Opinion: A tumultuous year

By Neville Bennett The collapse of capitalism is much exaggerated. True the world economy had a coronary attack last year but it is making a recovery. Concerted actions by the world's central banks have almost restored its collapsed arteries and blood is flowing, albeit at a slower pace. The vision of capitalism as a perfect, or near perfect system has survived, although most authorities feel much more regulation is necessary. It is hard now to recapture our bewilderment a year ago. At the time I compared it to September 1931 when Japan invaded Manchuria, when a thousand US banks collapsed, when Great Britain was forced off the Gold Standard and its government collapsed, being replaced by its first peacetime coalition government. Amazingly the Royal Navy had a mutiny over pay cuts. A huge Austrian bank collapsed creating contagious mayhem around the world. New Zealand suffered the horrendous Napier earthquake. In both September 1931 and 2008, men and women around the world began to talk about the collapse of capitalism.

In some ways 2008 was worse than 1931. No British Commonwealth bank crashed in the Great Depression, but in late 2008 many banks survived only because the state bailed them out and often took a major shareholding. Suave aristocratic banks in London, New York and Zurich were humbled. Few banks dared to lend to another for fear of total loss. Credit evapourated. Credit is the lifeblood of an economy. In this way a financial crisis was immediately changed into a major economic crisis. Survivors talk about the economy "hitting the wall" in October. This is no exaggeration as major manufactured items like cars, suffered dramatic collapses in demand. Huge manufacturers like General Motors, Chrysler and General Electric were devastated. Trade and manufacturing fell faster than in the 1930's. Transport also massively lost traffic whether by sea, air or land. Most economies plunged into recession and unemployment grew steeply. The causes of the crisis are generally well known and do not require undue attention here. It must be said, however, that the crisis was preceded by a lunatic belief that a rapid rise in asset values (of houses, shares and especially securitized debt etc) was sustainable, even if the credit agencies and banks pronounced them sound. There was a lot of self-interested behaviour in financial institutions especially in awarding bonuses to staff and in selling mortgages to non-prime lenders or advancing money for excessive development. But there was also delusion emanating from economists. As Paul Krugman has said, they placed reliance on models that did not relate to the economy. They accepted an "efficient market hypothesis" which assumed all assets were rightly priced which blinded central bankers to the danger of bubbles; and they were reluctant to intervene. Everyone assumed a CDO etc could be sold at will, but panic was underestimated, so when everyone ran for the exits there was an escalating crash. For several weeks many citizens around the world feared for the safety of their deposited nest eggs. The crash of share markets had precedents, and so had the failure of finance companies. But major banks had not crashed. The whole system seemed vulnerable to a falling-domino cascade. Ordinary Kiwis were agitated because their banks were over-exposed to property and were funded short time by overseas majors. As elsewhere, calm here was restored by a Government guarantee of deposits. Grave uncertainty prevailed until March 2009. Stock markets are a useful indicator of sentiment: they crashed in September and made a tentative recovery when the central banks stepped in to create vast pools and liquidity and lower interest rates. Governments were very accommodating: they turned to Keynsian ideas of stimulus packages and set new precedents by propping up failing companies with direct assistance. In March 2009, there was another stock market sell-off, but since then markets have gained remarkably. The economic situation has been stabilised by central bank and central government intervention. The level of global industrial activity has turned positive for the first time since May 2008. There are "green shoots" in abundance. The economy has continued to operate because people have to be fed, housed, transported, educated, entertained and be cared for. Retailers and manufacturers had too much stock and shops have been busy selling it down. New orders for inventory are appearing and people are travelling. People are a little more frugal, and conscious of debt, but that irrepressible spirit of humanity makes them optimistic and they are determined that life will go on and they will do their darndest to enjoy it. Naturally there are doubts that the recovery is sustainable. China appears to be strong but not strong enough one suspects to pull the global economy out of its stupor. I feel Wall Street has anticipated a huge recovery while most experts think growth with by rather low for many years as debt is an issue. I suspect the global economy will rise and fall for several years. Governments meeting in G20 feel the stimulus has to be withdrawn but their response is that of the alcoholic: "not yet!" ____________ * Neville Bennett was a long-time Senior Lecturer in History at the University of Canterbury, where he taught since 1971. His focus is economic history and markets. He is also a columnist for the NBR where a version of this item first appeared. neville@bennetteconomics.com www.bennetteconomics.com