Downturn stems from fear and green growth

The following comment by me appeared in the latest Fund Strategy (15 December).

As the days go by explanations for the economic crisis pile up. Initially the favoured explanation was a combination of greedy bankers and irresponsible borrowers. Others added to the list since include insufficient state intervention and timeless financial euphoria.

This column has argued instead that other factors are key. It can be seen as a crisis of green capitalism and of risk aversion.

Green capitalism is key because it means that the growth in productive capacity is being slowed by subjective limits. There is a widespread fear of growth and innovation. As a result a disparity arose between the scale of production and that of consumption. In that sense it can be called a crisis of underproduction.

Risk aversion also plays a role. As the financial sector has swollen it has been shaped by risk aversion. Many key financial instruments that have played a large role in the crisis – including credit derivatives and securitised mortgage products – are essentially mechanisms for transferring risk. Yet, contrary to what their creators intended, they have created the basis for “contagion” as financial problems have spread.

On reflection there is also another important factor to consider. It could indicate the decline in importance of a one-off boost to the global economy.

With the end of the Cold War a huge new labour force became more closely integrated to the global economy. China and India boomed and the world economy enjoyed a strong growth spurt as a result.

Clearly China, India and other emerging economies will still continue to exist and, hopefully, to grow. But it is hard to see any equivalent additional boost to the global economy of the scale of the addition of these countries.

In the past two decades the world has enjoyed an unprecedented period of extensive growth. The scale of involvement in the global economy has grown hugely and many millions of people have benefited as a result.

This boom is entirely different in character to that which followed the end of the second world war. That was much more characterised by intensive investment in technology and machinery.

Experience provides little guide to the character of the economic crisis. Its roots in green capitalism, risk aversion and extensive growth make it unlike any other.