A successful financial conference usually requires one or two well-known keynote speakers. Some have an interesting new perspective based on a unique understanding of a topical issue or trend usually derived from their jobs; others simply seem to be permanent, highly-paid fixtures on the international conference circuit, rolled out to preach their same tired sermons.
Certainly, the latter are invariably eminent people, clever and often having remarkable achievements behind them for an audience to acknowledge and applaud. Unfortunately, their speeches rarely contain surprises, but instead rely on predictable polemics. Perhaps, it’s the fault of the audience, who arrive with similar expectations to those of a crowd at a rock concert that feels short-changed if the band doesn’t play its favourite song.
There were few surprises when Joseph Stiglitz, Nobel laureate, former World Bank chief economist and distinguished academic, turned up to deliver his talk at the Asian Financial Forum in Hong Kong on January 17.
Stiglitz’s themes are extensive, capturing the one-issue agendas of disparate pressure groups and packaging them up in a rather puzzling “world view”.
At the same time he is refreshing, if only because his idealism and delivery style contrasts with the pessimism or egotism of some of his peers on the circuit.
Go to another conference and Jim Rogers will tell you about the case for buying commodities, learning Putonghua and earning enough money as an investment genius to really enjoy your mid-life crisis. Alternatively, hear Marc Faber mourn the death throes of the US; or GFC superstar Nouriel Roubini growl about the impending fragmentation of the world; or just listen to Lawrence Summers explain why Lawrence Summers is, without doubt, the smartest economist and most influential policymaker of his generation.
Yet, Stiglitz sounds unpolished, often tentative. He opines about the world, its faults and his proposed remedies, rather than basking in self-admiration. But perhaps that hesitancy is due to the fragility of the rainbow coalition of “just causes” he has devised: it’s illusory, lacking substance and there will never be a crock of gold. Maybe, he’s the Wizard of Oz.
“There are few grounds for optimism in Europe and the US; instead hope lies in Asia,” Stiglitz told an Asian audience during lunch at the Hong Kong conference.
Asia’s share of global GDP is on a path towards “rectifying a 200-year anomaly”. In the early decades of the 19th century the region had a 45% share that slumped to less than 10% due to “the industrial revolution, unfair treaties and colonialism”.
So, it seems that oppressed Asia is fighting back against Western bullies, and will succeed.
The lack of savings in the US — an average of zero — in 2007 was not only unsustainable but contributed to the worldwide financial crisis. In contrast, China’s saving rate in excess of 50% of GDP had been unfairly identified by Ben Bernanke, among others, as the major culprit by creating disastrous imbalances.
A spendthrift US blames a prudent China for its own irresponsible behaviour. And Asia’s resurgence — ignoring the rather nasty features of some of the region’s past (and some current) political systems — can be praised, and should rightfully take over roles corrupted by the decadent West.
In Stiglitz’s rainbow coalition, opponents of Western hegemony can link arms with banker-bashers and, most bizarrely, socialists.
“Increasingly, intermediation of Asia’s huge reservoir of savings will happen within the region rather than in New York and London,” argued Stiglitz. The presumption that the traditional Western centres of finance can handle risk best has been clearly undermined by the exposure of their failures in 2008. Savings had been misallocated to unaffordable house purchases and into Treasury bills to help fund tax cuts for the rich.
Meanwhile, complex financial innovation failed to improve productivity despite earlier claims by Wall Street, the Federal Reserve and government.
“The emperor was revealed to have no clothes.” The Fed had no idea that linkages between markets and asset categories were so entwined that spiralling contagion would make a mockery of its faith in risk diversification, said Stiglitz.
Yet, losses due to under-regulation — from bailouts and the slump in economic activity — far exceeded the costs that might have been endured from the burden of over-regulation.
And indeed, there is a consensus in the US — not shared by bankers — that the Dodd-Frank legislation doesn’t go far enough to militate against the moral hazard of financial institutions that are “too big to fail”.
So, the time is ripe to rebalance the international financial markets, shifting the fulcrum to regions such as Asia where there is a surfeit of savings. However, Asian policymakers need to learn the lesson from the US’s misguided dismantling of post-1930s regulatory architecture, and ensure strong rules and supervision are in place.
Meanwhile, China is saving the global economy from imploding.
The recent deceleration in China’s growth rate is encouraging because it indicates a shift from an export-led model to one driven by domestic consumption and is consistent with the country’s 12th five-year plan towards more sustainable economic expansion, argued Stiglitz. Imports, including from the West, have held up while exports have fallen.
In contrast, policymakers in the US and Europe keep getting it wrong. They surrender to powerful vested interests and ideology, enriching the wealthy, impoverishing the middle classes and condemning the poor.
In the US, high long-term unemployment is depressing wages, reducing median household income to a level as low as 15 years ago, said Stiglitz. Instead, “all the benefits are going to the people at the top”. Short-term corporate profits have been boosted, markets buoyed by low interest rates, but the consequences are damaging for long-term prosperity.
Here, Stiglitz will find plenty of support, far beyond the Occupy Wall Street mob.
The US needs to reactivate its economy, and acknowledge that its high industrial productivity and the shift of comparative advantages to China have caused a structural change to employment patterns. “Investment in the country’s crumbling infrastructure is overdue and would also create jobs, which in turn would raise demand.”
Austerity is not the cure for America’s ills; merely a slogan for a minority of influential ideologues.
In Europe, when the Greek crisis began in early 2010, EU policymakers prescribed austerity without explaining how the country could grow and prevent a deterioration of its fiscal deficit. Stiglitz compared the treatment to mediaeval blood-letting, which eventually kills the patient.
He doesn’t seem to be a great fan of the euro anyway, finding it analogous to the gold standard during the 1930s, and hence a constraint that is causing unnecessary pain. Nevertheless, should the currency collapse and break up, the effects will be highly disruptive for the global economy.
Whatever, the US and Europe need a hefty dose of government spending — and presumably borrowing if they can find enough lenders — in order to stimulate demand.
Fortunately, Asia is well-placed — although not insulated — to respond to volatility in the capital and wholesale markets if it adopts appropriate policy frameworks to support trade credit and focuses on the region’s vast domestic markets.
But, finally — and here lies the big lacuna in the manifesto for a new world order — let’s not forget climate change and environmental degradation. After all, Stiglitz shared another Nobel gong (the 2007 Peace Prize) for his lead authorship of the 1995 Report of the Intergovernmental Panel on Climate Change.
“If China and other emerging countries repeat the US’s manner of consumption, then the planet is doomed,” he warned.
Yet, clearly they are doing just that, and surely Stilgitz doesn’t believe that the domineering but discredited West should tell them not to buy cars or install air-conditioning in their homes.
Besides, if they weren’t, then as Stiglitz concedes, the West would be in an even bigger mess. At the same time, he also argues that European and US governments need to abandon austerity measures, and instead stimulate domestic demand through job creation, giving consumers more spending power.
No doubt too, the freedoms enjoyed by people in democracies are preferable to the constraints imposed under authoritarian regimes.
A member of the audience at the Hong Kong lunch suggested that perhaps a period of austerity wouldn’t be a bad idea if it meant saving the planet. Stiglitz laughed heartily, and the Wizard was revealed from behind the curtain.