Truth emergencies

I very much enjoyed Rebecca Solnit’s book of essays, The Encyclopedia of Trouble and Spaciousness.

Among the many interesting perspectives is her take on the aftermath of disasters, and critique of some standard stories of post-disaster disorder – reports or looting and violence. Solnit’s argument is that ‘looting’ is often – usually? – a grotesque misinterpretation of people trying to cope with chaos – with no electricity, no functioning payments system, no logistics – and taking reasonable steps to get food and water. As for violence, she argues that most people become unusually solicitous of the needs of others in the wake of a natural disaster, and that violence often is perpetrated by authorities fearful of losing control – “elite panic”. She describes the way this happened in Haiti, and in New Orleans post-Katrina, when the authorities and white vigilantes shot at black men on the streets, many of whom turned out to be trying to do what the authorities should have been doing, helping the stranded and vulnerable. Anybody who read Dave Egger’s book Zeitoun will find that strikes a chord. Without doubt crimes are committed, she accepts, but “far more people did heroic things.”

She concludes: “A disaster unfolds a little like a revolution. No one is in charge and anything is possible. The efforts of elites, often portrayed as rescue or protection, are often geared more towards preserving the status quo.” Emergencies are always truth emergencies. This struck a real chord with me because of a report I co-authored with Patrick Meier some years ago for the UN Foundation and Vodafone Foundation about the role of information in disasters – more vital than you can imagine unless you have been caught up in one. (Just think about how helpless or angry or frustrated you feel when your train halts for 5 minutes and there is no announcement – and then magnify that feeling in intensity a thousand-fold.)

The book also has two terrific essays on what Silicon Valley money and incomers are doing to San Francisco (not good) – fabulous observation of the ‘Google bus’ invasion. She writes also about climate change and ecology, the far North, growing food, Detroit, and much else. It has been an ideal companion for me for a couple of hectic weeks. Solnit will be in Bristol for the Festival of Ideas Cities Festival next November.

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Orthodoxy, radicalism and sanity

Fans of his columns in the Financial Times will know there’s no danger of finishing reading a whole book by Martin Wolf in an optimistic frame of mind. So it is with his new book, The Shifts and The Shocks. The subtitle is ‘What we’ve learned – and still have to learn – from the financial crisis’, and the message of the book is that there is more still needing to be done than sorted out already.

The main thing the book argues has been learned (by some people) since the crisis is that pre-crisis ‘official’ macroeconomics comprehensively failed. To echo the title of the relevant chapter, orthodoxy has been overthrown. Props to Wolf for acknowledging his own change of mind in the light of events (after all, he wrote an earlier book called Why Globalization Works.) He points out that the features of the global economy that turned out to matter in real life – the accumulation of debt and the growth of shadow banking – had been assumed to be unimportant or irrelevant. Wolf has become a wholehearted Minskian, but you obviously don’t need to jump into any new camp to agree that pre-crisis dynamic stochastic general equilibrium models were a nonsense. What’s rather depressing is that some macroeconomists still seem to think these DSGE models just need a bit of tinkering, a little bit of financial ‘friction’ adding in. As the book’s introduction forcefully points out, a theory in which something that did happen is impossible is a rubbish theory.

The first chunk of the book is a high-level description and an analysis of the origins and unfolding of the financial crisis, with particular emphasis on the Eurozone. He has long been writing in his Financial Times columns about the problem global imbalances, particularly between the US and China. This book focuses more on Europe. Much of the description is familiar territory, but seen this time through Wolf’s new spectacles of the Minsky convert.This section culminates in the ‘orthodoxy overthrown’ chapter, which includes a quick rundown of the various alternatives, in a nice, brief summary of the history of macroeconomic thought including those turned into renegades by the DSGE triumphalists of the 1990s and 2000s. Wolf ends by concluding that in a system in which the state is the ultimate supplier of money but most money and credit in use is created by the private sector is a ‘pact with the devil’. “Moreover, the liberalization of finance seems to lead to crises almost automatically. Surely this suggests the need for a new kind of system.”

So what might a new system look like? To fix finance, he advocates – following Anat Admati and Martin Hellwig’s outstanding The Bankers’ New Clothes – a much higher equity ratio for banks, maybe 20%, and serious macro-prudential tools. These seem such no-brainers that the real question is why regulators are so hesitant about them – but this takes us into the analysis of power in the western economies. A chapter on the Eurozone concludes that it isn’t working but it isn’t clear either how to turn it into a ‘good marriage’. This chapter is surprisingly diffident – Wolf writes: “Germany’s insistence on retaining its huge external surplus, on keeping inflation so low, on national responsibility for bank debts and on ever tighter fiscal discipline will not work. The Eurozone needs to become something different.” I would have expected him to predict the unlikeliness of this happening – although he does also acknowledge how messy a divorce would be.

