Oh, for the year that was… Battered global economy, foreclosed homes, Oil prices that soared and crashed, currency values that swung high and low – ah, the Madoff Scam that ended the year with a flourish. If I had the magic powers, I would have put the spinning earth on pause mode and have time stand still so that 2008 comes after a long enough pause to forewarn the world of the economic crisis that awaited it. And till we all had time to get out of our portfolio stocks 🙂
So what does that leave us with? Some bitter lessons. Will we miss the automatic deference accorded to titans of investment banking? The senior executives of banks used to command great respect; it is now clear that many of them did not deserve it.
The Anglo-Saxon capitalist model has been sorely tested in the past 12 months. Governments have been forced to prop up the banks and tempted to erect scaffolding around industrial titans. We may come to miss some of the dynamism and inventiveness of unfettered capitalism, but we will not miss glib free-market fundamentalism.
The ground is now clear for a safe touch down of Keynesian prophecies. The first lesson – Never analyze the economy like you do a business. For a company, it makes sense to cut costs. If the world tries to do so, it will merely shrink demand. An individual may not spend all his income. But the world must do so.
Next lesson – Never treat the economy as a morality tale. It’s a technical challenge. In the 1930s, two opposing ideological visions were on offer: the Austrian; and the socialist. The Austrians – Ludwig von Mises and Friedrich von Hayek – argued that a purging of the excesses of the 1920s was required. Socialists argued that socialism needed to replace failed capitalism outright. These views were grounded in alternative secular religions: the former in the view that individual self-seeking behavior guaranteed a stable economic order; the latter in the idea that the identical motivation could lead only to exploitation, instability and crisis. We can’t predict which is right. But we can certainly believe neither is.
We bid a hearty farewell to the lack of discrimination that characterizes the height of a boom. When even conscientious investors are happy to hand their money over to a man with inexplicable returns, a peculiar business model and whose name is pronounced “Made-off”, something is awry.
Finally, we are pleased that it looks like the end of a casually unsympathetic attitude towards society’s walking wounded. When even the highest in the financial land have been forced to seek assistance from the great mass of ordinary taxpayers, a humbler approach from all of us must be in order. So usher in 2009; only if you remember the lessons…