Sounding the Meltdown Alarm (Again)
European Central Bank boss Mario “Whatever It Takes” Draghi is at it again. He cut borrowing rates to historic lows, and banks are now accepting negative interest rates to park their cash with the ECB. Despite the nudge, Europe is heading into another recession; banks still don’t want to lend, and consumers and businesses don’t want to borrow.
That doesn’t surprise Martin Wolf, the lead economics commentator at the Financial Times. Hundreds of books and academic papers have been written about the Great Recession, and Wolf seems to have devoured them all for The Shifts and the Shocks: What We’ve Learned–and Have Still to Learn–From the Financial Crisis. For this survey of sorts, he has pulled some of the most salient ideas and spiced them with his own typically blunt assessment of how rich nations can avoid repeating another meltdown. For one thing, he tells us that blaming Greece, Spain, Italy, Ireland and Portugal for overborrowing and then demanding they embrace fiscal austerity, as German Finance Minister Wolfgang Schäuble has done, is a view that “is not only misleading, but dangerous. That it is held by the euro zone’s strongest country is frightening.”
The book isn’t necessarily about pointing fingers, although Wolf certainly does. He is more interested in explaining how vast macroeconomic and secular shifts (technology, global financialization, aging populations) made meltdown a certainty. When Asian countries and Germany created massive saving surpluses, that money had to seek an investment return in nations that were running savings deficits. Wolf explains this process without miring his readers in jargon, though you might want to bone up on current account balances. Blaming American homebuyers for their liar loans or Greece for its overleveragedness doesn’t fly. These agents behaved logically, given the forces at play. In the grand scheme of things, economics and economists failed, not economic agents.
And the shifts and the shocks aren’t done with us. There is trouble to come unless the world restructures its approach to global banking regulation, for one. Banks are still woefully undercapitalized, Wolf argues, suggesting a 10% equity capital ratio (that is, capital backing their loans) as opposed to the 4% being proposed. Bankers may protest that this will restrict business and push risk elsewhere. Wolf’s response: Nothing is more restrictive than lending paralysis, and if riskier business goes elsewhere in the future, good. At least governments will no longer be on the hook. Like Thomas Piketty in Capital in the Twenty-First Century or Joseph Stiglitz in The Price of Inequality, Wolf views income inequality as the weak link in the ability of the rich nations to expand aggregate demand and restore growth. Economic recovery has been slow in the U.S.; Europe is treading water. It’s demand and debt deflation, not inflation, that’s the problem, he writes. Governments and consumers need to spend, not save. Maybe we can start by buying a book?
A Scary Take on Climate-Change Economics
For progressives stumbling through the blackest days of the George W. Bush Administration, Naomi Klein’s 2007 book The Shock Doctrine was a light in the dark. Klein, a Canadian journalist and an icon of the antiglobalization movement, argued that conservative forces used the chaos created by natural and man-made disasters–Hurricane Katrina, the 1997 Asian financial crisis, 9/11–to push through extreme free-market policies. The disasters were the shock, and laissez-faire economics was the doctrine. Many mainstream economists found Klein’s conclusions naive and oversimplified, but there’s no doubt that the book–an international best seller despite its dense 672 pages–struck a chord among leftists wondering where it all went wrong.
It’s not surprising, then, that in her next book, Klein would take on the biggest shock of all: climate change. But in This Changes Everything: Capitalism vs. the Climate, Klein turns her doctrine around. This time it’s progressives making use of a major disaster to reshape the world. Because to Klein, climate change is such an existential threat–and so intimately tied to entrepreneurial capitalism–that responding to it will take nothing less than a complete transformation of global politics and economics. “Either we embrace radical change ourselves or radical changes will be visited upon our physical world,” Klein writes. “The status quo is no longer an option.”
If nothing else, this may be the first truly honest book ever written about climate change. The message from mainstream environmental groups has been that global warming is the greatest danger humanity has ever faced but one that can be solved with comparatively minor changes: carbon-trading systems, cleaner natural gas, electric cars. The way to beat climate change isn’t to dismantle the industries that are responsible for the carbon emissions warming the planet but to cooperate with them–which is how someone like Richard Branson, who makes billions off carbon-spewing airlines and owns a private island but pledges to go green, can be seen as an environmental icon.
The reality, as Klein demonstrates, is that if global warming is really as catastrophic as environmentalists argue, half-measures won’t cut it. And she has a point: even as renewable energy is adopted and sustainability has become a corporate concern, carbon dioxide levels in 2013 grew faster than they had in 30 years. We’re losing the battle against climate change–badly–because economic growth means carbon-emission growth. And as long as we grow–the objective of every government and corporation–we warm. Which means we need to rethink growth and just about every other conventional economic goal.
Whether you accept Klein’s radical message will depend in part on just how scary you think climate change is. There is real disagreement among even climate scientists about how fast the planet will warm, how disruptive that will be and how best to fight it. Klein embraces the worst-case scenario, and she has reason to. It takes the biggest shocks to force the biggest changes, changes many progressives would have wanted even in the absence of global warming. But at least she’s honest about the cost of her convictions.
This appears in the September 29, 2014 issue of TIME.