Edward Hadas

By Edward Hadas
The views expressed are his own.

Occupy Wall Street can claim a tremendous heritage. In almost every generation – from the French Revolution of 1789 to the student revolts of the 1960s – popular movements have rejected a society which, they say, denies some sort of basic freedom. But for a protest to leave a lasting impression, it has to start or mark a significant cultural change. What could OWS signify?

The Occupy movement certainly expresses popular fury at high finance. But that sentiment is far from revolutionary. President Obama and many business dignitaries have expressed sympathy. There also seems to be anger at inequality created by unjust practices. In the words of an October 14 blog entry on Occupywallst.org, the “99 percent” of the population will “no longer tolerate the greed and corruption of the one percent.” Such righteous indignation could perhaps spawn a revolution, but only if it came with a more positive agenda. As it stands, though, the manifestos and soundbites coming out of the leaderless groups are long on complaints and short on both intellectual coherence and suggestions for new arrangements.

Still, this movement must have something going for it. It has spread around the world and attracts much friendly attention from the mainstream media. I see three forces at work.

First, economic confusion. Occupiers see the economy as a disaster. They blame the triumph of “neoliberals” who put their trust in small government and big companies. Many of the hand-lettered signs at Occupy protests go further; they suggest the enemy is not an erroneous ideology but a huge economic conspiracy of the elite against the people.

Such claims are not justified. The global economy is certainly not in bad shape. The big news these days is the increasing prosperity and influence of China, India and other countries which used to be too poor to matter. The U.S. economy does have problems, especially in the job market, but the country remains prosperous. Occupy is certainly right that the elite are still powerful; that is what elites do. New laws and regulations would be enough to temper corporate power; a brand new economic order is not required.

As for the dangers of neoliberalism, faulty ideology did indeed lead to inept deregulation of the financial sector, but the political tide is already flowing in the opposite direction. In other parts of the economy, there is no need for reversal. During the years leading up to the crisis, the U.S. government increased its sway over healthcare, education and mortgage finance – three of the four domains citied in the Occupy Wall Street blog as under neoliberal control.

Second, utopianism. The spirit of Woodstock lives in OWS. There are tents, talk of peace and love and hope for improvement in human nature. “We must change, we must evolve” is a typical slogan. Utopianism, though, was not invented in 1968. The belief that society can be made perfect through radical democracy has long been part of the Left’s revolutionary ideology. More than two centuries of history show how easily the failures of past experiments in radical social engineering are forgotten. The enthusiasts at Occupy have duly forgotten.

Third, the decline of the Left. If the moderate left had a distinctive agenda for reform, Occupy’s wrongheaded and unrealistic musings would look like a dangerous distraction. But there is nothing to be distracted from. Even a crisis in speculative financial capitalism has not spawned substantial left-wing proposals for reform.

The Democrats in the U.S. make a partisan show while the European center-left parties mostly feud among themselves. As bearers of anything like an ideology, though, the Left is a spent force everywhere. The decline is easy to explain. The Left’s basic economic demands have largely been met: the proletariat has mostly become middle class and the government mostly protects the weak. That leaves the Left without an obvious agenda. In practice, it must choose between fine-tuning and revolution. The politicians go for incremental policy initiatives. The timidity leaves room for extremists to flourish.

Occupy’s participants might want to be revolutionaries, but they are a pale imitation of the idealists of the 1960s. While the new movement is undoubtedly counter-cultural, corporate leaders and politicians have learned how to co-opt such incoherent anti-establishment sentiments. Apple, for example, has done brilliantly by combining high tech, high prices and a veneer of counter-culture. Occupy participants use more than their share of Apple products.

Indeed, the grief over the death of Apple’s founder, Steve Jobs, gives a more accurate cultural reading than Occupy. The college dropout who wandered to Asia looking for enlightenment became a hero for many of the 99 percent. They may feel oppressed by the state of the economy, but they sense they have more to lose than to gain from any substantial change in the system that has provided iPhones and iPads. So what does OWS signify? The shallowness of our discontent.

