Crazy markets or crazy economic policies ?

Crazy finance is back. Listening to most observers, doubt is no longer possible. Only four years after the biggest stock market crash in history, financial markets appear to display their most evil behaviour again, that is their worst excesses. The last speculative bubbles are not yet entirely deflated that new ones are appearing, under other forms, but with the same lack of control and the same dangers.

This time stock markets are less badly hit – the American NASDAQ is worth less than 2000 points, while it had passed the 5000 mark in March 2000 – than other sectors of the market : bonds, developing countries borrowings, primary commodities, real estate. As regards disturbances on the currency markets, with the dollar-euro exchange rate plunge, these are also viewed as a consequence, as well as an illustration, of the extravagant behaviour of markets. Much more certainly and more seriously than Al-Qaeda terrorist attacks, the renewed “irrational exuberance”, to use the word of Alan Greenspan, the president of the American federal reserve board (the Fed), is thought to threaten world economic rebound. Growth would have more to fear from hyperfinance and its excesses, than from hyperterrorism and its madmen.

Faced with this threat states are as befuddled as helpless. Having deregulated, having dismantled legal constraints, having liberalised to the hilt, state authorities no longer have any lever of action to correct market excesses. They are powerless witnesses of the haywire movements of the economy, under the rule of speculators.

But does this manicheistic vision, which just about all governments of the planet are busy selling to their public opinions, correspond to reality? Do the large present imbalances in the world economy come from the craziness of the markets or from bad economic policies of the major industrialized countries? Shouldn't we worry more about the bubble of public debts than about Wall Street bubble? Aren't budget deficits more vertiginous than the roller coaster movements of the market indices or the plunge of the dollar?

In mid-February, in Boca Raton (Florida), the finance ministers and the central bankers of the seven most industrialized countries solemnly explained that "excessive volatility and disorganized movements of exchange rates are adverse for economic growth". Their aim was to stop the fall of the dollar value measured in Euros.

Yet to see them posing as guardians of monetary orthodoxy from troublesome markets is rather astounding! It is the American administration itself that for the last two years, with repeated comments about the beneficial effects of a weak dollar, pulled the greenback downwards. While swearing about its rock steady commitment to market freedom the White House, unofficially, used all means at its disposal to encourage market operators to set the dollar value at a level it judged best for the American economy.

Concerning monetary policy too the Bush team was particularly artful at manipulation, and it has a large part of responsibility in the current crisis on forex markets. All the more since that, by devaluing the greenback, market operators were doing nothing more than reflect the increasing imbalance of the American trade accounts. In 2003 the United States current balance deficit reached a new high of 542 billion dollars, breaking the previous record of 481 billion dollars. With these abysmal figures the question is no longer “why the dollar fell?” but “why it did not fall further?”. Knowing that some studies estimate the equilibrium exchange rate for the dollar to be 1.5 for one Euro, and that some others deem that it is between 1.7 and 1.8, markets appear to have had a rather moderating role and not at all, as the G-7 would like us to believe, an amplifying one.

Economists stress that only major changes in the economic policies of the United States, Japan, and Europe would durably stabilize foreign exchange markets. The U.S. government should now take measures to entice Americans to save more, and to stop the orgy of credits with which the U.S. live. Europe should reduce its public expenditures, and should introduce more flexibility in the labour and product markets to spur competition and to boost purchasing power. If America consumed less and Europe consumed more, the Euro-dollar exchange rate would be under less pressure.

But as long as they do not have the courage to launch these deep structural reforms, the state authorities’ action is limited to dangerous short sighted expedients that instead of putting back the world economy on a straight course create new disorders. That is the case of Asian central banks interventions. During the year 2003 their currency reserves increased by one-third, to reach about 2000 billion dollars, that is fifty times the amount of world reserves at the beginning of the '70s. Here too lack of control appears to be less a feature of the financial markets than a feature of the states and their interventionism. Particularly when one notes that the operations of the Bank of Japan mostly consist in buying bonds issued by American states, and therefore fuel the structural American life on credit.

When the lack of economic virtue of some feeds the vice of others, all excesses are permitted. Governments can let their public debts go without worrying. Under the pretext of giving the economy a new boost after the Sept. 11 attacks, the Bush team adopted an ultra Keynesian policy: as a result, the budget deficit should reach, in 2004, the record value of 521 billion dollars. As regards the debt it increases by 1000 billion dollars every 20 months. In Japan public debt now amounts to 160 % of gross domestic product, compared to only 70 % in 1985. In France it went from 296 billion Euro in 1988 to 980 billion Euro today, that is 16 000 Euro per person.

Summed up the public debts of the United States plus Japan plus the Euro zone passed the 20 000 billion dollars mark in 2003 and no one foresees a decrease! Even the central banks, supposedly independent and rigorous, underwrite this states' spending spree by maintaining extraordinarily flexible monetary policies. Never have their leading rates been so low (0 % in Japan, 1 % in the United States, 2 % in Europe). By opening so large the credit faucet, by making the cost of money all but free, issuing banks feed, much more than real estate speculation does, the public accounts reckless skid.

With higher interest rates the charge of the debt would become so heavy that it would force states to spend less and to manage better the money of their citizens. The indulgent policies of the Fed and of the European Central Bank are only a consequence of their cowardliness in front of the governments. Rather than facing them, central bankers prefer, with them, to put the blame on the financial markets, and to point at their irrationality. Yet it is today clear that it is in the governments’ behaviours, in the budget and monetary policies, in the soaring public debts, and in abnormally and artificially low interest rates, that one should find the true excesses and the true bubbles.

Le Monde, March 2004

(Translation AC)