August 8, 2008
How a local squall might become a global tempest
By Niall Ferguson
The phrase “perfect storm” has been trotted out once too often to characterise the past year’s financial crisis. Yet the real perfect storm may still lie ahead.
Fans of the George Clooney film will recall that the perfect storm was caused by the convergence of a hurricane off the Atlantic seaboard, an area of low pressure south of Nova Scotia and a cold front swooping down from Canada. Result: howling winds, vast waves and the loss of at least one boatload of Gloucester fishermen.
One year after the onset of the financial crisis we are still calling the “credit crunch”, could we be witnessing a similar catastrophic convergence, as the slow-moving hurricane of a US banking crisis hits first a commodity price rise and then a global slowdown?
The remainder of this article can be read here. Debate from our panel of economists appears below.
William Easterly: FT columnists seem to be competing to be ever more gloomier-than-thou about the current crisis. I am not well qualified to directly comment about how deep the cyclical gloom should be. Instead, let me address another issue that is already becoming debated more and more – how should the current crisis affect the extent to which long run global or national economic systems should be changed?
To think about this, let’s assume the worst – that we are indeed entering Great Depression 2.0. So to comment on the system-changing questions, why don’t we talk about historical lessons from Great Depression 1.0? In my field of development economics, the reaction to the Great Depression led to one of the greatest mistakes in the intellectual history of economics. Development economists weaned on the Depression recommended in the 50s and 60s a heavy degree of state planning for the newly independent Third World states, influenced by the supposedly better record of Soviet planning during and since the 30s in contrast to the crisis of the market economies. Many new countries went all the way to embracing state socialism. Only in the face of massive failure of state enterprises and other offshoots of planning, was there a swing back towards markets after 1980, but only after many opportunities for greater prosperity had been lost (those who chose to ignore development experts’ advice and take advantage of the great global trade market boom of 1950-1980 had the happier outcome of being dubbed “East Asian miracles.”)
Even today, the legacy of development planning that had its roots in the mistaken over-reaction to the Depression still haunts us in development discussions, as witness the attempted global central planning of the UN Millennium Development Goal exercise and its many acolytes among official aid agencies. Even recommendations of market reforms by the more market-oriented World Bank and IMF are still in the guise of the all-knowing development experts essentially telling countries how to “plan a market.” Think how much better things would have been for developing countries if economists (both inside and outside those countries) had kept their heads after the Great Depression and said yes, market economies have remarkable booms and even more scary busts around the long run trend, but it’s the long run trend that matters most. There is now no longer much doubt about market economies outperforming the alternatives on long run trends. In the long run, we may be as dead as Keynes said, but our children will be very much alive to see the consequences of either our epochal mistakes or our courageous wisdom today.
Posted by: William Easterly | August 8th, 2008 at 4:39 pm | Report this comment