There will be devastating consequences for the democratic market system because the global economy is slowly but surely sleepwalking towards a fresh economic and financial crisis, believes the former Bank of England governor Mervyn King.
There is a possibility of a repeat of the chaos of the 2008-09 period because of refusal to new thinking, said Lord King, who was in charge at Threadneedle Street during the crisis of the global banking system and the economic crisis almost a decade ago.
Very few posed any fundamental questions about the ideas that led to the crisis of a decade ago, said King while giving a lecture in Washington at the annual meeting of the International Monetary Fund.
“Another economic and financial crisis would be devastating to the legitimacy of a democratic market system,” he said. “By sticking to the new orthodoxy of monetary policy and pretending that we have made the banking system safe, we are sleepwalking towards that crisis.”
If the central bank of the United States – the Federal Reserve, did not have the necessary measures to fight out another incident similar to the sub-prime mortgage sell-off, the US would suffer a “financial armageddon”, he added.
There had been new thinking and intellectual change, following the Great Depression of the 1930s, said King.
“No one can doubt that we are once more living through a period of political turmoil. But there has been no comparable questioning of the basic ideas underpinning economic policy. That needs to change.”
King pointed out a number of geopolitical factors that has made the global economic and political climate very fragile and fraught. King pointed out to the US-China trade war, the ongoing demonstrations in Hong Kong, issues with some of the important emerging economies such as Argentina and Turkey, the increasing tussle between France and Germany about how the euro should be organized in the future and the bitter political conflict in the US which is increasing every day.
“Ripples on the surface of our politics have become breaking waves as the winds of change have gained force,” he said.
Currently, a low growth trap has engulfed the world economy, King said and added that the recovery of the global economy following the 200-09 global economic meltdown was much weaker and slower than that after the Great Depression.
“Following the Great Inflation, the Great Stability and the Great Recession, we have entered the Great Stagnation.” King said that in 2013 the former US Treasury secretary Larry Summers had reintroduced the concept of secular stagnation, a permanent period of low growth in which ultra-low interest rates are ineffective: “It is surely now time to admit that we are experiencing it.”
Two important aspects of economic policy – getting the global economy out of the low growth trap and the preparations to tackle the next financial crisis, can be achieved by taking recourse in standard models.
“Conventional wisdom attributes the stagnation largely to supply factors as the underlying growth rate of productivity appears to have fallen. But data can be interpreted only within a theory or model. And it is surprising that there has been so much resistance to the hypothesis that, not just the United States, but the world as a whole is suffering from demand-led secular stagnation.”
(Adapted from TheGuardian.com)