BACK TO THE BUBBLE / THE NEW YORK TIMES OP EDITORIAL ( VERY HIGHLY RECOMMENDED READING )

October 29, 2009

Op-Ed Contributor

Back to the Bubble

By NICOLAS BAVEREZ

Barely a year after the demise of Lehman Brothers the largest American financial institutions are again announcing record profits — and bonuses. They have set aside $140 billion for the entire sector in 2009, with $23 billion for Goldman Sachs alone. (Their more responsible European counterparts, by contrast, have moved to reimburse equity injections and emergency loans that harried governments put into place to keep them alive.) At the same time, the Dow Jones index broke the 10,000-point mark, a feat first seen in March 1999 in the midst of the dot-com boom.

Even as banking and finance boom anew, the economic crisis continues. Unemployment rates surpass 10 percent of the active population in developed countries. We are witness to runaway corporate bankruptcies and household-debt rates. Deficits and public debt have surged in the United States and the European Union. There is also a widening rift between emerging-market nations’ growth of 7.5 percent and industrialized countries’ paltry 1.5 percent.

The recovery that is taking shape is unsustainable. It is reliant on restocking corporate inventories and a level of governmental support that is unprecedented in a time of relative peace. It is a repeat of post-2001 policy mistakes that promoted speculative bubbles in equity and foreign debt. It essentially revives the very economic model that led to last year’s stock market crash.

Worse still, the deterioration of public finances and the erosion of central banks’ weight in developed countries leaves capitalism extremely vulnerable.

What about the rare mobilization of political initiatives since the autumn of 2008? They were barely enough to rescue banks, put deflation in check, and contain protectionism. Such strategies are, unfortunately, about to fail, due to four factors:

- Lack of policy coordination.

Individual governments initiated the strongest responses to violent debt deflation trends. Thus, to successfully move beyond the current crisis, the world’s largest economies should begin to align their strategies. In the United States, priority should be given to Main Street, not Wall Street. The European Union should emphasize growth and employment. China needs to develop a safety net and grow domestic demand.

- Poor economic models in banking.

The banking sector has never been plagued by such core dysfunction. This is clear from a fresh wave of concentration and restructuring, the high profitability that zero-interest rates afford, the banking world’s eagerness to provide financing to states and markets (to the detriment of firms and households), and by the nearly unlimited reassurances that governments have extended.

- The G-20’s refusal to take monetary action.

The dollar retains role its monopolistic as the world’s international currency, despite the lasting weakening of the U.S. economy. The Chinese renminbi remains inconvertible and undervalued. The euro is perpetually overvalued. All of which has shaken up exchange markets, debt payments and trade imbalances. The relative positioning of world economies is mirrored by and achieved through foreign-exchange rate fluctuations. The competitive devaluation of the dollar and the British pound, and the continuing undervaluing of currencies in emerging markets, leaves the euro as the sole adjustable variable in the economic recovery process.

- Globalization’s governance failings.

An institutionalized G-20 is a decisive step toward political integration in a capitalist system that has become universal. But it must reform the financial system and redesign globalization’s economic model, including currency- and commodity-related issues (beyond the meaningless rituals and hollow decisions of the G-8). To avoid a resurgence of protectionism, we need to highlight the clear link between capitalism’s regulatory framework, World Trade Organization negotiations and environmental concerns. The E.U’s economic governance has been in limbo since October 2008, drastically limiting the region’s capacity to elaborate a coherent exit strategy from the economic crisis, and react to internal or external shocks.

The world is not, in fact, facing a financial crisis, but a great economic crisis that amounts to a revolution. We are witness to the end of a post-Keynesian era that saw markets rise to prominence to the detriment of states in a context of accelerated deregulation and financial innovation, even as borders opened up. This crisis heralds the end of the United States’ absolute supremacy over the world economy. It loosens the West’s monopolistic grip on capitalism, with the emergence of the South, while also sanctioning the growing loss of confidence in developed countries’ capability to self-regulate.

The United States and Europe must reject a return to a “bubble economy,” progressively coordinate their economic policies, and renovate their institutions and economic models. Only then will they manage to engineer a lasting escape from the current crisis, and recover the legitimacy needed to reform global capitalism. For the moment, it is clear that they remain unable to control it.

Nicolas Baverez is a French lawyer, historian and economist and the author, most recently, of “Après le déluge: La grande crise de la mondialisation.”