Another recession could be about to arrive, or even be here already. Some people fear it will be as bad as the last one, which reduced output in the U.S., euro zone and Japan by 5.1, 5.5 and 8.9 percent respectively. Those GDP declines are often described in cataclysmic terms: staggering, disastrous or traumatic. Such words are vast – and dangerous – exaggerations.

Even at the trough of the last recession in 2009, real GDP in most rich countries was as high as it had been five or six years earlier – when economic conditions were not considered particularly bad. And that comparison is too harsh on the 2009 consumer experience, which included iPhones and the Airbus A380 super jumbo jets, both better than the comparably valued goods available in 2003.

Americans and Europeans have little enough reason to moan about their recessions; citizens of the world have much less. For mankind as a whole, the small travails of the wealthy are much less important than the entry of the truly poor into the modern economy. Industrial production in emerging economies, a good measure of that development, has increased at a heartening 6 percent annual rate over the last decade, according to the most recent data from Dutch consultants CPB. The recession reversed two years’ progress, but only briefly.

Of course, production is only one part of the economy. The recession has been harder on other parts. It led to both increased unemployment and a decline in the relative position of the poor, especially in the U.S. Neither of those bad trends has been fully reversed. But the former was caused mostly by the end of an unsustainable excess of construction activity while the latter only amplified a decades’ old pattern.

The last decline is often compared to the Great Depression, but was nothing like the economic pains experienced during the two decades after the First World War. Then a series of crises, including a 25 percent reduction in U.S. GDP, helped lead the world into the most destructive war in history. The desire not to repeat the inter-War experience spurred on the potent official response to the 2008 financial crisis.

That response basically worked, but the scary headlines and wild assertions continue, as if fascist governments were once again coming into power and hungry mobs were breaking into food stores. In fact, the few rioters have had less noble objectives: the defense of unaffordable pensions in Greece and the acquisition of branded consumer goods in the UK.

What causes the wide gap between perception and reality? I have two suggestions.

First, too many people look at the economic world largely through financial glasses. The recession made only a slight dent in industrial prosperity but the financial crisis which preceded it really was cataclysmic. Several major institutions almost failed, central banks lent and governments borrowed as never before, and the cult of free financial markets was discredited. And unlike the economy, the financial system has not really recovered. If anything, the crisis has broadened – from banks to governments.

Still, financial insecurity cannot really explain the prevalence of tragic rhetoric. The fear and trembling reflects a more profound error – a mistaken understanding of the economic good. Many people judge economic success only by the pace of expansion. For them, it is not enough to have adequate or even abundant quantities of necessities, comforts and luxuries. They say that an economy is only good if it consistently provides more of all these things, and that the faster the pace of increase, the better the economy.

That approach to life has bad consequences, even ignoring the limited satisfaction provided by material things. For individuals, it is a recipe for discontent. Those who always covet more wealth will inevitably spend much of their life feeling that they do not have enough, with or without recessions. The irrational craving for GDP growth also distorts economic policy. It makes small, temporary and otherwise trivial setbacks in consumption – a few less days of holiday or a few more months with the old car – look like, yes, staggering disasters.

It is right for policymakers to respond strongly to genuine or possible disasters. But when economic times are good, financial conditions should be something like normal. That is not happening right now. Despite three years of stability in rich countries and strong growth in poor ones, monetary and fiscal conditions remain extreme and policymakers, worried about another recession, are reluctant to make big changes.

The combination of financial extremism and fear of any decline in GDP could lead to a truly painful decline in output, if the already weakened global financial system becomes totally dysfunctional. The irony would be painful. The foolish desire for constant and fast economic growth would have made those scary headlines – otherwise completely unmerited – come true.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By Edward Hadas

LONDON (Reuters Breakingviews) – What turns a financial mess into a deep recession? The answer to that question is crucial right now. There is a mess in the euro zone and signs that GDP has stopped increasing in much of the world, but neither the markets nor any large economies have fallen off a 2008-style cliff. Not yet, anyway.

