Last week in my article ‘Europes existential crisis’ I said Europe is on the brink of a major disaster and it would result from Europe’s own fixation with long term solutions. I also noted that one misfired bullet is all that it would take to start a revolt in Greece and it seems that it is only a matter of time before people take to the streets in Greece. Yesterday, a 55 year old man set himself on fire in northern Greece after he was refused by a bank to renegotiate on an overdue loan payment for his home and business.
At the same time, the Frankfurt motor show kicked off a few days ago in Germany, where motor companies, as if oblivious to the embroiling economic crisis all of Europe, turned their attention to unraveling the most astonishing cars they possibly could, with better specifications, more advanced engines and a higher price tag. The fact that the show was thronged by visitors out of whom there would be prospective buyers as well; depicts the rising socio-economic disparities of Europe.
“It is essential to understand that battles are primarily won in the hearts of men. Men respond to leadership in a most remarkable way and once you have won his heart, he will follow you anywhere,” said Lord Vince Lombardi. Unfortunately, failure to win the hearts of men has led to a leadership vacuum in developed countries. There is a reason why people took to the streets in England and there is a reason why they are taking to the streets in Greece. As far as the US is concerned, the failed policy of providing a fiscal stimulus is making policy makers wary of rising unemployment which has remained at above nine per cent for 22 of the last 24 months. This points to policy failures of those sitting in the echelons of power whereas those who advocated the policy are of the view that the fiscal stimulus dampened the exposure of the US economy to the present recession.
A major reason that these measures did not work was that they were accompanied by a massive increase in private spending. Whenever markets fail and a vacuum is created it implies that things can only improve if government and stakeholders step in to fill that vacuum; take risks and create an environment that increases investor confidence. Therefore, a good approach to tackling the crisis would be a systematic policy of quantitative easing. By this, I mean that central banks should turn to purchasing risky assets, like corporate bonds instead of investing in long term government securities.
The current economic crisis is more embedded in the hearts and minds of men as it is in the failure of prudent policy making. Lack of confidence leads to volatility in assets, creating an environment of distrust and fear under which conditions bad government policy making plays a catalyst to exacerbate a situation spiraling out of control.
The Great Recession was eventually dealt with mainly due to coordinated policy making and action of governments across the globe. Socio-economic disparities also need to be dealt with and efforts must be made to increase employment opportunities for the less privileged. It needs to be understood that the recession did not turn into Great Recession part II mainly because central bank intervention played a pivotal role in the success of governmental measures. A recovery in stock markets can only be fostered by the collective approach of quantitative easing that would eventually reduce the real expected return of long term governmental bonds is the way to go.
The current economic crisis that embroils the developed word today can only be averted by instilling confidence that is in essence a self-fulfilling prophecy which must be managed by direct intervention in asset markets.
As I noted in a previous column, “the collective belief of humanity to possess the ability to predict the future is now tearing itself apart like a vast sinew of lies and the false belief in the might of human intelligence is now systematically eroding. By forgetting the philosophy behind capitalistic regimes, and blindly believing in a science that has collectively failed us we are in fact paving way for another dethronement of human arrogance.” One can only hope that a new approach to tackle the economic crisis is evolved since fear feeds on itself and rumours that the market will further fall, are effectively realised. This monster of fear needs to be dealt with and the battle needs to be won in the hearts of men.
The writer is News Editor, Profit. He can be reached at [email protected]
