Capco Blog

More than 2 Years since the Lehman collapse and we are still none the wiser on the state of the economy

During the past two and a half years, since the Autumn of 2008 when global finance imploded, economists the world over have been rushing to suggest ideas to national governments, supranationals, and central bankers on how they should manage their economies through the crisis. The number of ideas is as huge as the number of people who claim to understand economics. A quote from President Ronald Reagan which always comes to my mind when I think about economists and their genuine belief that they understand the subject whereas bankers do not is: “How do you tell a communist? Well, it's someone who reads Marx and Lenin. And how do you tell an anti-Communist? It's someone who understands Marx and Lenin.”

The problem, of course, is not that we have so many ideas and suggestions; the problem is that despite a good number of them being applied we are still no more comfortable about the state of the major Western economies than we were two years ago.

The bailouts of a number of countries in southern Europe as well as Ireland, with a number probably needing further bailouts shortly, have not in any way eradicated the risks of these countries defaulting. The assumptions that once bailed out these countries can get back to health and then finance their way to prosperity are way overoptimistic. Many financial institutions in these countries still have mountains of commercial and residential loans that have yet to be marked-to-market. Once these losses are recognized a good number of them will become nothing short of insolvent. And, the property markets in many of these countries do not look like they will be turning a corner any time soon. If the property markets behave the way I think they will and banks are forced to recognize their losses the Germans and the French will once again be required to bail out the financial institutions operating in southern Europe, as well as those based within their own markets, since the implications of not doing so would be to allow many of their own banks to also go bankrupt, because a good number of these loans have been granted directly or indirectly by their own banks. It would be interesting to see just what the German and French governments will do when the next wave of financial defaults start taking place across Europe.

The U.K. is in no better shape. For some reason everyone thinks that since property prices in prime London locations are still high that the economy of the entire country is also holding up. But, it is not, and the U.K.’s national property market is in fact extremely fragile and could experience another major fall; and all the signs are that it is already experiencing another drop. On top of that, the very slow rate of economic growth combined with the very strict austerity measures make the chances of the U.K. economy experiencing another bout of recession not as remote as many would like to believe.

The U.S. economy is also experiencing its own problems, with many still unclear about just how healthy, or not, the economy really is. The recent announcement by the Fed that the growth in 2011 will be less strong than previously expected is bad enough. But, no one really knows just what would happen once the Fed stops pumping money into the economy in June, or even worse once it starts to withdraw some of the unprecedented liquidity that has been pumped into the economy. With the recovery being as fragile as it is no one really knows what would happen once liquidity is withdrawn from the system.

Consequently, when one looks at the Western economies the situation still looks bleak with many unknown risks lurking in the background. The East does look healthier, and it is their excess reserves that are allowing Western economies to keep interest rates low, just as they did prior to the crash. However, there is a big difference between what happened in the 1970s, when the reserves of the oil rich countries were invested in the West and helped the economies to recover, and what is taking place now. This time, it seems that companies do not even need to access the cheap credit since many are sitting on large surpluses; surpluses that they seem unwilling to invest. Without adequate private sector investment, the withdrawal of the liquidity that has been pumped into Western economies could result in another potential crisis. The implication would be that we have spent trillions on resuscitating the economy only to find that all we did was to delay the inevitable.

There is nothing wrong with millions of people prognosticating about what the state of each major economy is. We are living through an unprecedented crisis, and for that reason need to access as much brain power as possible. However, what seems to be missing from all these discussions is the perspectives of those executives that will be required to pull the economy out of the current doldrums. The voices of those few that do speak out have been buried under the barrage of opinions emanating from economists. And so long as that remains the prevalent state of affairs, all that will happen is that we will just increase the number of wonderfully thought out academic theories and models that serve no purpose but to fill university libraries, and sadly increasingly the opinion sections of the broadsheets, and we will fail in our efforts to find a genuine solution to the current crisis.

Comments

You’ve got it in one. Coldun’t have put it better.

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