Wednesday, October 22, 2008

Memoirs of a Recession

A rare opportunity to do some creative writing came my way. A friend publishes a private circulation journal and wanted a few of us to 'project in the future to assess the recession'. More of a fun exercise, but this allowed me to think beyond my worries today. I have her permissions to put this on my blog.

So, here it is, a take on today's recession written in the year 2040.
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My only qualification for being asked to write about the Great Recession of 2009/10 is that I had been an observer and a participant. There are many studies then, and since, regarding what caused the recession, and how it played out - on the economies across the world and also on the politics and culture of the age. My economics is rusty, and I would not dare tread there. However, my age gives me the advantage of perspective, and this is exactly what I wish to share here.



The Great Recession of 2009/10 is often compared with another world changing event, the Great War of 1914-1919. I know I am showing my age and talking about an event so distant. While I am not as old to have lived through the Great War, I know the time before the war was a time of exuberance, when everyone expected the world to go on as it was and assumed that the empires of the time would last forever. The Great War changed all that - seemingly irrational and trivial decisions taken by autocrats who ran those empires rocked the apple cart and changed how people thought about empires altogether. The unending war made people believe the world will come to an end. And, it almost did.
There are many similarities between the Great War and the Great Recession. Not just these were watershed events between hope and despair, these were global events. The Great War made war global; the Great Recession, recession. I come from India, though at the time of Great Recession, I lived in London. In India, the previous global recessions were like distant canon fire, we heard about it and it disturbed our sleep, but never affected us personally. But it was different in the Great Recession - when our economy stumbled, rupee devalued and the glamour jobs in large American corporations vaporized. It brought recession to our doorstep, just as the Great War brought European wars to us.



The other similarity between the Great War and the Great Recession was that they were unfinished events. Students of history knows that the Great War ended in the treaty of Versailles in 1919, only to erupt again 20 years later in a bigger war, the Great War of 1939 - 1945. The reason why the Great War was left unfinished because the combatant powers exhausted themselves fighting each other, and took exhaustion as resolution. It actually never is, as Great Recession will go on to show six decades later. But, as I say, Great Recession of 2009/10 was also an unfinished business, and we continued to live in its aftermath, only to reach here today - when a bigger, all-encompassing Recession 2.0 is staring at our face.



At the time, however, the Great Recession itself was called Great Depression 2.0, in a reference to the big stock market crash of 1929. While that was fashionable, this was not a like-for-like comparison. The Great Depression 1929, which continued to have a long term effect on the world economy, was, in a way, part of a broader shift which started with the Great War I and culminated in Great War II. Its reach was somewhat limited to banks and stock markets of America and Western Europe, and in a large part of the World, this was like a distant canon fire. The depression was, then, not yet global.



There were two other significant differences as well, which became clearer in the years after 2010. First, there were no mass media, except newspapers, during the Great Depression. Newspapers, by their very nature, was for the literate, wealthy city folks. The news gathering was largely local, and often time-lagged. In contrast, by 2009, news was carried by TV and the Internet, real time, to almost everyone who cared to watch. I recall a friend joking - "Great Depression was depression once a day, but this recession is recession 24x7'. Apart from being a truly global recession, the Great Recession was also a truly universal recession.



The second difference was the power structure of the world in 1929 as against 2009. The world in 1929 allowed a fresh accumulation of capital by extracting it from the colonies and submerging them with unequal tariffs. By 2009, that cycle was largely over - the poor nations were by then better organized and more aware, and fewer of them were being run by 'client' governments. So, there was a solution available in 1929 - spending the way out of trouble. As the experiences of 2010 showed us, that's exactly what the governments tried to do, but failed and got us to a bigger crisis.



But, before I get to the aftermath, I shall spend a moment on how the Great Recession happened in the first place. The prevailing wisdom at the time was that this caused by sub-prime lending by banks, which, in plain English, loans made to poor people who could not pay back. The word 'sub-prime' became a part of the lexicon in 2007, and it looked like a great steal, wherein the poor people stole all the money that hardworking entrepreneurs were earning.



However, my personal experiences during the time, and research in subsequent years, showed that while sub-prime lending is indeed the reason, the borrowers who defaulted were not exactly the stereotyped poor Joe. In fact, the Great Recession had nothing to do with any redistribution of prosperity, as was commonly seen. Contrarily, this was more about speculators stealing a bit of real economy; a nexus of bankers, corrupt builders and leveraged speculators taking a slice out of taxpayers' money. In the end, all of us were 'sub-prime'. All of us who speculated on buying a house when we don't need one, all of us who shored up credit card debts because the money was cheap, and even those governments who spent money irrationally because it was available. Banks lent money to banks with the same irrational exuberance, and countries bought up sovereign debts assuming that this could go on. All of that was sub-prime.

