Not good, or at least not yet. Most people with the power to do anything are still wedded to the idea that we can’t get by without credit flowing as it did during the gusher days, and they’re far from alone in this belief.
Hardly a surprise, I suppose. The freewheeling, apparently prosperous days of rapid credit growth look very attractive from our current funk. To accept that the salad days are over (quite possibly for a very long time) is never going to be easy, not even with the best will in the world. Expecting politicians, befuddled themselves by the whole mess, to sell that difficult message is probably to expect too much.
There are a few glimmers of light. For example, Paul Volcker seems to have finally tired of playing the “good soldier” within the Obama administration and instead decided to use his formidable reputation, and undoubted courage, to do what he can to turn things onto a saner course. His recent campaign has shifted the tenor of the debate but it’s almost certainly unrealistic to hope that one man can truly turn things around.
The political sweet spot was this time last year. With the markets in turmoil, there was a genuine constituency for root and branch reform and opponents were in disarray. Had the opportunity been seized, almost anything could have been pushed through. Instead, the status quo was propped up and has, if anything, emerged even more powerful.
Perhaps still worse is the fact that most governments are now locked into reacting in a certain fashion, one from which it would be exceptionally difficult to extricate themselves. Almost all of them have made either explicit or de facto commitments to support their financial systems, come what may. For the moment, most are tinkering with the tricky (but nevertheless relatively pleasant) problem of how best to unwind some of the support programs put in place during the depths of the crisis. If things once again headed south, though, does anyone really think they won’t be handing out blank cheques again?
Had lenders to the financial system only been allowed (or where necessary, forced) to take their share of the pain, things would look very different. Bank equity would be way up, and bank indebtedness down; the top managers of restructured financial institutions would, for the most part, have been replaced and the new ones wouldn’t have the same incentive to defend and propagate past practices; finally, and by no means least, a more sane balance between risk and reward would at last have been restored.
Sadly, it wasn’t to be and it’s not easy to see how the intellectual leap to a radically different policy will be made. The incumbents are far too wedded to the errors of the past. Not many people can say “I was wrong” and mean it, and that’s exactly what would be needed.
Perhaps thoroughgoing reform will only occur in the wake of a fresh crisis sufficiently severe to end the reign of the current crop of leaders. That’s far from impossible. With the gross imbalances built up through the years of excess hardly even touched, additional crises seem more likely than not.
Whether any such new leaders would be an improvement is another matter. History suggests the risks are uncomfortably high.
Ingolf Eide
January 2010
Money, Credit & Financial Systems 