The final chapter has a key point: “Unless regulation and the supply of fiscal backstops is to be much more global, finance should be far less so.” Little would be lost by decreasing the global integration of banking, he argues. Wolf is more radical than what he describes as the ‘new orthodoxy’, which aims to preserve the globally integrated financial system through incremental reform – and, I would say, keeping fingers tightly crossed.This section echoes the chapter in Ian Goldin’s The Butterfly Defect, which underlines the inherent risks in the complex, integrated financial network.

Wolf argues that western elites are continuing to let people down, to a dangerous degree. He accuses them of ‘three huge failures’ – misunderstanding the consequences of financial liberalization and fantasizing about the self-stabilizing features of finance; ignoring the consequences of the emergence of a plutocratic global elite for the civic glue that enables democracy to function; and turning what should have remained a mundane common currency or currency management plan in the EU into a German currency administered by unaccountable ECB and Commission officials without channels of accountability to other Eurozone countries and citizens.

If we cannot implement radical changes – more radical than most people recognize, Wolf says – then, well he doesn’t explicitly spell it out, but implies, economic and political disaster.

By and large, I agree. There’s no point just tinkering with a fundamentally broken system. There are some questions not covered in the book that would only add to the gloom. For example, the extent of outstanding debt left over from the crisis is ginormous. Without a growth miracle – no sign of that on the horizon – the options are explicit or implicit default. How will that happen? The large international banks have returned to pre-crisis behaviours with only marginally more capital – and are still being allowed to judge their own riskiness! What happens when a modest decline in some market somewhere sets us off on the downward spiral of liquidity and solvency we saw in 2008, but this time without any fiscal or monetary firepower left? And by the way, what about demographic and environmental challenges?

The Shifts and the Shocks is a dense and chunky book about economics, not a manifesto for the Occupy movement. I can’t quite picture Martin Wolf in a Guy Fawkes mask outside the ECB. Still, he makes a good case that the ‘new orthodoxy’ of minor reforms favoured by global finance is madness. Radicalism is the only sanity.

Policy pickles redux

History repeats itself, with variations; as the famous Reinhart and Rogoff book on sovereign debt crises argues, This Time is Different – not! I’ve just been reading a fascinating book by Bill Allen on UK macro policy history, Monetary Policy and Financial Repression in Britain, 1951-59. The 1950s were preceded by a period remarkably like today’s context in important ways. The Bank rate – the key policy rate of the period – had been kept at 2% for nearly two decades, to combat the Depression, finance the war, and keep the economy growing in the post-war years. With a new government in 1951, monetary policy was ‘reactivated’.

The author – formerly a senior Bank of England director and now at Cass Business School – argues that the 1950s have highly relevant lessons for today. The Bank’s key rate has been at 0.5% for more than five years and will stay there for some time longer. With short-term government debt outstanding amounting to £342bn at the time he wrote (just over 20% of GDP), “This means that any increase in short-term interest rates would entail an immediate and substantial increase in government expenditure.” Yet, he continues, it is inconceivable that interest rates can stay so low for ever. The only way is up.

What possible paths are there out of this situation? Either higher interest rates will lead to a big increase in the fiscal deficit or (much) more austerity; or nominal GDP will have to rise substantially either via real growth or higher inflation to reduce the fiscal impact of higher interest rates; or banks will have to be forced to bear some of the cost of rising interest rates – as in the 1950s – by a requirement to hold very large non-interest bearing deposits at the Bank of England. The first option is unappealing, the second unlikely given present economic trends. “One fine day there will have to be a new reactivation of monetary policy, and the authorities will have to manage exactly the same problem that faced their predecessors.”

There are of course some very important differences between now and the 1950s, including the fact that the amount of private debt outstanding now is so much greater (141% of GDP vs 16% of GDP in 1951, the much lower liquidity ratios of banks now). Still, the parallels make this history extremely interesting. The bulk of the book consists of a chronological account of monetary policy and description of the techniques used and decisions made over the decade. The final chapters cover four themes: monetary policy tools, financial repression, power and influence, and an overall assessment of the monetary policy chosen.