Most observers were astounded by the speed and scale of the last collapse — in just a year industrial production in developed economies fell 17 percent and global trade fell by 20 percent, according to Dutch consultants CPB. The shock of the September 2008 failure of Lehman Brothers massively amplified the fear and credit tightening which were already slowing the global economy. The authorities responded with strong enough countermeasures to prevent a great global depression, but they were not fast enough to stop the economic decline.

The experience has made everyone jitterier. As European politicians bumble and investors’ confidence crumbles, talk of a Lehman moment in the euro zone gets louder. At some volume, the worries can become severe enough to be self-fulfilling, precipitating a crisis.

But there are good reasons to hope that the global economic fabric will not be torn. To start, the euro zone as a whole has nothing like the U.S. housing credit bubble and the profligate governments in the currency bloc are all moving in the right direction. Also, some lessons have been learned — the financial world has been preparing for substantial writedowns on Greek debts for more than a year.

But these bulwarks might not be strong enough to resist a Lehman-like unexpected calamity. The most obvious risk is that euro zone politicians live down to their worst instincts, but there are many financial imbalances around the world. If something explodes, panic could spread to businesses and ordinary people.

Everyone should hope that does not happen. After Lehman, the world’s authorities could offer effective relief. But now policy rates can no longer be cut and more stimulus, either monetary or fiscal, would be as likely to increase panic as to calm nerves.

CONTEXT NEWS

— The European Commission index of economic sentiment in the euro zone fell from August to September from 98.4 to 95, the lowest level since late 2009. The indicator is only above its long term average in one country, Germany.

(Editing by Hugo Dixon and David Evans)

By Edward Hadas
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Financial markets are tiring of the Federal Reserve’s love offerings. The U.S. central bank has long been able to soothe nervous investors with rate cuts or newly-printed money. But markets spurned Wednesday’s announcement of the Twist, an operation to lengthen the maturity of $400 billion of the Fed’s $1.7 trillion U.S. Treasury.

Stock markets fell sharply and the price of bonds from governments still considered safe rose. Investors were right not to be impressed. The Twist is aimed primarily at the U.S. housing market. But even if the Fed’s rearrangement lowers mortgages costs, house prices will be held back by a weak economy and the massive oversupply left over from the bubble years.

Tight monetary policy has long ceased to stand in the way of economic growth. Official real interest rates are solidly negative almost everywhere. The Twist could even impede lending –- and growth –- by narrowing the gap between short and long term rates. Banks, after all, gain from a steep yield curve.

Central banks could try to regain investors’ favour with yet more monetary love. The Bank of England dropped some not so subtle hints on Sept. 21 about another round of quantitative easing. There are calls in the United States for QE3. But no amount of money –- whether it comes from fiscal transfers, QE3 or QE33 -– can force banks to lend or consumers to borrow and spend.

More money will not push up the prices of financial assets which investors deem too risky. The Asian market rout is caused in part by fund managers trying to get ahead of an expected wave of redemptions from cross-border investors. But while the gains from monetary stimulus are small, the potential harm is significant. The Fed and its peers are creating piles of money which would be put in and taken out of different assets in disruptive quantities and dizzying speeds.

In the current economic environment, the twists and turns of monetary policy will not reduce unemployment or rebalance trade. It would be better for the world if central banks stopped trying.

It’s the beginning of a strong economic recovery. Just ask the folks at Intel. The chip producer is smiling because companies “have some breathing room in the economy and their budgets”, as chief executive Paul Otellini put it on Tuesday. Or maybe it’s the end of a weak recovery. Tom Albanese, the boss of miner Rio Tinto, subsequently noted “fears about a possible double-dip recession in OECD countries and a slight slowdown in Chinese growth”.

