Monday, May 18, 2009

Hitting the Niall on the head

Human beings are as good at devising ex post facto explanations for big disasters as they are bad at anticipating those disasters. It is indeed impressive how rapidly the economists who failed to predict this crisis — or predicted the wrong crisis (a dollar crash) — have been able to produce such a satisfying story about its origins. Yes, it was all the fault of deregulation.

There are just three problems with this story. First, deregulation began quite a while ago (the Depository Institutions Deregulation and Monetary Control Act was passed in 1980). If deregulation is to blame for the recession that began in December 2007, presumably it should also get some of the credit for the intervening growth. Second, the much greater financial regulation of the 1970s failed to prevent the United States from suffering not only double-digit inflation in that decade but also a recession (between 1973 and 1975) every bit as severe and protracted as the one we’re in now. Third, the continental Europeans — who supposedly have much better-regulated financial sectors than the United States — have even worse problems in their banking sector than we do
. Niall Ferguson

I envy Niall Ferguson's command of the facts of history. Reading his books or essays, leavened with historical yeast, reminds me of the limits of my own sense of history.

Yet, for some odd reason, despite the, apparently, appropriate leavening, the "bread" of his arguments never seems to rise, for me. Jumping to a new metaphor, his arguments are like cloth from a weaver with the strongest, most vivid and varied thread, but a broken loom.

The loom on which a storyteller weaves his fact-threads into cloth is his perceived experience. If his experience-loom comports with the reader's the story seems to come alive. If not, the story will prove inaccessible to the reader.

Similarly, arguments in essays require a shared loom of premises, else they too fall short.

To accept Mr. Ferguson's argument the deregulation was NOT the problem, we would have to accept that policy changes 29 years ago alternatively have no impact on today's events or have a negative impact which must be balanced by the intervening good. We would also have to accept that the depths of the current event have been plumbed, else the comparison with the 70s might, in the future, obviate his argument.

In the arena of history, the view that the Treaty of Versailles's punitive imposition of reparations on Germany led, in part, to the rise of Hitler and WWII is reasonably well accepted. Should we, a la Ferguson, deny that a policy choice decades prior can have no effect on today's events, or that the intervening good- no war and a France rebuilt on Germany's dollar (or mark)- negated the flaws in the Treaty?

Has the fraud and theft of Mr. Madoff been negated by the years of income he did provide his investors, or the fact that his choice to "go Ponzi" occurred decades ago?

To me, though, the most egregious error in Ferguson's reasoning is his ridicule of the dollar crashers and sense that the depths of the current crisis have been plumbed.

Reality, it seems to me, has yet to fully unfold on this crisis. When it does, in the event that, as I suspect, the US$ loses it's place as global reserve currency the wisdom of retaining the old (or similar) regulations on finance will become evident.

Borrowing a phrase from his essay, for reasons to do with human psychology, regulations of certain activities has proven effective. These regulations are often capable of significant improvement, but their absence....well, when this story ends we'll find out the true cost of their absence.


Charles Butler said...

Agreed. His shoddy attempts to conceal a political program behind academic garb don't stand up to much scrutiny.