When the dust
eventually settles
BY: DAVID SMITH
I
t is sobering to think that the period consequences but not the ones you experience recession, though in general
we have just been through – are still necessarily expect. recessions will be relatively short and
going through – will be talked about Or think of 1992-3 and the great shallow. As for the world economy, it
for decades to come. Living through crisis for the European exchange rate will be kept going by emerging
history is not always as exciting as one mechanism (ERM), which included economies, notably China and India.
expects, though the past few months Britain’s ‘Black Wednesday’ exit from the If we take the International
have had enough dramas, and jitters, to system. Predictions about Britain, which Monetary Fund’s latest forecast as a
fi ll many years. And yes it has been both had undergone a big, unplanned sterling template, next year will see zero growth
exciting and rather alarming. devaluation, were split between forecasts in advanced economies and 6% in the
But if the events themselves will stand of depression and those of rampant emerging world. Overall growth of 3%
the test of time, what about the infl ation. Predictions for Europe will be above the 2% normally used as
conclusions that we draw from them? centered around the ending of the dream the defi nition of world recession.
Will they look shrewd or foolish? Just as of European monetary union and a The IMF, in common with most
few people can genuinely claim to have single currency. forecasters, emphasises that there are
spotted the crisis coming, how many will ‘downside risks’ to this assessment. It
get the consequences right? UNEXPECTED CONSEQUENCES could, in other words, be a lot worse.
The record, it should be said, is not In fact, as we now know, the But could it also, to play devil’s advocate,
that good. If we take a series of consequence for Britain of leaving the be a lot better? History tells us, after all,
admittedly rather different fi nancial ERM was a long period of non- that policy can make a big difference
crises, it is easy to see how predictions infl ationary growth, unparalleled in the when serious downturns threaten. This
made in the heat of the moment turned modern era, while for Europe, the time we have seen policymakers deploy
out to be wide of the market. ERM’s problems merely led to a new every weapon at their disposal, some of
The October 1987 stock market crash, determination to push for monetary which we were unaware they had,
for example, generated as many union, which was achieved in 1999. including comphrehensive banking
predictions of a new Great Depression as There are many other examples. The system rescues, aggressive use of fi scal
the current episode. The parallels between simultaneous Asian, Russian and hedge policy and big cuts in interest rates.
1987 and 1929 were just too tempting, fund crises of 1998 would surely lead to The easiest thing at times like this is to
even down to the month and severity of a global recession in 1999, would they go along with the conventional wisdom
the share price plunge on Wall Street. not? No, 1999 was a boom year, again and to assume that the biggest fi nancial
The conventional wisdom was, thanks to aggressive rate cuts, led by shock since the 1930s will have fairly dire
however, wrong. There was no Alan Greenspan in the United States. consequences for the real economy. It
depression, and not even a world Even the 9/11 attacks on America in may be that the conventional wisdom is
recession for three to four years. That September 2001 did not lead to the right and, indeed, is understating those
recession, when it came, was not as a expected prolonged recession. The policy downside risks, but be aware of the
result of the crash but as a consequence response more than offset the economic alternative view.
of central banks and governments impact of those attacks. The conventional wisdom about
tightening policy to bring down So, it seems, a little humility is in banking is that there will now be very
infl ation. Where did the infl ation come order. What does the conventional profound changes. De-leveraging will
from? It came because monetary policy wisdom say about the impact of the last for years and will be accompanied by
was eased too much to head-off the credit crunch and the wild gyrations we fundamental changes in banking
recessionary dangers resulting from the have witnessed in recent months? It says behaviour. No more will bankers be
stock market crash. Actions have that most advanced economies will taking undue risks with depositors’ and
4 WINTER 2008/09
0404 comment.indd 4comment.indd 4 27/11/0827/11/08 16:19:2116:19:21
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