Both chiefs are optimistic for the long term. Why not? The enriching of most of the world’s five billion or so relatively poor people will be great news for suppliers, whether of the most basic raw materials or of the most sophisticated electronic components.

But for the next few quarters, investors have a lot to worry about. Tech companies may be doing better — Dutch chip equipment maker ASML increased its 2010 forecasts on Wednesday — but the macroeconomic data from the United States and much of Europe remains largely mediocre. Euro zone industrial production in May, released on Wednesday, grew less than expected.

Investors are torn. They’ve been optimistic for almost two weeks, but that hardly makes a trend. The mood improvement came after a pretty bad second quarter. Indeed, since last September stocks have been up and down, but have generally made little progress while credit spreads have widened.

Financial markets look more fragile than markets for goods, despite near maximal fiscal and monetary support from governments and central banks. Or maybe because that support could end. Modest tightening in China is probably hurting asset prices there and in commodity markets. The fear of similar policy moves elsewhere, especially if they come before economic growth is well established, is restraining investors’ exuberance.

It would not take much to darken the mood in the market — a misstep from a central bank here, a bit too much deflation there or an unexpected bank problem somewhere else. But for now, liquidity is still ample and there are just enough signs of growth to keep up investors’ spirits.

The poor are teaching the rich a lesson. It used to be that the world’s less developed nations were the problem children — giving plutocrats too much power while running irresponsibly large budget deficits and failing to overcome deep internal imbalances. Now, rich countries look like the new poor.

Start with trade. China and middle income commodity exporters have most of the biggest trade surpluses while the world’s richest large economy, the United States, still runs the biggest deficit. With surpluses come financial clout and funds for investment. Deficits lead to dependency and, eventually, industrial weakness.

Fiscal deficits are too high everywhere, but after the financial crisis of 2008 the rich are in far worse shape than the poor. Deficits in developed economies like America and Britain have jumped by 7.7 percent of GDP, close to twice the 4.2 percent rise in middle-income countries, according to the International Monetary Fund.

And rich-country governments are finding it hard to summon the political will to reduce those outsized deficits. Leaders know they have a problem but can’t bring their people — and sometimes their political allies — along with them. Barack Obama and Nicolas Sarkozy are among them. That’s a big contrast to the strong and popular governments in countries such as Brazil.

Finally, rich countries seem unable to agree what they stand for. America’s culture wars define its politics. There are sharp disputes about the future of the European Union and the euro. Japan is forever searching for its role in the world. Poor countries have their fights, but much less doubt in their overarching goal of getting richer.

Sure, there are exceptions. Many poor countries, such as Thailand, are struggling. And some rich ones, including Germany, are doing relatively well despite the economic turmoil surrounding them. But the global balance does seem to have shifted.

This shouldn’t be too surprising. People in developing countries want more wealth, and are learning from those who amassed it before them. As for the cultural malaise of the already rich, almost two millennia after the Roman Empire started its decline, the jury is out on what exactly went wrong.

The Gulf of Mexico disaster has wrecked many reputations. BP, President Barack Obama and the whole offshore drilling business are all struggling under the weight of an uncontrolled flow of oil. A key feature of British corporate governance — a separation of the role of chairman and chief executive — is also under threat.

The two-at-the-top approach has some thoughtful defenders. Paul Myners, a high profile British critic of supine institutional shareholders, told students at Yale on Thursday that his board experience, on both sides of the Atlantic, supports the case for separation. He says a single leader can stifle “effective and challenging discussion”.

Myners does not discuss BP. But the oil company is certainly no poster child for the British way. The crisis has shown the current chairman and chief executive, Carl-Henric Svanberg and Tony Hayward respectively, to be a pair of relative weaklings.

Their predecessors, Peter Sutherland and John Browne, were both considered tough and the duo was widely admired. In retrospect, though, it seems clear they presided over the creation of a dangerously weak safety culture.

