The Fallen Heroes of the Financial Crisis

PARIS – Oscar Wilde said that experience is the name we give to our mistakes. Last year, we tried to analyze the errors that led the world into economic crisis. Now it is time to analyze the mistakes we made when trying to get out of it. When the scale of the crisis became clear last year, many were certain that it would be managed badly. But perhaps we should be grateful that it was managed at all. Unlike in the 1930’s, decision-makers acted quickly, ignoring dogmas that warned against rapid intervention. Moreover, they knew that, in contrast to the inter-war period, close international coordination would be needed. In 2008-2009, the influence of the G-20 grew, at the expense of the G-8. People became aware of the need for truly global governance. And, at long last, a number of proposals emerged aimed at making such governance a reality. Experience, it turns out, is not just the name we give to our mistakes. As the financial crisis has shown, it is also the process that enables us to increase our understanding and ultimately to envisage a new world. Unfortunately, however, this process has not gone far enough, enabling many banks, governments, and international institutions to return to “business as usual.” Indeed, today the global economy’s arsonists have become prosecutors, and accuse the fire fighters of having provoked flooding. At the peak of the crisis, governments had an opportunity to create a new global financial infrastructure. But they let it slip through their fingers. The fact that many Western economies got out of recession last year should not fool us into thinking that the crisis was only a brief interlude, and that the post-crisis world can return to the pre-crisis status quo. There is pressure to re-write the history of this crisis by depicting effects as if they were causes, and to blame the governments that managed the crisis for starting it. A low point – perhaps one should say the height of ridiculousness – was reached last year when rating agencies intensified their surveillance of government debt, and markets that had been victimized by the agencies’ incompetence and bad faith became fixated on their evaluations. Lehman Brothers had been awarded a high rating on the very eve of its collapse, yet now the rating agencies criticize governments that pulled the global economy back from the abyss for violating accounting principles. Are rating agencies and the markets really so ill-informed about public spending? According to the International Monetary Fund, G-20 countries earmarked 17.6% of their GDP on average to supporting their banking systems, although they spent much less. Likewise, spending to stimulate the real economy totaled only 0.5% of GDP in 2008, 1.5% in 2009, and probably 1% this year. In total, the recovery plans of European Union members came to only 1.6% of GDP compared with 5.6% in the US. Governments took the right measures to save the banks, but ignored the political consequences. By doling out vast sums of money to rescue the financial system, without asking for genuine guarantees in return, they showed a lack of foresight. Acknowledging that rating agencies were incompetent without doing anything to regulate them was inexcusable. As a result, taxpayers may need to pay twice, once for the bailout and again for the low-quality debt they have incurred during the bailout, as the austerity programs unveiled in Europe attest. Paradoxically, the growing sense that a catastrophe has been averted has given rise to a growing demand for governments to cut public and social spending, and to refrain from proposing investment programs. People are racing back to the policies that caused the crisis in the first place. But governments are not guilty of deceiving the public; if anything, they acted naïvely and are now paying the price. Governments really have no choice: they must take responsibility and exercise power, even if it requires swimming against the tide of public opinion – and especially if it can help alleviate the social suffering brought on by the crisis. Indeed, we should remember that economic growth was sustainable only in countries with highly developed social welfare systems, like France. Yes, these countries will recover at a slower pace than elsewhere, but countries that have fallen into a deep hole must work harder than those that have fallen into a shallow one. Perhaps most importantly, the drive for greater competitiveness, regardless of the cost, will only aggravate the crisis. After all, export-led growth policies can succeed only if other countries are willing to run deficits. Given that the global imbalances that led to the crisis remain unaddressed, increased competitiveness will be a Pyrrhic victory – and one that will exact a severe toll on domestic living standards and consumption. Jean-Paul Fitoussi is Professor of Economics at Sciences-Po, Paris, and at Luiss, Rome.