two reasons: a) shipping the whole circus to Sydney next year would be appropriately bonkers; b) a load of academics would have to come up with a grand thesis for What This Says About Being European Today.

The answer to that, I suspect, is that being European is about being part of a club that half a dozen countries are queuing up to join, but Britain regards as vaguely below its dignity. Which is why I’ll be voting Remain in June, even if I wouldn’t vote for our Eurovision entry, Joe and Jake, who appear to be two prepubescents with a guitar and the pained expressions of the severely constipated. And why, frankly, I would like to see Jean-Claude Juncker rock big hair and a sparkly jacket more often.

The Eurovision semi-finals will be broadcast on BBC4 on 10 and 12 May (8pm), and the final on 14 May (BBC1, 8pm)

Helen Lewis is deputy editor of the New Statesman. She has presented BBC Radio 4’s Week in Westminster and is a regular panellist on BBC1’s Sunday Politics.

This article first appeared in the 05 May 2016 issue of the New Statesman, The longest hatred