Monday, February 15, 2010

How Real is The Recovery?

This is not a rhetorical question, nor a political one. The question, how real is the recovery, is serious and needs serious consideration not just from the policymakers, who are only too aware of the situation, but also from the media and the general public at large. We have long lived with this motto of 'perception is reality' and the current recession has indeed established the primacy of psychological factors in our economic world, but when we have started seeing the green shoots of recovery everywhere, it is better to set perception aside for a moment and get real.

Yes, because despite all the optimism in the market, the economic problems remain. What we see now are more symptomatic of the problems of the cure applied than of the disease itself, so to say. We are straddled with a big debt everywhere in the Western World, societies which have become accustomed to cheap money and lower interest rates, and unless some serious steps are taken now, it will be a very long time before we get out of the troubles. If ever.

The issue is that we are not going to be able to take those serious steps without hurting a lot of people. And, in the age of democracy and mass media, it is exceedingly difficult. Compare the Great Depression like for like with the current troubles, and you know the problem. We knew much more about economic cycles this time, but policy making was easier then. It was hilarious watching Hank Paulson and Alan Greenspan on television yesterday, when Fareed Zakaria chose to re-telecast an interview they have given on another network recently. Both of them said that difficult choices have to be made and the deficits have to be reduced; the next moment, though, they fumbled when asked whether the Bush-era tax cuts should go. They just could not say it on TV. Such is the power of mass medium - that it tamed two of the veteran policymakers, though not in elected office, from making one clear public pronouncement which could be unpopular with people.

So, we are left with two choices, both bad, and both will possibly occur simultaneously in the next few years. The inflation will rise first. It is already rising. Despite all the recession, we live in the era of real shortages: of food, of housing in popular urban areas, of health care, of education, of essential commodities. So, prices will rise - though the sale signs outside shops will become more common and more shops will fold. And, then, suddenly, the money will become scarce and the interest rates will start rising. And, both will possibly happen in quick succession, at least in Britain. We shall see some running inflation by Summer this year, and by next summer, we shall possibly be into a deep recession again aided by higher interest rates and failing businesses.

I am no pessimist, but standing at this point, it seems that we have handled the recession really bad. With all the knowledge of handling the Great Depression, we have still got it wrong. That's the problem of public policy: A disaster may teach you to ask the right questions, but you never know the right answers. Conventional wisdom held that letting the banks fail was one mistake that brought on the Great Depression; but even when the banks were given a lifeline to survive, it does not seem to be aiding the economies too much. If anything, the crisis is getting deeper, at least in some areas, and slowly affecting the social dynamic.

Here is an alternative answer. The real problem uncovered by the current crisis is that just how much of the economy belongs to banks. Some 40% of all the profits in Britain, by some estimates. Now, banks are the money business - it is actually more a social utility which keeps the money going rather than generate any value by itself. 40% of the profits is a rather disproportionate price to pay for such a function [let's try a parallel : an electricity generation system which generates all the pollution, but consumes 40% of the net power generated; but it is a bad parallel]. This is actually a black hole, which not only siphons out value, but also perverts the social mechanism by driving up conspicuous consumption as well as rents in faraway places where a banker may never go to live. And, our policies, instead of correcting this imbalance in any way, threw money at this imbalance. Throwing oil to fire, that's what we have done, because the Great Depression taught us that when the fire is burning too fast, it may quickly consume all that can burn - so we threw oil at it and it kept burning. May be, this time, I got a better parallel!

From a pure economic perspective, recessions like this have a utility. Every society, as it matures, builds up a class of rent-seekers, who extract a price from every act of value creation, without adding back any value to the society. Their existence discourage value creation, and pervert the economic functioning of the society. Their existence, and success, encourage other people to seek shortcuts to luxury rather than taking the long and arduous path to enterprise and creation of value. Recessions wipe out these rent-seekers and restart an economic regeneration. All this comes at a great social cost, and with lots of pain for the people who are not so well off. This is why recessions make elected politicians cringe; but one way or the other, such recessions are an unavoidable part of the capitalist free-market system that we all love.

However, we are still very bad at managing such crisis, despite all our knowledge and self-professed expertise. We live in a society where the power of vested interest, read rent seekers of our age, reign supreme. So, our policy-making is policy-making to restore the past, the same past that got us in trouble, rather than trying to usher in the future. So, we throw more oil to the fire. We use wrong indicators: We know the house prices were way above their long term value, but we want these prices to go up again. We want the banks to be profitable and take that as an indicator of life back to normal - which indeed it is - though crisis is the new normal.

And, this is no conspiracy theory, this is just normal democratic politics and free press and all that. This is what supposed to happen. We have got rid of autocratic, theocratic and all such voodoo powers and created a system where money, and only money, talks. Banks talk, therefore, as creators and holders and consumers of money. Our world - if we can still call it that way - is an irreversibly alienated world of money, where these currency figures jump up and down in front of our eyes to denote progress and disaster, where the stock market index can correctly indicate how we speak to our spouses when we return home, and house prices can define what our lives were worth. This is where freedom is perverted, by ourselves, into our ability to buy into slavery, of a payslip, a mortgage and a retirement saving. And, our elected representatives have no choice, and remember that they are the beneficiaries of the same rent-seeking system as we are, but to keep propping up the same sinking ship.

Whoever talked about arranging the deck chairs on the sinking Titanic, prophesied this moment.

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