Sunday, 28 August 2011

Ben did not deliver, but Wolfgang did

 US Fed Chief Ben Bernanke’s speech at the annual meeting of central bankers in Jackson Hole ended up by being an anticlimax. Before the speech we were told that the markets would collapse if he did not announce a large-scale bond purchase program. He did not, but he did repeat that in case the (US) economic situation did deteriorate, Federal Reserve will do something. So at the end of the day, the stock markets chose to interpret the lack of announcement as a positive statement that the economy is not that bad, after all. Confused? You are not alone. But you have just witnessed one of those episodes that demonstrate why central bankers rarely speak plainly.

At a much lower-profile economic conference at the St Gallen university in Switzerland, Germany’s Finance Minister Schäuble made some statements that were far clearer. He bluntly stated that the global programs of fiscal consolidation create a risk that the global economy faces a period of seven lean years in terms of economic growth. He also said that structural economic reform is necessary in four EU member countries and that governments should take a greater responsibility in fighting the global economic crisis.

Note that Schäuble is a politician who is not facing an election anytime soon, he is not trying to become Germany’s next Chancellor, and he has a reputation for speaking his mind – he did after all state that the previous US Quantitative Easing Programme was “clueless” and that it was a proof of how the US did not know how to solve its crisis.

Readers of this blog will not be surprised that I share Schäuble’s point of view. It is just rare to hear it stated so clearly from a senior politician in one of the large global economies. I believe that there is a risk of a period of slow growth because of the ongoing unwinding of the debt global debt bubble.

Quietly, consumers in many OECD countries have increased their savings rate significantly. It means that traditional measures to stimulate demand – lower taxes – will not work as it will only increase the savings. In itself it is enough to warrant a period of slow growth. Now this is being compounded by fiscal austerity measures that will only extend the period of slow growth further.

At the beginning of 2009, I used the same biblical metaphor of the seven lean years. That is soon three years ago. With another four years to go, I still may be right. That economic growth will be back on track by 2016 instead 2018 as implied by Schäuble.

However, there are still some structural problems where I do not see any signs of improvement. They may still derail any well-meant attempt at letting short-term pain be a mean to achieve long-term gains.

I am talking about the fact that there are countries, where the access to consumer loan finance is easy and considered almost a human right, and the biggest of them is the US. In Europe, UK is the main representative of this attitude. It could happen that there is a political backlash waiting from consumers (voters), who get fed up with having to save. 

There is no political gain to be had for anybody to try and fix this by introducing legislation or regulation that puts a limit on the access to loans. No, I do not mean quantitative restrictions, but something as simple as requesting that consumers are able to make a reasonable down payment on house or car before financing the rest. Banks should be forced to make a minimum verification of borrower’s credit worthiness before extending a loan. And so on.

I know, it is not very likely. Politicians have a tendency to think in terms of elections, and that is bad news for structural reform. But then we can hope for something else – the continuation of the current trend towards forcing the banks to have a far more significant capital base. It will cut the banking sector down to size, it will reduce the profitability of the sector, it will reduce its political influence. And at the end of the day, this deleveraging will contribute to extending the period of below-trend growth. Meaning that Schäuble may end up being right that 2018 is a likely time for return to trend growth.

There are many aspects of the cleaning up after a debt bubble that burst. Schäuble did not touch upon them all. But at least he has the political courage to speak up.

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