Column : Fork in the road

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Column : We always overcome

: After the global economic turbulence of 2008, what does the future hold?  This is unusually hard to call.  Consider two scenarios. 

First let’s look at what could happen with a positive spirit.  Think of this as the victory of ideas over interests and economic complexity—the true legacy of Keynes.   2008 experienced the most dramatic financial crisis since the Great Depression.  Most of the industrialised world is in recession, and commodity and asset prices have collapsed.

But it could have been a lot worse. The financial system was saved from implosion. It seemed interminable at the time, but there was, by historical standards, an impressive response from the US, Europe and many developing countries.  This involved strikingly pragmatic government involvement in the financial system, unprecedented monetary easing, and a near-consensus on the desirability of contracyclical fiscal policy. 

Good ideas and good policy could keep the recession in rich countries modest and brief, with monetary action acquiring traction, credit flowing, and fiscal expansion working.  Smart financial policy would support the smooth deleveraging of the financial system.   

The developing world would suffer a slowdown, but this would be modest and temporary.  China undertakes a genuine fiscal stimulus and succeeds in increasing domestic consumption, compelled by the political necessity to keep growth rates above 7-8 percent.  India suffers from lost export markets and indirect effects of the international credit crunch, but growth rates would only dip to around 5 percent.  

There would also be silver linings.  A better form of regulated financial capitalism will emerge, bringing the shadow banking system into the fold of core regulatory structures with more effective market and societal scrutiny.  Financial innovation would indeed slow down, and financial sector rewards would no longer be at obscene levels, but this will induce the best talents to go back into the real economy. Physicists will do science rather than write models of asset price behaviour.