One of the things that’s cool about smart people is that they can make otherwise obvious points sound interesting because they know how to formulate arguments cogently. I heard an interview a little while ago with David Tuckett, author of Minding the Markets (a member of the class of books that I should and would like to but likely won’t read), and he made this point regarding the current global economic sinkhole: The problem we’re in is that everyone knows things went wrong but no one can agree on who should take the losses.*
Of course this is a pretty obvious point. Things indeed did go wrong and someone or some many probably should suffer loses. But who? The problem right now isn’t debt, or deficits, or loose lending, or loose borrowing, or structural inefficiencies, or whatever. I mean, these are all problems and they do need to be addressed; but the main issue facing Europe and by extension the world has to do with who’s going to take the hit for the things that went wrong.
Tuckett’s argument goes like this. Markets are uncertain and involve, to a large degree, emotions. (They also involve things like bounded rationality as well as the burden of too much information, but Tuckett is a psychoanalyst by trade so he likes to think a lot about emotions.) When things are going well, people get excited and they want to catch hold of that excitement. But things can’t always go up, poor decisions are often made, and then when things go wrong loses have to be taken. Regarding the current crisis, everyone knows that things went wrong (and everyone right now is super interested in telling that story, the “why” story), but no one knows how to distribute the loses. Yet loses have to be taken. And one of the reasons why markets are so volatile right now is that this problem hasn’t been resolved.
In connection with this, and as his very general explanation for what went wrong, Tuckett thinks that financial markets cannot, or at least should not, grow faster than the real markets underlying them. In the build up to the crisis, this relationship became massively distorted and so along with assigning loses, we also need to get better at acknowledging reality.
And here’s where we come to politicians and the policies they’re entrusted to make. Because reality is often difficult and annoying and stubborn, if we and the markets we create are to come to grips with it, then we need leaders both willing to speak about the tough decisions that have to made and courageous enough to start actually making those decisions.**
The circular part of this story is that the decisions these theoretically courageous leaders have to make is where and to whom to assign loses. And for us as citizens to trust these leaders we’d like for them to tell us a fairly reasonable story as to why these particular people/institutions are taking these particular loses. And now we’re back to the “why” game. Nevertheless, I still think Tuckett makes a good point about how necessary it is that politicians step up and assign loses. Let’s just hope the story they tell while doing so makes sense.
* Should Greek citizens be accountable? The Greek government? The Italian government? Their banks? German banks? German tax-payers? Greek tax-evaders? Other eurozone member states? Their tax-payers? American financiers at Goldman? Investors that keep blowing air into the sovereign debt and CDS market (which apparently isn’t much of a market anymore)? EU technocrats that haven’t figured out an efficient and reasonable way to integrate European economies? EU law that doesn’t hold anyone accountable for breaching the Maastricht Treaty’s Stability and Growth Pact. The ECB? That idiot in Ireland who continued to flip real-estate at the height of the bubble? Robert Schuman’s saccharine idealism? Immigrants? The list can get pretty long…
** Obviously “face reality” is a terrible cliche. And cliches are to be avoided. But economics is usually described as a subject of choices, not of aesthetics. There are, in fact, realities to be faced. More fun with lists: falling demand, rising unemployment, rising inequality, finite resources, crappy air quality, shady accounting practices, too much financial innovation, not enough infrastructural innovation, the fact that Oreos taste much better than they should be allowed to taste, etc.