John Roughan 's Opinion

John Roughan is an editorial writer and columnist for the New Zealand Herald.

John Roughan: A fourth year of economic fear

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The real estate market has dried up, holding prices up. Picture / Bloomberg News
The real estate market has dried up, holding prices up. Picture / Bloomberg News

How much longer must this credit crunch siege mentality carry on?

The global financial crisis didn't happen yesterday - it just feels like it. More than three years on, economies are still in shock. If the oracles are right we have entered a fourth year of flat business life.

The oracles can be right for no better reason than they are self-fulfilling. It is not a question of believing them, if they are the accepted wisdom it is probably not a good idea to defy them.

So nobody dares a venture at the moment. Companies hunker down again, cutting costs, taking no risks. How long must this nonsense go on?

The United States Federal Reserve said last week it expected to keep interest rates near zero "at least through late 2014". Three more years. How long does it take for that Keynesian medicine to work?

When the crisis struck in late 2008 it was universally compared to the Wall St crash of 1929 that triggered the Great Depression. The Depression deepened over the ensuing three years, reaching its nadir in 1932-33, and thereafter economies slowly recovered.

History has it that the recovery came when governments adopted the suggestion of a British economist, John Maynard Keynes, and stopped worrying about balancing their budgets for the time being. In the United States this is dated from the inauguration of Franklin Roosevelt in 1933 and in this country, the election of the first Labour Government in 1935.

So this time governments wasted no time. When a string of Wall St investment banks collapsed in 2008 and the worldwide financial system went into shock, governments and their central banks flooded their economies with instant money to keep banks afloat and maintain activity.

To that extent they succeeded. A year or so later they congratulated themselves on escaping with nothing worse than a mild recession. Then came the hard part: when and how do you take the patient off life support?

Despite the huge stimulants injected into the US and European economies, oracles such as the Economist continue to urge more. Meanwhile, bond markets are suffering severe doubts about the solvency of several countries in Europe carrying large budget deficits or other liabilities in a shared currency.

The euro represents no single sovereign country and acts as a fixed exchange rate between economies with quite different governments and electorates.

Much of Europe is said to be back in recession this year, which is the main reason the oracles cite for their dim outlook on 2012. But I suspect there is a deeper uncertainty at work.

The trouble with artificial life support for modern economies is that business knows it is on it. It knows it cannot last, and that sooner or later public accounts will have to be repaid and interest rates rise, lest inflation return.

The stimulus is unreliable. Business confidence, I suspect, is waiting for reality to return.

Budget deficits are a collective debt that is much more obvious to people than the excessive household borrowing that supposedly occurred before property prices crashed in 2007. Personally I knew nobody who was wildly overspending their income. Did you?

I could believe people were borrowing too much to buy second houses but even that belief has not been supported by subsequent events. Anyone who over-borrowed for a quick capital gain would not have been able to keep the house on rental income alone for the past four years. We would have seen houses flood the market and prices collapse. Instead, we have seen the market dry up for the past four years and with few houses offered for sale, prices have held up.

Excessive private borrowing may have been merely an economic statistic but Government borrowing is not. People are well aware something is wrong. That common sense underlies movements as disparate as the 'tea party' in the US and mobs occupying Wall St and public places in many cities these past few months.

There is a sense that facts are not being faced, problems not solved, that financiers don't understand the system that has richly rewarded them and that we have all got off lightly so far.

We live in fear of a "double dip". I wonder if the 1930s were like this. Harrap's 20th Century Almanac records that after a few years of his "New Deal" President Roosevelt decided to balance the US budget again.

By 1937 the US was sliding back into deep recession. That was eight years after the crash - 2016 in today's terms. The Almanac says the real cure of the Great Depression was the spending required for World War II.

It may be that Keynes' antidote to depression merely delays the inevitable.

I suspect that is how it seems to business decision makers who are sitting tight, distrusting recovery, reading the experts and waiting for a green light.

- NZ Herald

John Roughan

John Roughan is an editorial writer and columnist for the New Zealand Herald.

John Roughan is an editorial writer and columnist for the New Zealand Herald. A graduate of Canterbury University with a degree in history and a diploma in journalism, he started his career on the Auckland Star, travelled and worked on newspapers in Japan and Britain before returning to New Zealand where he joined the Herald in 1981. He was posted to the Parliamentary Press Gallery in 1983, took a keen interest in the economic reform programme and has been a full time commentator for the Herald since 1986. He became the paper's senior editorial writer in 1988 and has been writing a weekly column under his own name since 1996. His interests range from the economy, public policy and politics to the more serious issues of life.

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