To get the split model to work, it is necessary to find chairmen who are strong enough to keep the boss in check, but restrained enough not to meddle unnecessarily. Purists also insist that chairmen should come from outside the company — if not the industry — guaranteeing a high level of ignorance about many important matters.

Myners may exaggerate the strengths of the split model. But he is right that the combined model can go badly wrong. It allows bosses with hyper-egos to push companies anywhere they want, with other board members following along like fearful ducklings.

So if split and combined are both imperfect, what is the right formula for boards of directors? There isn’t one. Shareholders need to recognize that companies and countries are too diverse for such a one-size-fits-all approach.

Besides, there is no way to eliminate the greatest weakness of all governance arrangements, which is not structural but moral. Chairmen, chief executives and board members will always be prey to foolishness and greed.

The European Union has rarely looked so united. The disparate members have joined up to mount a strong defence of the region’s single currency. But the EU has also never looked so close to dissolution, divided by tensions between more and less fiscally responsible and economically successful countries. The fate of the union could follow either of two historical precedents with starkly different outcomes.

Exactly 150 years ago, on May 27, 1860, Giuseppe Garibaldi started to besiege Palermo. The city was the capital of the Kingdom of the Two Sicilies, which had lasted in roughly the same form for almost six centuries. Most of the establishment at the time, including the Pope and Emperor Napoleon III of France, dismissed the notion of an Italian nation.

The romantic nationalist Garibaldi proved them wrong. Italy was unified under the Turin-based king of Sardinia. Huge regional differences in history, economy and culture have been diminished by the flow of people from south to north and of government money and bureaucracy in the other direction. The unified Italy has survived and prospered.

The less optimistic precedent is Yugoslavia. An expansion of the Kingdom of Serbia, the country was created after the First World War. Strong Slavic ethnic identity made it only slightly less likely to succeed as a nation than Italy. And Yugoslavia’s disparate peoples seemed on the path to unity for most of the following six decades.

But everything fell apart quickly 30 years ago, after the May 1980 death of Marshall Tito. Without Yugoslavia’s longstanding autocratic leader, the Serbian nationalism that had supposedly been crushed proved a potent divisive and destructive force.

Overall, the last two millennia of European history look more Yugoslav than Italian. But the last half-century has been more Italian, helped by the increasingly free movement of ideas, money and people.

For the future, much depends on the region’s collective memory, a term coined by Maurice Halbwachs, a French — or is that European? — sociologist. Europeans may choose to read their history as an inevitable movement towards unity. If they do that, Athens and Berlin may prove no more distant than Palermo and Turin.

By Martin Hutchinson and Edward Hadas

Investors rarely like wars or rumors of war. But for global markets, the renewed military tension on the Korean peninsula comes at a particularly sensitive time. The threat to this fairly big economy — South Korea’s GDP is four times larger than Greece’s — adds to the impression of a world out of control.

South Korea’s response to confirmation that the North torpedoed a Southern naval vessel in March seems proportionate, merited and economically minor — sanctions will hit an annual trade of only $286 million, about 0.3 percent of South Korea’s GDP. The effect on the already impoverished Northerners may even be mitigated by China, Pyongyang’s traditional ally.

In more settled economic times, markets could probably absorb this increase in Korean tension without too much difficulty. Everyone knows North Korea is dangerously unpredictable. Investors usually respond to provocative actions with only a brief flurry of worry. They sometimes even interpret aggression as desperation, and dream of potential gains from eventual Korean unification.

This time could be different. As of Tuesday, the Korean stock market had dropped 8 percent since the official report on the sinking, and the won had fallen by a similar proportion against the dollar. Investors may be thinking South Korean companies will face higher capital costs or that military expense will hold back the country’s growth. Or they may just be blindly shunning geopolitical risk.

