Entangled Alliances

On Tuesday night I was watching Channel 4 news when they aired an interview with Wall Street “legend” Jim Rogers, who the reporter described as “one of the world’s leading financiers” . The build-up to the interview was interesting:  Rogers, it was ominously announced, thinks the economic rescue plans being put forward by Gordon Brown and Barack Obama are “ludicrous and insane” and that “the politicians could be leading us into another Great Depression”.

Well you can imagine my surprise at hearing this, given that I was under the impression that the deficit-spending, government-stimulus strategy being adopted by leaders like Obama was meant to stop another Great Depression, not start one. If I’d been drinking coffee, you can be sure that I’d still be wiping it off the TV instead of writing this. But I thought I’d see what Rogers had to say before coming to judgement on the man. Big mistake!

Analysis and conclusions come over the fold.

Let’s start with this Rogers quote:

The idea that you can solve a problem of too much debt and too much consumption and too much borrowing by more borrowing and more consumption and more debt to my mind is ludicrous and insane.

This is a pretty crazy thing for Jim Rogers to say. The “more borrowing” he’s referring to is that of the government – say, the US government – used to fund, for example, Obama’s stimulus package . The theory behind such a strategy is the following:  in a deep recession, the only way to stimulate the economy is to get the government to pump lots of money into it, piling up national deficits in the process. Any government spending by definition creates jobs and this helps to get the economy going again. The government has to do this because the private sector can’t: when no-one else is able to spend to get the economy going again it’s left to the government to step in as a spender of last resort. Crucially, the government’s borrowing is not, as Jim Rogers is suggesting, the same as the borrowing of the private sector. The government can afford to rack up deficits in the short term to fund anti-recessionary borrowing,  indeed they have to: if private credit is frozen, who else is going to step in?

This isn’t just one of many opinions: it’s the theory of legendary macro-economist John Maynard Keynes, whose work on the solutions to recession are accepted by the vast majority of economists. Now it’s true that you could probably find a few who disagreed, but it’s pretty evident from the interview that Rogers’  response was not that of a man who wanted to point out the defects in Keynes and respond with his own argument. Oh no. Instead it’s the kind of response you’d give if, having never seen a car before, you drove one to the petrol station and then some stranger came up and jabbed a hose in your bodywork . You’d think he was pretty mad, wouldn’t you?

Having said all that, let’s give Jim Rogers another chance, shall we?

Unfortunately everybody’s making the same mistakes we made in the 30s… the 30s started out as a typical stock market bubble – pop – and then a recession, but then the politicians got together and made mistake after mistake after mistake and it led to the great depression… I’m afraid it’s happening again.

This time it’s not just economists who might be puzzled at Rogers’ words, it’s historians too. The mistakes he is referring to must be the alleged ones of President Franklin D. Roosevelt, since it’s Roosevelt’s deficit spending which is being mimicked today by politicians. (He could of course be referring to Herbert Hoover’s mistakes, but then that would completely destroy his argument, so let’s give the man some benefit of the doubt.) This, then, is a bizarre thing to say by any standards. While it’s true that FDR’s reign was not without its economic blunders, it’s generally accepted by economists that his deficit spending helped to relieve the depression of the early to mid 30s. Indeed, if anything, modern Keynesians think that he should have piled up more deficits. In fact, the real blunder of FDR’s presidency came not when he was spending deficits but when he decided, in 1938, to reign in spending and balance the budget. This is generally assumed to have caused the second main recession of the 30s, and is universally regarded as maybe the biggest economic blunder of the 20th century. That recession, in fact, was only ended by the ultimate example of Keynesian Economics: the enormous deficit spending of World War II, which finally ended the Great Depression for good.

Again, Rogers isn’t articulating another economic viewpoint of the 30s here. He’s just being ignorant.

I could go on, but I think I’ve made my point (although I should give a shout-out to Rogers’ interesting assertion that the stockbrokers of London will soon be handing over their lambourghinis to the presumably rather non-plussed farmers of China).  As the interview drew to a close I reflected that it was sad to see Channel 4 news present this guy in the same way you would a well-respected economist. He’s not. He’s a well respected financier.

The kind of garbled, faux-economic mumbo-jumbo spouted by Rogers is, sadly, not an isolated case. Across the media spectrum, financial commentators and cable news Wall Street reporters are queuing up to offer their outraged opinions on what they see as Obama’s economic stupidity. For example, CNBC’s Jim Cramer claimed recently that Obama’s budget was “the greatest wealth destruction I’ve ever seen by a president”. I can only  assume the words “by a president” were inserted there to distinguish it from “the greatest wealth destruction I’ve ever seen” which is presumably the description Cramer’s saving in case  Obama follows his advice and does nothing to help the economy.

There’s an obvious conclusion to be drawn from all of this: finance is not the same as economics.

I can’t stress how important a point this is, because it’s one of the main reasons why the public debate about the actions of world leaders such as Barack Obama in combatting the global recession is fundamentally flawed. Instead of having a genuine argument on the economic merits of the various plans, the soapbox is instead often being left in the hands of people who show no interest in even the basic points of macro-economics – and this includes illustrious and important members of the world of finance.

Just as a Harvard macro-economist is likely to know know very little on the subject of  collateral debt obligations, credit default swaps and other bizarre financial contraptions, so too a Wall Street financier cannot be assumed to know his output gap from his liquidity trap. And if you’re expecting a basic knowledge of  Keynesian theory, then I’ve got news for you: the money men don’t care. Ask them how to invest your money and you’ll get a fairly solid reply (though you might come to regret it later). But ask them to defend their opposition to anti-recessionary government spending on solid economic grounds, and it’s like entering Alice in Wonderland. If, that is, Alice had  sweetened her rabbit hole experience further by indulging in a bit of LSD.

Once again: finance is not the same as economics. A lifetime of trying not to get caught when the bubble bursts is not equivalent to a degree in macro-economics. Just saying!