| Charles Dumas. Profile Books, 2010, 277 pages, £15. |
| As the economic crisis continues into its alleged recovery phase,
the policy debate mirrors the analysis of the crisis thus far, mostly
focusing on micro factors such as regulation, incentives, the size and
structure of banks, and so on. Charles Dumas exposes the folly of
addressing only these concerns at the expense of bigger issues. His
hypothesis is simple: the era of globalisation that permitted the
movement of capital in particular, is fractured owing to imbalances
primarily in the savings of rich countries vis à vis the deficit ones.
Had this glut of savings found a more useful outlet (for example,
serving domestic consumption) then US consumers in particular would not
have engaged in such heavy borrowing that led to the crisis in the first
place. |
| Pinning the blame on savers rather than borrowers of course goes
against the grain of the morality play that passes for economic analysis
in too many instances. But Dumas makes a credible case, not least
because in both China and Germany it was a combination of policy
decisions and deep-rooted mercantilist thinking which fostered high
savings and low domestic consumption. Thus given the Fed’s policy of
pursuing full employment/low inflation, especially in order to foster a
recovery from the 2001-02 recession, US consumers had little choice but
to borrow. Moreover, Dumas illustrates how these mercantilist policies
by the surplus countries meant that the initial stages of the recession
hit the exporters the hardest as over-extended borrowers reduced
consumption. In that sense, they really did ‘choose’ recession as he
states, and are likely to do so again as we tip back into it. |
| But Dumas is making a more sophisticated argument than this simple
contrarian view. His key insight is that the policy conflicts today
arise precisely from policies that were divergent but compatible in the
past – American leveraging, Wall Street ‘excess’, Japanese/European
restructuring and Chinese saving. It is thus policy makers’ failure
and/or refusal to see this conflict that is preventing the appropriate
remedial action. |
| It’s a brave call, but Dumas makes a convincing and credible
argument. Supported by data, he illustrates in turn the problems facing
Europe, the UK, the US, Japan and China, showing how the seeds of this
problem were sown long ago – in for example, the decision to allow Italy
entry to EMU, or the failure by Japan to address its internal structural
problems in a timely manner. All the analysis leads to the same
ineluctable logic stated in the cynical but accurate title of chapter
10, “What should be done and what probably won’t be.” Here, Dumas’
analysis centres on the US and he shows through the ineluctable logic of
international financial accounting that net exports (or import
substitution) are the only escape route for the US (and thus the world),
with higher domestic consumption or higher Government deficits not an
option given the required rebuilding of personal balance sheets. |
| However, an increase in exports or greater import substitution
necessarily means less market share for China and, through the
imposition of import tariffs (quite likely in the US political climate),
the ‘opportunity’ to make everyone poorer and break the world the
globalisation we have come to know. Unappealing though this obviously
is, Dumas makes clear how the blinkered thinking of the Chinese and its
powerful export lobby is probably unable to see beyond the immediate
goal of growing exports. The alternative is the status quo, continuing
US borrowing, probably by the Government, until a degradation of credit
is inescapable. That scenario seems equally implausible. Which way the
balance will tilt will decide the fate of the global economy. |
| The strength in Dumas’ book lies in its strong data-driven narrative
and its pragmatic but not casual use of economic theory. This is
probably the only analysis of the crisis in which Keynes, Friedman and
Schumpeter sit side by side. This in itself is a strong rebuttal to
those (on all sides) who see the problems we are facing in much simpler
terms and particularly to those who see high deficits per se as an issue
to be addressed. |
| The weakest points come early on, in particular the earful he gives
Ben Bernanke and Hank Paulson for their decisions in 2007. Dumas argues
that if the Fed had enforced a standstill period in which an analysis of
asset values could have taken place, then a market in those assets would
have been available and the information gap which led to the breakdown
in the interbank market would not have arisen. But though he is probably
correct that it was the asset markets in which the crisis originated,
his alternative policy is surely too naive. Dumas’ solution was
essentially asking for a 1930s-style suspension of convertibility to the
corporate sector, given that corporate repos accounted for the bulk of
the liabilities, but this just would not have been feasible. |
| This is a minor quibble. Dumas has done more than anyone else to
identify the correct policy mix going forward and outline the stark
choices to be made. |
| Nooman Haque |
|