Who’s Afraid of a Big Bad Crash?

How I learned to stop worrying and love a stock-market crash

‘World’s Richest People Lose $182 Billion in Market Rout.’ It’s not often these days one sees a headline like that.

But who cares? And I’m not saying this from the standpoint of a hater, happy to know that rich people are suddenly feeling a bit of the anxiety ordinary people have been dealing with for a long time. I actually think it’s good for both the economy and democracy if we stand aside when these routs happen.

Market cycles are one of the unfortunate but unavoidable features of a market economy. However, like any grey cloud they can have a silver lining. In his best-selling book, the French economist Thomas Piketty notes the equalising effect that market crashes have. The 1929 crash wiped out a lot of rent-seeking and sluggish firms, thereby freeing up capital for new entrepreneurs to start businesses. The period which followed the Great Depression was therefore one of considerable economic dynamism, as new firms and technologies came into being, average incomes rose across the board, and expanding welfare states delivered the benefits to most everyone.

The gains were widespread because the 1929 crash was equalising in another way. Everyone felt its effects. If they didn’t actually leap off New York buildings to their deaths, as legend has it, many bankers and millionaires were wiped out and joined bread lines. This meant that everyone was in the Great Depression together. Even those who escaped its ravages and prospered during the decade, as emerging businesses and many salaried workers did (with prices falling, even a fixed salary meant your real standard of living rose), didn’t want to advertise their wealth. The fashion trends of 1930s America reflected this, as the ostentation of the Roaring Twenties gave way to the understated elegance of the decade. This sense that everyone was in it together forged a broad consensus, which politicians like FDR in the US and Clement Atlee in Britain could employ to charge ahead with their huge ambitions: to create the modern welfare state.

Now compare this to the fashion trends of the era of Kanye and Kim. We live in a society of haves and have-nots, and the template for the years which have followed the last Great Crash (2007-2008) has been not the 1930s but the Gilded Age of the late nineteenth century. Since the recovery began in the US in 2009, all the income gains that have resulted have been captured by the wealthiest 10%, whose income has doubled; everyone else has seen a drop in their standard of living. In 1965, during that era of post-war consensus, CEOs earned on average twenty times what their workers did; today, that’s up to about three-hundred.

Meanwhile, ultra-loose monetary policy has driven asset values back up, which has made housing unaffordable to young people. Those lucky enough to get in on the property ladder in Britain before the crash, for instance, have been getting wealthier by the day without having to lift a finger, while young professionals in London flat-share and even room-share while working long hours on short-term, flexible contracts. Because none of their peers have felt the ravages of the Great Recession, the rich thus flaunt their growing wealth. There is no political consensus to speak of. Other than the fact that most everyone agrees the political establishment stinks and should be torn up, politics has become highly polarised between populists of the left and right, with little agreement on anything.

Our problem is that the response of central bankers and politicians to that crash was to do everything possible to keep the rich afloat, while leaving everyone else to fend for themselves. The theory behind the current orthodoxy in monetary policy is that by flooding the economy with money, central bankers could drive up asset values, such as houses, shares and bonds. This would, first, create a wealth effect: people who felt richer would spend and invest more, restoring growth. Second, by making money supply grow faster than the prices on goods and services, it would drive up prices. Higher inflation would encourage people to go shopping, making their purchases before prices got any higher. More shopping would lead to more growth, and we’d be off to the races.

It hasn’t worked. The basic problem is that by worsening inequality, it has constrained demand at the lower end. But the strategy also neglects the even more fundamental problem about which I’ve been writing in my blog series on the relative decline of the West. Productivity growth has been slowing for decades, and politicians simply can’t deliver on their pledges to make the economy grow by 3% or 4% per year. If someone’s income is to rise that fast, it means that someone else’s must fall. So politics has become a tribal game of delivering the goods to your own constituents, and freezing out most everyone else: the right favours business, and the left favours unions, but neither offers a truly encompassing vision of a new society.

Anyhow, I would submit that ‘bubblenomics,’ the term I use for the strategy of driving economic growth by inflating asset bubbles, hasn’t worked because its real purpose was something else: to redistribute wealth from poor to rich. I liken it to Britain’s Land Enclosure movement of the eighteenth century, and I’ll write about it another day (I’m hungry now — I’m going  to grab some breakfast). And in meeting that aim, it has worked splendidly.

Al least, until now. As I will write, regardless of whether or not markets bounce back this week, the strategy is doomed to eventual failure. When it does, we’ll enter the next phase of this rolling crisis. And if the next time, we seize the opportunity of broadly shared pain to build a consensus for change that is lasting and fair, we will finally start rising to what is one of the great challenges of our time.

So if the markets will fall, I say let them fall. Then we can start dealing with the real problems besetting our economy and society – and it won’t be by trying more of the same, whether of loose monetary policy and austerity (the solution of the right), or a return to Keynesianism (the solution of much of the left). We need a wholly new approach for what is a wholly new time.

More anon…


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