At the time, Jack Welch, a highly respected retired executive, called this 'Murder in the Financial Express' in the column he wrote, along with his wife, Suzy Welch, in the Businessweek. While the title may sound cheesy, he likened the whole affair to a famous crime novel of yesteryear, Murder in the Orient Express, in which a murder takes place on a running train, where almost all the other passengers were involved in the crime. He made his point - not just the bankers here, but everyone else running the economic system, including the presidents and prime ministers, were involved in causing the recession.

However, in all fairness, not one of them can be faulted individually. I recall two past Chairmen of the Federal Reserve, Paul Volcker and Alan Greenspan, were singled out for most of the flack. Their fault: Mr. Volcker adopted a solely monetarist approach to economic management, after the fashion of his time, and Mr. Greenspan kept the economy going by keeping the interest rates low even when storm clouds were around the corner.



At the hindsight, it seemed grossly unfair to blame them for the trouble. If Mr. Greenspan raised the interest rates higher, he would have been blamed for obstructing economic growth. They could afford to keep the interest rates low and let the sub-prime lending to happen because all the countries in the world were ready to loan money to the United States at a low interest rate. These two men were not world's bankers, as media almost made us believe then; they were United States executives carrying out a mandated job, enabled by the foolishness of the rest of the world.



I also remember, at the time, the comparisons were made with the recessions of 1970 and 1990. 'The biggest recession in 30 years' - you would have often found a headline. These comparisons were soothing and misleading in a way. The Great Recession was the first GREAT recession - nothing in human history that far could really compare with that. Joseph Schumpeter, a mid-20th century economist, saw economic cycles operating in smaller short-term curves, all of these collectively forming up a great long term curve. The Great Recession was seen, correctly, as the end of the post-Great War II expansion of the real economy, turn of the long-term economic cycle, quite unlike the short-term ones in 1970 and 1990.



There was another man who was barely mentioned at the time, as his theories were completely out of fashion. His name was Karl Marx, an amateur 19th century economist, who realized the crisis-prone nature of the capitalist economy and theorized that capitalism was bound implode, and the human society could only be preserved by a systemic diffusion of wealth and creation of shared prosperity and opportunity. Marx had a brilliant vision, but he was too optimistic as a man, and thought that he could get the world rid its capitalist follies within one lifetime. He did not succeed. His followers tried the grand experiment in Russia, and then elsewhere, to create a post-Capitalist society, which failed miserably. With its political underpinnings, Marx's theories were shunned by mainstream economists and policy-makers ever thereafter. The Great Recession, in many ways, affirmed his thoughts, but his ideas were still a political no-go. If his warnings were heeded, the policy prescriptions following the recession would have facilitated a gradual restructuring of the society, and would have made it ready for the coming age of scarcity. Alas, that was not to be.



Indeed, what happened after the Great Recession is more significant than what happened during it. I recall seeing many essays during the time describing the recession as the start of a shift away from American world power, and the emergence of the Chinese, or the Indians, as the pre-eminent countries. Nothing of that sort actually happened, though. The world continued to have faith in America's economic powers, its rule of law and banking system, and the United States government continued to use the cheap money made available to it to spend its way out of trouble. This effectively ended the recession - by diffusing it through spread. This was the reverse of Marx's solution - this spread the bankruptcy and misery rather than opportunity and prosperity - and created a sub-prime borrower of gigantic proportion, the United States itself.



Politically, the Great Recession made the world feel more global. The Great Wars undermined the nation states. The Great Recession undermined the national economies. The implications of the actions of distant traders in Tokyo, New York or London reached our doorsteps. It was no longer enough for an American President to protect the 'American Lifestyle'. One good thing : The Great Recession psychologically readied us for scarcity - of not just oil, but for an age when even clean air and water would not be sufficient.

And, then there was this question of leadership. I remember the election day of November 2nd, 2008, when I was in Bangladesh and watched America choose between John McCain and Barack Obama. Looking at it today, it turned out to be as significant as the choice American public faced, and made, between Herbert Hoover and FDR in the aftermath of the Great Depression, one trying to give more of the same old prescription and one promising change and a fresh approach to solve the problems. In all fairness, none of them had the final answer, being the system's children as they are. But, at least one of them cared as much for the bank bailouts as the medical care for the aged and the elderly. Thankfully, Americans made the right choice at the time and that sustained its economy, and more importantly, its society, through the crisis.

However, while American society was preserved through some exceptional leadership, I still see the Great Recession as an unfinished business. And, the current crisis of the bankruptcy of the nations appears be a bigger, deeper and possibly the final crisis of the current economic system. I am not a doomsayer and I have faith on the human ability to find solutions. I shall keep my faith - we are indeed capable of building a better, stabler economic system than the current one, which causes so much of misery to so many people, so frequently.

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