The power and influence chapter is especially interesting. This was long before Bank of England independence so the Chancellor of the Exchequer took the policy decisions and was in principle answerable to the House of Commons. In practice, secrecy prevailed, and there was almost no communication about policy – quite a contrast to today’s situation of ample, and perhaps even excessive to the point of confusion, communication. The book places the blame for the prevailing secrecy on the dire state of Britain’s financial problems both in the 1930s and again after the war. “Formal post-war default by the UK would have been technically possible but politically poisonous.” Commentators on policy had to apply guesswork to figure out what the Bank of England had already done, never mind what its future actions might be – the book uses archive material to fill in the blanks.

One result was that academic discussions diverged from practice, a damaging divorce. For those who understood the institutional reality of money and those who developed theories about monetary policy on the whole stopped speaking to each other – something we arguably paid the price for in the recent crisis, by which time the non-institutionally grounded theories had reversed themselves into central bank thinking too. (I find the institutional detail explained in this book far more interesting than the abstractions of macroeconomic models, I must say. It brought back to me memories of reading parts of the Radcliffe Committee Report in my undergraduate days, and being intrigued by the practicalities of monetary policy – an interest thoroughly destroyed by subsequent exposure to real business cycle theories and representative agent models.)

My sole criticism of this fascinating account of the reality of a decisive decade in UK monetary history is that it’s priced for institutional libraries (£70); but anybody at all interested in how we might find a way out of the present policy pickle would do well to borrow a copy.

Forbidden places

Bradley Garrett’s Explore Everything: place-hacking the city  is an ethnographer’s account of his time as a member of a loose group of urban explorers, based in London but making forays into Paris and the US. Urban exploration means going into places you’re meant to keep out of – ruined buildings boarded up at the tame end, through construction sites, the roofs of skyscrapers, and the Underground and sewers at the more dangerous end. And it is dangerous. A few people die. There are arrests – especially in London, where surveillance is so extensive and official paranoia runs far higher than elsewhere. (This closure of urban space is the subject of Anna Minton’s Ground Control.)

Now, there is nothing I’d like to do less than climbing out onto the arm of a crane at the top of a building like the Shard while it’s under construction – I am, after all, a middle aged economist with vertigo, not a young urban explorer. However, I found this book very interesting and understand the itch the activists have to ‘hack’ these forbidden places. It’s partly the comtrariness aroused by being told not to do something, partly the serious politics of challenging the authoritarian tendencies that have been installing CCTV all over and privatising urban public space.

The pictures in the book are amazing – vertigo-inducing in themselves, the socisl science jargon that creeps in only mildly irritating. Urban explorers are obviously people whose politics and experiences put them in a minority – which makes it all the more interesting to have a window into their attitudes and experiences. And it’s well worth reflecting on what the shutting away of so much space is going to do to our cities over the years.

As a fan of Victorian infrastructure, I especially enjoyed reading about the forays into Joseph Bazalgette’s sewers. The book claims the cost was equivalent to £234 billion now. I haven’t checked, but if true, it’s hard to believe they would get built these days.

Read this book!

On the train yesterday I devoured Do No Harm: Stories of Life, Death and Brain Surgery by Henry Marsh. I can’t recommend it highly enough. It is the author’s retrospective take on his career in neurosurgery, as he approaches retirement. From the start you share his sense of the strangeness of taking surgical instruments to people’s thoughts and emotions, memories and reason – as he puts it, too strange to think about really. He gets on with the delving into the jelly of the brain. This is a fascinating and utterly humane book.

It does illustrate – as so many others have done – the strains on the NHS, due to demand growing faster than resources, but even more due to the madness of mediocre bureaucracy and constant reorganisation.

But the overwhelming message I took was the importance of the counterfactual in medicine. Marsh writes that as he grew more experienced as a surgeon, and older himself, the urge to operate always – because it’s what families and patients expect, and what surgeons do – began to ebb. Increasingly often, he concluded that the choice his patients often faced was between two different ways of dying, one of them involving painful and sometimes brutal surgery that gave false hope, a short extension of life at best. Given the strains on the NHS, the ageing population, the continuing advances in technology that make new interventions possible, this is going to be an important debate.

Anyway, as I get older too, getting the counterfactual right increasingly seems the key issue in any context. And one that it’s very hard for people to get to grips with, because seeing the realistic alternative course of events requires reason, experience, judgement and imagination.

On the medical theme, I’m also keen to read Atul Gawande’s Being Mortal: Illness, Medicine and What Matters in the End. I loved the other books by him I’ve read, Complications: A Surgeon’s Notes on an Imperfect Science and Better: A Surgeon’s Notes on Performance.