The problem with understanding economic problems is that there are many ways to analyse an economic situation. The leaders of the G20 have resolved that a multi-pronged approach aiming to end the liquidity crunch while amending the rules under which banks operate should do the trick. Do their efforts represent a real solution or are we seeing the playing out of another drama of ignorance about economic processes?
A feature of the G20 proposal is that it partly addresses the demands of Gordon Brown for stimulus while partly addressing the demands of European leaders for reformation of the banking system. It is wonderful rhetoric, but does the rhetoric contain the solution, or might one ask in all sincerity whether there is at this point a solution. In my view, this rather depends on your point of view and how you see the economic processes playing out over time relative to what you consider your ideal.
Its obvious that the main target of community leaders should be to minimize inflation while maximizing real growth in new directions such as to resolve other crises that humanity faces. The measures proposed in the G20 statement of intent will go some of the way towards resolving the different crises, but what will play out will be huge differences in emphasis in different countries because of their respective competitive situations and whether they are the initiators of the crisis or the unfortunate recipients.
One has to ask the question why the credit crunch. If one gets the right answers then it is possible that solutions may be found. However, if one asks the wrong questions or looks at the economic processes incorrectly, one can easily foresee a continuation of 'issues' rather than their resolution. In my view the wrong people are reviewing the financial processes and probably getting it wrong. This is not because they are not brilliant in the field of economics or finance as presently defined, but because the whole science of most economic analysis is built on mistaken identity based on stereotypes that no longer apply. Partly, we are all to blame because we believe or have faith in mathematical analysis as the end of the story rather than thorough examination of the details through time.
Mathematically, we can examine the economic problem from a macro or micro economic perspective. In conventional macro economics, it is not obvious that there was rampant and destructive inflation. What was overlooked was the disjoint between short term financing and long term need. The gap between the two was bridged by a false and failing macro economic approach. What was needed was a measure of processes of inflation that are socially divisive.
This was definitely overlooked by the IMF whose role it was to have such an indicator. Do you think they will advise on the correct measure of inflation the second time round. I don't, and that is a real problem for the world! Their macro economics approach is presently insufficient to the task. They need to get a better measure of inflation and act accordingly.
Another aspect of the G20 communication is that there needs to be changes in the rules of banking. This we would all agree. The problems we have identified are associated with leveraging, hedging, borrowing short and lending long (in all environments of immediate, short and long term financial markets), debt burden creation by not limiting loans to weaker segments of borrowing, arm chair banking at it very worse, disregard for prudent loan management. All these are, however, to misidentify the real problems, which I believe will be allowed to continue unless they are understood for what they are.
Economists are prone to forget the very close connections between stock market activity and money market activity. When both markets are structured in such ways as to produce instability from their very nature, this does not augur well for the economic system as a whole. I believe that the structural problems of the financial system have not been identified or are being ignored while the focus is on the effects of bad structure not the elements of bad structure that need to be address.
Yes, my dears, mis-identification is the order of the day, and habit persistence of bad habits will govern the greater mess me will be forced to endure.
