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In autumn 2008 the economist Mohamed El-Erian, then working at the investment management firm Pimco in the US, rang home to ask his wife to withdraw the maximum daily amount of cash from their account. It had become clear to him, he writes, that the banking system was on the verge of collapse — a valid fear, as was later confirmed.
The great financial crisis of 2008-09 now seems an age ago; the pandemic, the energy shocks that followed Russian’s full-scale invasion of Ukraine and stubborn inflation have relegated it to distant memory. Yet, as a striking chart in Permacrisis illustrates, the $532bn in assets held by banks that have failed in 2023 exceeds the $562bn assets of failed banks in 2008, adjusting for inflation. The global financial system is not out of the woods.
One damn thing after another: that is the notion of Permacrisis. Covid-19, conflict, geopolitics. Add the impact of continuing extreme weather events (as I write this, New York is flooding and in a state of emergency) and geopolitical flare-ups and policymakers are perpetually in firefighting mode. This makes systematic improvements in policy, and thoughtful risk management, next to impossible.
Nevertheless, the tone of this book is optimistic. The three co-authors — a former UK prime minister and chancellor, a distinguished financial economist (and Cambridge colleague of mine), and a Nobel Prize-winning microeconomist — have a three-part diagnosis and plan. The first problem they identify is the disappearance of economic growth since the mid-2000s, with supply constraints at the heart of the issue. “Growth models which have focused too narrowly on privatisation and deregulation have outlasted their use-by dates,” they write.
This leads to the second problem: inappropriate policies to manage an economy with such supply challenges. “Public investment backed by appropriate financial risk sharing and incentives and, where appropriate, more nimble regulation, matter far more than any neoliberal model has ever acknowledged,” they argue. They also explain that interventions are also needed to improve social cohesion and sustainability. The third problem, illustrated perhaps by the difficulty of international agreement on climate and biodiversity, is the need for new international economic governance in an age of renewed nationalism.
Their programme for better economic management also comes in three parts. First, policymakers should keep an open mind. An obvious example of failing to do so is the Fed’s delay in raising interest rates because of its blinkered view that the inflation shock was transitory. Step two is to strengthen policy architecture. The cautionary tale they offer here is the catastrophic UK premiership of Liz Truss, with its absence of fiscal and monetary co-ordination (although the Bank of England did an effective crisis management job). Step three is: “Be ready to show leadership.” One fears this is thin on the ground in many countries, at least in the enlightened sense intended here, but it is hard to argue with.
The last in the trio, they argue, is the need for a revamped approach to international governance and co-ordination, with reforms to the WTO and the United Nations, recapitalisation of the World Bank and more strategic leadership by the IMF. The authors also suggest that the G20 should be expanded to include permanently countries such as Nigeria, Singapore and Vietnam, and have more systematic leadership — moving away from a system where each rotating chair sets a different agenda each year.
Using the analogy of the Japanese art of kintsugi, in which broken pottery is mended with gold so that the repairs remain visible, they paint their proposals as the opposite of radical. Yet — as the conclusion acknowledges — international non-co-operation seems to be the new norm, prices are still rising, technological advances seem as likely to make humans redundant as to augment their capabilities, and environmental disaster has become an everyday occurrence. Still, they write, “it can be done”.
Yet the book left me feeling far more pessimistic. One of its refrains is the need for political buy-in, even for sensible and incremental policies. Yet it is hard to imagine this in the current environment. For example, green policies have become an axis of political fracture in many countries, to the extent that UK prime minister Rishi Sunak thinks interfering in decisions about road speed limits is a vote-winner. China-US, China-EU and EU-US economic relations are all fraught. There are other zones of potential conflict.
So I would have liked to read much more about the political economy of the programme advocated in Permacrisis. If there were to be a new “Committee to Save the World” — as Time Magazine denoted Larry Summers, Alan Greenspan and Robert Rubin in the aftermath of an even more distant financial crisis, that of 1998 — the three authors of this book would be my top candidates. But they are right to admit that politics now dominates economic analysis. Given that the old growth model has indeed led to permacrisis, people in many parts of the world are looking for other solutions.
Permacrisis: A Plan to Fix a Fractured World by Gordon Brown, Mohamed El-Erian and Michael Spence, Simon & Schuster £25, 336 pages
Diane Coyle is Professor of Public Policy at the University of Cambridge
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Source: Economy - ft.com
