‘Mammon being carried up from Hell by a wolf, coming to inflame the human heart with Greed.’ Aquinas on Avarice
In mid 1997, the Thai Baht began to falter. Its decline marked the beginning of the East Asia crisis. Currency speculation had led to a supra-artificial economy. As traders in the First World poured money in purchasing the exotic currencies, their values shot up. Predictably enough, the moneymen then cashed in and sold up. The flight of capital out of the East sent the economies of the Asian countries into free fall. It was (uptil then) the greatest recession since the Great Depression.
Why do we need to be reminded of this not so old economic history now? Because history seems to be bent on repeating itself. True, if we ignore the issue of the scale of central bank injections, there are other possible candidates that share more specific similarities to our current downturn. The Japanese crisis at the turn of the 90s has, perhaps, clearer parallels. Paulson and Co. seem to have pinned their hopes on emulating Sweden’s support for its failing financial institutions. All this admitted, there still remain central economic tenets that we should have gleaned from what happened a decade ago. Our failure to learn wisely has allowed for the chickens to come home and roost.
The sweet irony is that, although the modern transaction may take place in trendy neon-lit , soaring glass skyscrapers that house our financial industry , we still remain addicted to some pretty age-old economic wrongs. I refer the reader to my previous post. If gambling-addicted traders sinned in their pursuit of greed during the East Asian crisis, then usurious bankers have a lot to answer for today. Both built artificial economies on the presumption that the good times would always last. The difference was that , last time, we didn’t feel the pain and so had no incentive to learn the lessons that were clear to all. I suspect this time might be a little different.
So are there any golden rules that could help us avoid ‘next time’? There will be plenty of suggestions to come, but two basic laws must not be forgotten : (1) – Unimpeded free markets are an idealists dream; State intervention will always be needed to maintain the balance of economic forces. Then, the IMF couldn’t stomach this as it exacerbated the crisis with its monocular thinking that forbade capital controls. Today, the nationalisation and recapitalisation of world banks mark a watershed in economic thinking. The mixed economy has returned to being the default option. Now we must continue through and recognise that the markets are not solely accountable to the laws of confidence. To be sure, we cannot not engage in the folly of communism and seek to ignore the laws of supply and demand altogether. Nevertheless both recent failures have highlighted that the rampant flow of money based on a whiff of information can be catastrophic. We need to slow down our casino trading, regulate our bankers and align interests so that they suffer if they take wild risks. (2) – Just as importantly, prosperity is judged on true blue growth and not on inflated fiscal standards. Before the East Asian crisis we in the West arrogantly assumed that industrialisation had nothing to do with wealth creation. Instead of FDIs which could have been hardwired to the pre-97 manufacturing boom of East Asia we speculated with capital which was begging for investment. Today, the interconnectedness of banks means that we will end up paying for our national neglect of manufacturing. House prices may have provided paper wealth, but in this game of rock, scissors, stone, our monopoly money simply will not stand up against the Chinese spanner . The Thatcher/Major/Blair years saw manufacturing either outsource or grind to a halt. London might well aim to be a centre of finance, but that need not mutually exclude its being a centre of produce. Home and abroad, we need to reprioritise.
These, then, are basic, rudimentary lessons. In these testing times we are likely to acknowledge them, much like the fevered patient who must swallow the bitter pill. But when we are healthy will we remember such preventative prescriptions? Hardly likely. After all, man is made of haste.