The fear is likely to be exaggerated. An all-out war can probably be avoided, even if North Korea’s announcement of a freeze in relations leads to direct military confrontations. What’s more, while the Korean economy is bigger than Greece’s, it accounts for only 1.5 percent of global GDP. The euro zone contributes 22 percent.

The political forces which threaten the Koreas are completely different from those that are shaking confidence in the euro zone. But there is one unfortunate similarity. Until a few months ago, the governments, which had responded so powerfully to the financial crisis, were a comfort to markets. But weak and wild policies around the globe are undermining that conviction.

Forget about Greece for a moment. Just think about country X, which has lived well beyond its means for years thanks to loans from inattentive or foolishly optimistic lenders. When the crunch comes, the X-people will have to cut back on spending. And the X-lenders will generally suffer from the famous rule of banking: “Can’t pay, won’t pay.”

If Herman Van Rompuy, the president of the European Council, has his way, Greece is not going to be country X despite its weak government, bloated civil service and poor trade position. Van Rompuy said on March 25 that a vague new support agreement should “reassure all the holders of Greek bonds that the euro zone will never let Greece fail”. This default taboo should be reconsidered.

True, the Greeks might manage to tough it out. But it won’t be easy, even if the EU, the IMF and foreign investors are willing to help. A near miraculous economic recovery is required: from sharp recession and falling wages to fast growth. The euro makes the task more difficult, because Greece cannot stimulate growth through devaluation.

A limited default — rescheduling combined with modest write-downs — would make the task more manageable, besides appropriately punishing risk-blind lenders and complacent politicians. But Van Rompuy and many investors fear a sovereign default would start a chain reaction of panic and failures, perhaps breaking up the euro zone.

The worries are certainly not groundless, even if Greece’s 270 billion euros of debt is only 4 percent of all euro zone sovereign obligations. A write-down could reduce Greek banks to insolvency. Other fragile European banks would suffer. Other weak sovereign borrowers might follow, intentionally or not, creating a cascade of traumatic defaults.
But carefully planned debt write-downs could actually be less destabilising for markets than a long wait to see if Greece can struggle through. The uncertainty is distorting the euro zone’s politics and the euro’s value. A solution, even a bitter one, would calm nerves. And the risks of a Lehman Brothers II meltdown could be reduced by a three-pronged preparation.

First, the market needs to be softened up for bad news. For months, politicians such as Van Rompuy have been trying to persuade a doubtful world that Greek default is unthinkable. A change would cause a shock, but on reflection investors might actually welcome a more realistic approach.

Second, banks need to be kept in business. The Greek government does not have enough euros to rescue its own banks, so some tough but fair measures would be needed: converting bank debt into equity, freezing bank deposits and perhaps selling out to healthy foreign institutions.

Foreign banks holding Greek paper might need government help to get through write-downs. That path is well-trodden and it might ultimately prove less costly for other EU governments to help banks directly rather than offering indirect help through guarantees or loans to the Greek government.

Finally, other members of the euro zone with debt problems would need to get ready. Ireland, Italy, Portugal and Spain have already started to argue that they are fundamentally different from Greece. If their cases are persuasive, investors will not abandon these governments. But if one or more cannot avoid a debt restructuring, then delay will not lessen the eventual pain.

The Greek problem is important for the world, because the country has a particularly acute case of a common financial disease: debts that are too large to be serviced by current incomes. The leverage-fuelled global bubble in asset prices has left many individuals, some companies and a scary list of countries at credible risk of default whenever interest rates rise from their current ultra-low levels. The United States and the UK are certainly on the list.

The Van Rompuy solution, a combination of growth and frugality, can solve the problem, but only if creditors are patient and debtors are virtuous. Historically, the more common ways to cut debt loads have been monetary: straight write-downs of loans, inflationary increases in incomes or currency devaluations that reduce the real value of repayments to foreign lenders.
Debt overhangs are unseemly and all the monetary solutions are unpleasant. But default may not be the worst. In Greece and elsewhere, it shouldn’t be dismissed without first getting serious consideration.