Gringo leaders to blame for crisis

The following comment by me appeared in the latest Fund Strategy (6 April). The headline is a reference to the derision heaped on President Lula of Brazil in some sections of the financial media for daring to blame the developed countries for the crisis.

While the G20 leaders were smiling politely for the world’s media, the blame game on who was responsible for the ­economic crisis intensified. Several potential culprits are in the dock.

Bankers are probably still the most widely blamed. Their greed is held responsible for creating a financial bubble which then burst with catastrophic results. Politicians have happily cranked up the attacks on bankers to help distance themselves from the crisis.

China is widely held responsible in more high-­flying circles. According to this view, excess Chinese savings were at fault as they found their way into the American financial markets. From this perspective, it was Beijing’s irresponsibility that played the key role in creating the bubble.

But what could be called the “Greenspan explanation” is coming up quickly on the inside. This blames loose American monetary policy under Alan Greenspan – until recently seen as a God in financial circles – for the creation of the bubble. He is accused of keeping interest rates irresponsibly low during his two decades as chairman of the Federal Reserve.

While these are competing explanations, with ­different policy implications, they have much in common. All of them see excessive popular consumption as playing a key role in the build-up to the crisis. The ultimate culprit is seen as the consumer; particularly the American consumer. It was a view implicitly endorsed by Barack Obama in his joint press conference with Gordon Brown last week when he referred to America’s “voracious consumer market”.

For this perspective, a long period of overconsumption gave rise to a crisis of underconsumption. A huge consumption bubble gave way to bust.

Such an argument can be countered on political and analytical grounds. Politically it is a misanthropic outlook: it assumes ordinary people are ultimately to blame for the unsustainable cycle of boom and bust. Yet such people have little or no control over business or economic policy.

Analytically it is grossly one-sided. It is blind to the fact that what is consumed first has to be produced. Production is logically and chronologically prior to consumption.

Greenspan certainly kept American interest rates low but this was not a policy error. It was an attempt to overcome the chronic lethargy of the American economy. To an extent the apparent dynamism of the American economy, particularly during the Clinton administration, was illusory. The massive extension of credit exaggerated the strength of growth in the American economy.

The leaders of the western world – those President Lula of Brazil called the “white and blue eyed” – really are responsible for the crisis. They failed to tackle the weak growth dynamic in their own system.