The expenses scandal may not have cost Gordon Brown his job, but it has done a good job of helping everyone forget about the fact that the world is facing the most serious economic downturn since the Great Depression.
The recent talk of ‘Green shoots’ is now looking distinctly optimistic. A recent analysis by economists Barry Eichengreen and Kevin O’Rourke suggests that the world economy is following a worryingly similar pattern to the Great Depression. One year in, global output is declining at roughly the same rate as it was in the 1929-30 downturn (Chart 1).
However, in terms of global trade, things are looking a lot worse than 1929-30 (Chart 2).
You may remember all the talk of how important it was to avoid protectionist policies for fear they would lead to another Great Depression. Well, there has hardly been a whiff of a trade tariff yet global trade has collapsed anyway.
This has resulted in the interesting phenomenon, as Paul Krugman recently suggested in his series of lectures at the London School of Economics, of major exporting countries such as Japan, Brazil and Germany, who had very little in the way of housing or other asset-bubbles, suffering more than the Anglo-Saxon bubble economies of the UK and the US. Meanwhile, developing countries dependent on foreign investment flows have been hit even harder. The Great Depression was global and global financial deregulation has made this one equally so.
Governments have been much more active in stimulating demand – through slashing interest rates and pumping money in the economy – than in the Great Depression of course, so things may pick up.
On the other hand interest rates can’t be lowered much further and there remains massive questions over the amount ‘de-leveraging’ still required by the major banks (and shadow banks) before credit lines can really be freed up. Germany still refuses to go public with the results of its banks’ stress tests, no doubt for fear of the resulting stock market collapse. As long as US house prices and the mortgage-backed securities dependent on them continue to lose value, counting chickens remains ill advised. And then then there is the possibility of another oil shock of course.
Rather than looking vainly for green shoots, governments should be getting on with the job of creating a Green New Deal with reform of the financial system at it heart. Some progress has been made on tax havens, yet other structural reforms have lost momentum, or not even got going. There is little evidence of the UK or European governments seriously looking at separating retail from investment banking for example, or re-mutualising financial institutions, as proposed recently by nef. And there is a danger that stronger reforms issued by the EU – for instance stricter regulation of mortgage credit limits – will be blocked by an increasingly euro-sceptic Britain.
A Labour MP I quizzed last weekend suggested it was rather hard for Britain to take the lead on financial regulation ‘because we live in a globalised world and might lose out to other countries’. Funny how this doesn’t work the other way around – Britain has always been very happy to be the first to de-regulate.
As the FT suggested in its editorial on Monday, a return to ‘business as usual’ in the financial sector is simply not a viable option. Its time to get the financial crisis (or perhaps we should call it the depression), and what to do about it, back on the agenda.