Monday 21 September 2009

Learned nothing and forgotten nothing

I haven't taken a pop at Anatole Kaletsky for a while, but his piece in today's Times, titled "Economic policymakers should sit tight until 2011", is just too imbecilic to resist.

Kaletsky starts by repeating his surely discredited argument that the credit crisis only became a serious problem when the US allowed Lehman Brothers to collapse. Yes, it's still all Hank Paulson's fault: "It was Mr Paulson’s testimony before the Senate on September 23, to explain what he would do with this money, that turned the crisis into a previously unimaginable nightmare, by revealing that the man supposedly in charge of the world’s most important economy literally did not know what he was talking about". Well, Anatole certainly knows how it feels not to know what you're talking about.

Personally, I don't remember feeling all that comfortable about the crisis right up until the point where Lehman went under, as Kaletsky now claims he did. Neither do most other media commentators. For example, Jeremy Warner over at the Telegraph took issue with the "blame Hank" approach just a couple of weeks ago. As he, and I, and just about everyone else now sees it, if it hadn't been Lehman, it would almost certainly have been someone else. (Probably Merrill Lynch, but for John Thain's shameless scuppering of Bank of America's planned rescue of Lehman: see my previous posting).

That's all history now, of course. Much more disturbing is Kaletsky's prescription for the future: expansionary fiscal policy at least until 2011, and lax monetary policy basically for an indefinite period. Scary quote: "The low interest rate policy adopted by Alan Greenspan to support the US economy after 9/11 and the dot-com crash is now being implemented by the world as a whole. The probable result is that asset prices will again rise rapidly and financial activity will accelerate..."

Rejoice, saya Anatole. The whole world now enjoys the discredited monetary stance that got the US and the rest of us into so much trouble so recently. And even Kaletsky acknowledges that it will lead to the same outcome. Not a problem, though: "Booms and busts in asset prices are a natural feature of the capitalist system and the only way to prevent them would be either to paralyse the creativity of private enterprise or to keep the economy permanently depressed, with unemployment needlessly high". Anyway, Kaletsky knows the solution: "The real challenge for policymakers, therefore, is to find ways of channelling the next upsurge of financial activity into more constructive and sustainable investments than the last one". Phew, we're saved. Oh, hang on though: "But how exactly to design these improved regulations and better public-private partnerships is far from obvious".

It's hard to overstate how completely fatuous a piece Kaletsky has delivered here, especially since at the end of it he can't even come up with a concrete proposal. What's more, he's almost certainly wrong about the desirability of keeping rates low for a long period, and not just because of the risk of another asset price bubble. One of the more interesting pieces I've seen recently suggested that near-zero rates are directly contributing to the ongoing paralysis in the credit market. If you're a sound bank with lots of cash on hand, why would you lend it for almost no return to another bank that might still be facing credit problems? Better just to keep it in the vault. Even the most junior banker would understand that, but it's undoubtedly way beyond Kaletsky.

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