The Federal Reserve on Wednesday shrewdly declined to draw firm conclusions about recent mercurial swings of the markets. But investors are at least wary about a new global downturn. Citizens are similarly apprehensive: on Wednesday, Ipsos Mori’s confidence index gave the gloomiest reading in three years. Meanwhile, the economics profession has still only done a fraction of the difficult thinking demanded by the last crash. Sure, there is more understanding than in 2008 about banks keeping rainy-day funds aside, and more realism, too, about complex financial products, which exist to conceal rather than to manage risks. But the deeper questions about a more sustainable prosperity, less prone to disruptive vicissitudes, remain unanswered. So, too, does the immediate question about how to resuscitate the economy when it next falls to the floor.
The nasty end to the Nice decade – the years of non-inflationary, continuous expansion – came so abruptly in 2008 that practice had to move faster than theory. Interest-rate cuts broke all records and, before the austerity turn, there was a fiscal stimulus too. Quantitative easing, which nobody had heard of until it started happening, entered the language. The same excuse for lack of preparedness is not going to cut it again. And yet – as a sobering Resolution Foundation report lays bare on Thursday – we are in some respects even less well-placed to respond.
Forget the current wave of anxiety emanating from China; the regularity of recessions in modern history is enough to make it more likely than not there will be a downturn within five years. And even if it is not till 2021, the market’s best guess is that the base rate will then be 1.5%. That leaves pretty limited scope for more reductions. If rates continue to remain lower for longer than the markets expect it will be more limited still. The emergency medicine left in the bottle is, Resolution calculates, unlikely to have more than a third of the power of that administered last time. Other treatments must be prepared.
New thinking is emerging – pushing rates below zero, directly financing the deficit with made-up money, even abolishing cash. But such ideas need to break out of the seclusion of the seminar room, and be thrashed out on the political stage. In the public mind, the prescriptions have changed even less. After 2008, every politician and central banker vowed to build a recovery less dependent on debt, speculation and frenzied finance. It hasn’t happened. Debt has not so much been reduced as pushed around the system, moving from the private to the public sector and then back again, while also shifting from the west to the emerging economies.