During the two years I spent raising funds for my company, I found myself the most unlikely but grateful guest of the Economist magazine's Buttonwood Conference. It was an incredible thrill because for me, a political economy wonk, being invited to anything the Economist hosts is the equivalent of going to the Oscars.
Economists, (free-market economists, anyway), attribute a kind of native intelligence to the markets. Adam Smith’s “invisible hand” suggests a self-correcting intelligence, although this “intelligence” seems to have been overrated. We could say that capital and reason, once happily married, are now having marital problems. Capital has taken leave of its senses. It has gone on vacation and left poor Reason at home. While Capital is out on the road, we look to the experts to tell us when it will be coming back. Last week at the Economist Buttonwood Gathering in New York City, I waited to hear what the experts had to say.
After two days of listening to bankers, finance analysts, and pundits, I was left with the feeling that the real problems facing Europe and the United States are neither purely economic nor purely political. Mohammed El-Erien, the CEO of Pimco whose Bagehot lecture was a focal point of the conference, argued that propping up valuations could not be guaranteed to work in an atmosphere of low growth rates on both sides of the Atlantic and weak corporate earnings. But he did not offer any other solutions, either. According to El-Erien, and other notable financial experts, the United States will continue to struggle indefinitely with sluggish estimates of > 2% growth. The European Union, if the Europeans are lucky, may track to 1.5%. The bright spot, if there is one, is that emerging markets are projected to grow between 6-7%, with China as the clear standard-bearer. We’ll see how that works out.
What paralyzes political leaders in both the United States and the EU is not simply the current atmosphere of fundamental economic disruption and political instability. It is also that our discussion about what is happening these days is often devoid of reason. Some very smart people depict the global economic crisis differently from other very smart people, but I believe that there is a tremendous gap between those who “know the numbers”, (economists and policy wonks), and those who “lead” (CEOs and influential market analysts). I have to admit that, after the Gathering, I do not see anyone on either side of the Atlantic whose “leadership” is very effective at present.
The general sentiment among the policymakers and finance professionals assembled at the National Archives building for the Buttonwood Gathering was one of dour foreboding. I talked to one young European banker whose cool detachment reminded me of a first lieutenant standing alongside his captain at the helm of a ship headed into an unavoidable tempest. When I asked him how much input he had been allowed to give on the course for his firm, his answer showed that he was not inclined to interrupt the ships’ course for fear of angering his Skipper, regardless of the consequences. It was significant to me, then, that Hurricane Sandy was bearing down on the city when I flew back to Los Angeles on Friday.
The chasm that lies between leaders and thinkers is the natural ignorance that capital has of human reason. This has nothing to do with Adam Smith’s invisible hand. How else can one view the inherent liberty of markets themselves? We do not look at biological systems and ascribe “intelligence” to them. Indeed, the last five years aptly demonstrate how dangerous markets can be when left to their own devices, and how base opportunism tends to prevail.
Now, some circles will attribute the disconnection between capital and reason to the machinations of the elite, or to the Paris Club, or the Masons; but such conspiracy theories are a distraction. Unfortunately for fans of The Da Vinci Code, and the 9/11 “Truthers”, the fiscal cliff in the United States and the ECB intervention are quite real—disturbingly so.
The discussion at Buttonwood stayed on course, managing to avoid veering into philosophical inquiry. I am not saying it should have done so. On the other hand, the bigger issues of deleveraging in the EU and the fiscal cliff in the United States were largely ignored. Europeans want everyone else in the West to overlook, very politely, the serious civil unrest in Spain and Greece. In fact this would be unwise, since both of these countries are in the first wave of the macroeconomic pandemic which may (or may not) break loose. According to Alan Greenspan, who appeared on CNN last Tuesday morning, “Europe is comprised of 17 welfare states, and one doctor, the ECB.” These states are all wavering under the prospect of trying to manage themselves into an “organized depression” (as another economist called it).
El-Erien noted that several bankers in the United States and in Europe are venturing into uncharted territory. These bankers are pulling policymakers along behind them. El-Erien echoed the general consensus of the Gathering, that leaders on both of the Atlantic spent too much time “dithering and bickering,” and not enough time formulating and deploying prescriptive action. His argument underlines my contention that Capital is so distant from Reason that we characterize the behavior of leaders as “adventurous”. I do not think the citizens of Europe or of the United States of America, whom El-Erien characterized as “confused and confounded,” want their leaders in politics and economics to be “adventurous.”
I believe they would prefer them to be reasonable.