August 5, 2008
Repel the calls to contain competitive markets
By Alan Greenspan
The surprise of recent months is not that global economic growth is slowing, but that there is any growth at all. The credit crunch of the past year has not followed the path of recent economically debilitating episodes characterised by a temporary freezing up of liquidity – 1982, 1989, 1997-8 come to mind. This crisis is different – a once or twice a century event deeply rooted in fears of insolvency of major financial institutions.
This crisis was not brought to closure by the world’s central banks’ injection of huge doses of short-term liquidity. Only when sovereign credits were substituted for private bank credit, first in the case of the UK (Northern Rock) and subsequently in the case of the US (Bear Stearns), was a semblance of stability restored to markets. But the London Interbank Offered Rate spreads on overnight index swaps and credit default swaps of financial institutions have not returned to the modest pre-crisis levels. Fears of insolvency have not, as yet, been fully set aside. There may be numbers of banks and other financial institutions that, at the edge of defaulting, will end up being bailed out by governments.
The remainder of this column can be read here. Debate from our panel of economists appears below.
Martin Wolf: Alan Greenspan is certainly correct that a worldwide backlash against the market economy is now more likely than at any time in the last quarter century. Indeed, the chances of a move against deregulated finance are now so high as to verge on a certainty, though, as Larry Summers points out in today’s FT, the US seems even more likely to combine the worst of both worlds – open-ended government guarantees to allegedly private entities and an almost complete absence of effective regulation.
I do not wish to re-enter the debate on how far mistakes in monetary policy caused the boom and subsequent bust in the US. But I do wish to take issue with Mr Greenspan’s “all or nothing” approach to globalisation. In particular, he makes two points: first, regulation will never do any good; and, second, regulating almost anything more tightly risks ending the benefits of globalisation. As I have argued in a previous column, these are counsels of despair.
On the first, I see no alternative but to try. It is simply impossible, at least in democratic societies, to offer large explicit and implicit guarantees to financial activities without regulating them. It is equally impossible to argue that governments can do nothing whatsoever to regulate such activities. I agree that any regulation will be imperfect. But it should be possible to reduce the frequency of the most egregious risk-taking behaviour. There is no way, for example, that lending for house purchases can ever be sound, in the absence of down payments by the borrowers. If the latter have no equity in the house, what protections do lenders possess?
On the second, I simply disagree. As I argued in my book on globalisation (Why Globalization Works), integration into the world economy is not all or nothing. It is perfectly possible for countries to benefit from liberal trade and flows of long-term investment capital, without integrating financial systems fully, for example. China has done just that. Again, almost every country in the world international restricts integration of the labour market. That is why wages differ so much across the world.
Thus it is perfectly possible to imagine a world in which integration continues in some areas, but is more tightly controlled in others – most obviously in finance. Indeed, I would argue the precise opposite of what Mr Greenspan does: if we tell the world that it really is all or nothing more countries will end up saying: “OK. It’s going to be nothing.” It is only if we allow some room for politics and policy choice that we will encourage countries to remain open, overall.
None of this is to argue that a backlash against globalisation is not a big risk: financial crises, slowing growth and soaring commodity prices do not make an ideal backdrop for selling the virtues of market capitalism. But insisting that there is nothing to be done, but grin and bear it, does not seem to me to be true. It is also a defeatist political strategy. What is needed, instead, are policy actions that should help and, at least, should not add to the harm.
Posted by: Martin Wolf | August 7th, 2008 at 7:50 am | Report this comment