In regard to the depth of the downturn, the comparison is very different between countries. In the US and Germany, the loss of output since 2008 of about 5-7pc hardly registers against the losses registered during the Great Depression, when output fell by 25pc.
But the recession here in the UK has been greater. Contrary to the folk memory of a disastrous decade, in the 1930s the UK did relatively well. Of course, unemployment at first rose alarmingly – and this counted for far more then as living standards were lower and there was less support for the needy. Yet output here only fell by about 8pc, and it subsequently recovered rapidly.
In the popular imagination, the slump of the 1930s was set off by the sharp falls in share prices in the Wall Street Crash of 1929. In fact, the direct effect of the Crash was probably not that great. More important was the international banking crisis which followed the collapse of the Austrian bank, Creditanstalt, in 1931.
This time we have not had major weakness in share prices, but we have had a major asset price collapse, namely in real estate prices - in America, Spain and Ireland. As a direct result, we have certainly had a major banking crisis.
This was a key feature of 1930s America. Interestingly, though, despite the economic downturn, there were no bank failures here. That meant that the policy of very low interest rates and concomitant low bond yields could succeed in boosting private spending.
The depressing aspect of today’s situation is that the banks are so weakened by the combination of losses on past loans and fears of euro meltdown that even official interest rates close to zero are not having much of a stimulative effect. Moreover, tighter regulation has made banks more risk averse at just the time that economic recovery demands that they should be more enterprising.
As regards policy to get out of the mess, there are both similarities and differences. In 2009, there was an international conference in London to try to sort the problem out. The same thing had happened in 1933. And then, as now, it does not seem to have done any lasting good. In the 1930s, the possibility of reaching a global solution was hampered by the difficult relationship between the old hegemon, the UK, and the new powers, the US, Germany and Japan. Now the US, as the declining hegemon, squares off against China and the emerging markets.
Then, a rigid fixed exchange rate system, the Gold Standard, was a key part of the problem. Today, this role is played by the euro. But for good measure, we also have the informal fixed exchange rate system operating between the United States and much of the emerging world.
Thankfully, one major absentee in today’s conjuncture - so far anyway - is protectionism. Just as today, the Great Depression occurred against the backdrop of the British government struggling with a high level of debt. Indeed, the problem then was much worse. In 1929, the ratio of government debt to GDP was 162pc, compared to “only” 65pc now. Interestingly, in America, the equivalent figure was 14pc. It did not reach 50pc until the war.
Then the effectiveness of monetary policy was hampered by the fact that one of the world’s two major central banks, the Federal Reserve, was young and inexperienced, which led it into some unforced errors. You cannot say that about the Fed now. But step forward the European Central Bank (ECB), which presides over an economic area roughly as large as the US. It has been nobbled by a combination of inexperience and the impossible political pressures created by the euro.
As recently as July of last year, the ECB was raising interest rates to head off a supposed inflationary danger. Interestingly, it also raised rates in July 2008, just as the world was heading into recession. It is still refraining from cutting rates all the way to zero, as the situation surely demands.
In the early 1930s, the world also suffered from weak political leadership. In Germany, Weimar governments bumbled on ineffectively; in France there was a rapid succession of weak leaders; in the UK, this was the era of Stanley Baldwin and Ramsay Macdonald; in the US, President Hoover famously built a dam, but not much else.
There were great leaders around from the past – Lloyd George in the UK – and those yet to come to power – Winston Churchill and Franklin Roosevelt. But by comparison, the current incumbents were pygmies. Surely I do not need to rehearse the parallels now.
So what is to be done? Next week, I will give my views on how we can get out of this mess.
The Telegraph
No comments:
Post a Comment